j davies aus

8/14/2019 j Davies Aus

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The accountant

and the fightagainst money

laundering

Date : July 2006

Speaker : John Davies

Head of Business Law

ACCA (London)


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What is money laundering?

Money laundering is the

process whereby criminals

attempt to conceal the true

origin and ownership of

the proceeds of their

criminal operations


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The object of anti-moneylaundering (AML) controls

To discourage criminal activity by ensuring

that criminals who try to use the financialsystem for laundering the financialproceeds of their crimes can be identifiedand their funds confiscated


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Possible warning signs of moneylaundering activity

Unusually large deposits of cash made by an individualor company whose affairs would normally generatedeposits by cheque or bankers draft

Substantial increases in cash deposits without apparentcause

Customers depositing large numbers of smaller cashamounts which together make up a substantial sum

Reluctance by a customer to provide routine informationwhen opening an account; providing information which isdifficult or expensive to verify

Large cash withdrawals from a hitherto dormant/inactiveaccount


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The global scale of moneylaundering

World-wide money laundering could amount to 2

5% global GDP ($590 billion - $1.5 trillion)

(IMF)

25 billion of criminal assets are laundered through

the UK financial system every year

(UK Govt estimate)

$3.5 billion is laundered though the Australian

financial system each year

(AUSTRAC estimate)


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Why are AML controls important?

Most national governments have signed up to international

AML conventions so are obliged to implement international

norms

If lenders feel that a countrys AML controls are defectivethis could affect availability and cost of lending to that

country

Countries do not want to give out the message that crime

pays

National financial infrastructures have a direct interest in

preserving their reputation for sound finances


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The Financial

Action TaskForce(FATF)

www.fatf-gafi.org
http://www.fatf-gafi.org/http://www.fatf-gafi.org/


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The role of FATF

Monitors developments in money laundering

techniques

Conducts evaluations of individual countries AML

controls

Issues detailed recommendations for AML controls

Remit now covers terrorist financing


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FATF finding, 1999

We have observed an increasing

tendency for professional service

providers, such as accountants,solicitors, company formation

agents and other similar

professionals, to be associated

with more complex money

laundering operations.


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FATF recommendations foraccountants

They should take steps to establish the identity of their

clients (client due diligence CDD procedures)

They should keep records of their CDD data for 5 years

They should adopt internal programmes for guarding

against money laundering and terrorist financing

They should be required by law to report to designated

authorities where they suspect or have reasonable groundsfor suspecting that funds are the proceeds of money

laundering or terrorist financing


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The source of global rules onmoney laundering

Financial Action Task Force (FATF)recommendations

Professionalguidance

for accountants

EU law

UK law

AustraliaLaw

AUSTRAC

rules

NZLaw

Policeguidance


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MoneyLaundering -

ACCAguidance


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ACCA statement 3.8 on moneylaundering Applies to members world-wide

Para 4 members should be aware of their obligations under local law

Para 6 member firms should establish in-house policies and practices andensure their staff are properly trained on AML issues

Para 8 member firms should carry out CDD checks when a prospective clientapproaches it

- You must obtain independent advice of the clients identity, e.g. passportand proof of address

- Where the company is a company you should- obtain proof of corporate status- establish the companys business and registered address- establish the structure, management and ownership of the company- establish the identity/authority of those who are instructing you

You must establish precisely what the new client is asking you to do

IF YOU CANT ESTABLISH IDENTITY DONT WORK FOR THE NEWCLIENT!

Para 19-21 where you know or suspect that funds derive from crime, reportyour suspicions to the relevant national authority (where one exists)


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ACCA statement 3.8 on moneylaundering (contd)

What is suspicion?

Suspicion is more than speculation butfalling short of proof based on firmevidence. A particular set ofcircumstances which may besuspicious in relation to one client maynot be suspicious in relation to anotherclient. Therefore the key to recognisinga suspicious transaction is for membersto have sufficient understanding of

clients and their activities.


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Should you suspect? (1)

You know your long-standing client enjoysoccasional private (and legal) gambling. Hisrecord is unexceptional. One day you see himdriving an expensive new sports car whichwould normally be beyond his means. As far asyou can tell his business is proceeding as

normal.

Provided you are satisfied that yourclient is an honest person and is

telling the truth, there is nothing here

that should necessarily cause you tosuspect that your client is dealing in

the proceeds of crime.


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Your client runs a restaurant. On checking theaccounting records of the company in the course ofpreparing its annual accounts, you notice that thereis a very significant rise in the amount of cashtakings over the previous year which seems to youunusual and difficult to explain given your

understanding of the performance of similarbusinesses. You further find that a number ofinvoices appear to be made out to companieswhich, on further examination, do not appear toexist. Your client is unable to answer your queriesto your satisfaction.

These details may give you cause to suspect thatyour client is dealing with the proceeds of crime.


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You are aware that a new clients business hasmade large taxable profits over a period of time.You come across information which reveals thatinformation presented to the tax authorities inthe past has substantially underestimated the

taxable profits and hence the companys taxliability.

This gives you evidence which should causeyou to suspect that your client is dealing with

the proceeds of a crime.


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ACCA Technical Fact Sheet 94 (accountantsAML responsibilities in the UK-www.accaglobal.com/transparency/money

laundering)

Dont tip off your client that you have reportedhim

But advising a client not to break the law doesnot constitute tipping off


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MoneyLaundering

Europeanlegislation


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EU Second Directive obligationsimposed on (among others)

Auditors, external accountants and tax advisers

Notaries and other legal professionals

Trust and company service providers

Real estate agents

Natural and legal persons who trade in goods where theyare sold to one client for 15,000 euros or more (either inone or a series of transactions)


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EU Second Directive compliance obligations

Internal procedures firms must put in place adequate andappropriate procedures for record keeping, internal control,risk assessment, risk management and communicationdesigned to forestall and prevent money laundering or

terrorist financing

CDD checks firms must verify clients identity by reference todocuments, data or information obtained from a reliable andindependent source

Reporting of suspicions member states should establishfinancial intelligence units and require regulated persons toreport to them where they know, suspect or have reasonablegrounds for suspecting money laundering or terroristfinancing

Prohibition against tipping off


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UK implementation of the

Second Directive

The Proceeds of Crime Act2002

The Money LaunderingRegulations 2003

www.hmso.gov.uk


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AML controls

AML controlsin Australia


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FATF assessment of Australias MLcontrols (1996)

Australia can pride itself on a well-

balanced, comprehensive and in manyways exemplary system, and must becongratulated accordingly. It meetsthe objectives of the FATFrecommendations and is constantly

reviewing the implementation of theirAML provisions, simultaneouslylooking well ahead into the future.


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The Anti-Money Laundering andcounter-terrorism Financing Bill

(December 2005)

Adopts two-tier approach to regulation primary obligations set down in legislation, detailed technicalguidance to be set out in AUSTRAC guidance

No application to accountants and auditors as such AML obligations applied only to reporting entitieswhich provide designated services, e.g.

providing a safe deposit box or similar as a licensed financial adviser, giving

personal advice on securities,

derivatives, life insurance or pensions acquiring or disposing of a security on

behalf of another person

Rec 14 exemption from liability for tipping off

Rec 15 Institutions to set up in-house control procedures

Rec 16 above provisions to be extended to accountants et al

Reg 24 Governments should regulate parties with money laundering duties


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Features of the draft Bill Obligation for reporting entities to carry out CDD checks (though AUSTRAC will

identify low-risk circumstances where CDD checks will not be required)

Requirement for reporting entities to report to AUSTRAC where

you have reasonable grounds for suspecting that

information you have gained from providing a designated

service

- may be relevant to the investigation of an evasion or

attempted evasion of a tax law

- may be relevant to the investigation or prosecution of a

person for an offence against a law of the Commonwealth

or of a Territory

- may be of assistance in the enforcement of the Proceeds of

Crime Act 2002or regulations made under it

- you have reasonable grounds for suspecting that the provision

or prospective provision of the service may be relevant to the

investigation or prosecution of a terrorism offence


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Features of the draft Bill (contd)

Obligation to put in place wide-ranging, on-going AML

programmes within a specified period of providing

designated services for the first time; these must aim to

identify and materially mitigate the risk that its activities

may be used for purposes of money laundering or

terrorist financing. AUSTRAC to issue detailed

compliance rules

Breaches of obligations under the Bill punishable byimprisonment of up to 2 years and 120 penalty units or

both


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ImplementingAML controls issues and

options


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Who needs to be covered byAML controls?

FATF requires governments to regulate activities of accountants only

where they prepare or carry out specified activities, viz

- Buying and selling real estate

Managing of client money, securities and other assets

Management of bank, savings and securities accounts

Organisation of contributions for the creation, operation or management of

companies

Creation, operation or management of legal persons or arrangements,

and buying and selling of business entities

Where a financial activity is carried out on an occasional or very

limited basis such that there is little risk of ML activity occurring, a

country may decide that the application of AML procedures is notnecessary, either fully or partially.


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Definition of criminal conduct forML purposes

Must be a clear legal definition of conduct which gives rise to an

obligation to report

FATF recommendations say that reportable activities should apply to

serious offences punishable by imprisonment of at least 6 months

Setting a threshold of seriousness would help avoid excessive and

innocuous reporting


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The meaning of suspicion

The draft Bill requires reporting entities to

report not on the basis of proof but where they

have reasonable grounds for suspicion need to

establish (via AUSTRAC guidance) the meaning

of suspicion and reasonable grounds


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Who should accountants reportto?

FATF allows governments to allow professional

advisers to make their suspicious activity reports

not direct to government agencies but to self-

regulatory agencies, e.g. professional bodies


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Intra-firm arrangements

AUSTRAC to issue detailed rules to supplement primary

legislation

Should be adequate to ensure that all members of a firm pass

on information to a designated compliance officer/money

laundering reporting officer, who should make final reporting

decision on firms behalf


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Confidentiality issues

Essential that regulators respect the

confidentiality of advisers who report on their

clients if advisers are obliged not to tip off their

clients, the system must not do so either


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Implications for adviser-clientrelationship

Requirements to report clients very difficult issue for

professional advisers

Risk is that clients will withhold information

threat to quality of professional service andeffectiveness of the AML reporting system


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Regulatory effectiveness

Chosen form of AML regulation needs

- a clear and justifiable purpose

- to be effective and proportionate


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AML controls final thoughts

Accountants must always comply with the law

Accept that accountants are part of the financial services sector

and may sometimes be privy to information which may be linked

to financial crime

BUT AML controls must not involve regulation for its own sake

must avoid intrusive bureaucracy and respect integrity of the

adviser-client relationship


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Thank you

j davies aus

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