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AIA and AMLCC
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Proliferation financing refers to the movement of funds or financial resources that contribute to the development, acquisition, or transfer of weapons of mass destruction (WMDs). These weapons, which include nuclear, biological, radiological, and chemical systems, pose a significant threat to global security.
Unlike money laundering, which conceals the origins of illicit funds, or terrorist financing, which supports ideological violence, proliferation financing specifically facilitates the production and dissemination of WMDs. Given the UK's commitment to international security, accountants must be vigilant in identifying and mitigating risks associated with this form of financial crime.
Why accountants should be concerned
The Financial Action Task Force (FATF) has prioritised proliferation financing due to its increasing complexity and potential impact. For accountants, the risks are twofold:
Identifying proliferation financing risks in accountancy
You’re uniquely positioned to detect irregular transactions that may indicate proliferation financing. Key risk indicators include:
Unusual transactions
Complex corporate structures
High-value transactions lacking justification
Client activity and geographic concerns
Case studies of proliferation financing
Examining real-world cases provides insight into the evolving methods used to bypass financial regulations. Recent examples include:
In July 2024, a property transaction in the UK raised red flags when the purchasing company was traced back to an engineering firm in a high-risk jurisdiction. This scenario matched known typologies of entities under investigation for proliferation financing.
In December 2023, an Iranian national and a previously sanctioned Chinese individual were charged with procuring U.S.-manufactured dual-use electronics intended for un-crewed aerial vehicles (UAVs) used by Iran's Islamic Revolutionary Guard Corps (IRGC).
The pair’s operation involved front companies across Iran, Malaysia, Hong Kong and Indonesia to obscure the end destination of these goods. Notably, a French company was unwittingly involved, purchasing electronic items from the U.S., which were then diverted to Iran via Hong Kong.
A recent case involving an Iranian arms dealer, who successfully avoided deportation from the UK by leveraging EU human rights laws, shows how close to home proliferation financing can be. The individual was allegedly involved in procuring and supplying weapons components in violation of international sanctions, and has been identified as a security risk.
Compliance and mitigation strategies
To safeguard against proliferation financing risks, accountants must implement robust compliance measures:
Enhanced Due Diligence (EDD)
Monitoring and reporting
Staff training and awareness
The role of AMLCC in supporting accountants
AMLCC provides essential tools and guidance to help accountants comply with AML and counter-proliferation financing (CPF) regulations. Through comprehensive risk assessment tools, training modules, and reporting systems, AMLCC ensures that accountancy professionals can:
Proliferation financing presents a significant challenge to global security. And financial professionals play a critical role in its detection and prevention. By implementing stringent compliance measures and staying informed about emerging risks, accountants can help safeguard the financial system against illicit activities.
Terrorist financing might seem like something far removed from everyday accounting work. But the reality is that it’s a risk that professionals in the UK need to take more seriously.
Organised crime continues to pose a significant threat to the UK and global economies. At its core, money laundering is a tool that enables and sustains criminal enterprises, including drug trafficking, terrorism and modern slavery.
In essence, money laundering transforms illegally obtained funds into what appear to be legitimate earnings. This process allows criminals to utilise their illicit profits while concealing their illegal origins, perpetuating harmful activities that impact communities worldwide.
However, it’s not only career criminals who engage in money laundering—fraudulent activity and false tax claims also fall under this category. These actions are often carried out by regular individuals who may not realise the full implications of their conduct.
As a professional operating in a regulated sector, understanding the mechanics and risks of money laundering is crucial. By recognising the methods employed by criminals and implementing anti-money laundering (AML) practices, you can safeguard your clients, your business and society as a whole.
Breaking down money laundering
Money laundering refers to any activity that involves concealing, transferring or legitimising the proceeds of crime. This could range from spending and converting illicit funds to helping someone else engage in such practices—whether knowingly or unintentionally.
UK law, under the Proceeds of Crime Act 2002, defines money laundering through the following activities:
The term ‘criminal property’ encompasses any money or assets acquired through illegal means. It even includes cases where financial obligations like taxes are evaded, with the unpaid amount classified as criminal proceeds. For instance, a client reducing their tax liability by falsifying income has effectively generated criminal property.
The primary aim of anti-money laundering legislation is to disrupt the cycle of crime by denying offenders the financial rewards of their illegal activities. This reduces the appeal of engaging in such acts in the first place.
Common money laundering tactics explained
Criminals use money laundering to obscure the origins of their unlawful gains, enabling them to integrate these funds into the legitimate economy. Research by the United Nations Office on Drugs and Crime estimates that over $2 trillion globally—about 2-5% of the world’s GDP—is laundered each year.
Here are some common methods criminals use to launder money:
Understanding these techniques highlights the need for vigilance and robust AML procedures to counter evolving criminal strategies.
Are you a ‘professional enabler’?
Regulated professionals are at the forefront of the fight against money laundering, acting as gatekeepers of the financial system. Unfortunately, this also makes them attractive targets for exploitation by criminals seeking to legitimise their gains.
The term ‘professional enabler’, introduced in the Economic Crime Plan 2023/26, describes individuals or organisations whose actions—deliberate or negligent—allow criminal activity to thrive. These professionals, whether aware of their role or not, are critical to enabling money laundering schemes.
By failing to conduct due diligence or comply with AML regulations, professionals may unintentionally assist criminal enterprises. Safeguarding your services requires a proactive approach to understanding your clients and their intentions.
Seemingly routine professional tasks can be exploited for laundering purposes, such as:
AML as the solution
As a regulated professional, you’re obligated under the Proceeds of Crime Act 2002 and related regulations to identify and mitigate money laundering risks. Ignoring these responsibilities won’t make them go away.
This responsibilities extend beyond checking boxes. They’re an essential component of the larger effort to combat financial crime and uphold the integrity of the financial system.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 outline clear steps to ensure compliance. Embedding these measures into your operations strengthens your ability to identify and respond to potential threats.
Keeping accurate records of all your AML activities is not just advisable but legally mandated. This is so you can ultimately submit a Suspicious Activity Report (SAR) to the relevant authorities when you identify potential money laundering. After all, this is the only way that illegal financial conduct can be uncovered and the people involved dealt with.
Each step you take contributes to building a financial environment that is harder for criminals to infiltrate. Together, regulated professionals can make a meaningful impact in the fight against financial crime.
About Richard Simms
Richard Simms, MD of AMLCC, is a chartered accountant and a leading authority on anti-money laundering. He is a sought-after guest at accountancy and AML conferences worldwide due to his position at the pulse of changes in guidance and legislation that impact DNFBPs.
A Politically Exposed Person (PEP) is an individual who holds or has held a prominent public function, either in the UK or abroad.
This includes heads of state, senior politicians, senior government officials, senior judicial or military officials, senior executives of state-owned corporations, and important political party officials. Family members and close associates are also considered PEPs due to their potential influence and access to funds.
Due to their power and influence, PEPs are more vulnerable to corruption. Which is why the Regulations have always demanded more scrutiny of them.
Previously, a complete set of enhanced due diligence (EDD) measures were mandatory for all PEPs, regardless of their country of origin. Now, while EDD still needs to be used for domestic PEPs, regulated professionals are being asked to make the assumption they’re lower risk than their foreign counterparts - and to act accordingly.
To quote the Regulations:
…where a customer or potential customer is a domestic PEP, or a family member or a known close associate of a domestic PEP—
(a) the starting point for the assessment is that the customer or potential customer presents a lower level of risk than a non-domestic PEP, and
(b) if no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to that customer or potential customer is less than the extent to be applied in the case of a non-domestic PEP.”
This essentially allows businesses to apply a risk-based approach when assessing domestic PEPs, so resources can be focused on higher-risk areas.
It’s crucial to note that while the legislation provides a degree of relief for domestic PEPs, it doesn’t eliminate the need for EDD altogether.
In July 2023 the now-leader of Reform UK, Nigel Farage, alleged that private bank Coutts had closed his accounts with them due to his political views. Former UK Chancellor Jeremy Hunt also revealed that he’d been denied a Monzo account due to his PEP status.
In the wake of these stories, the Government announced that it was reviewing how domestic PEPs should be treated under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. As of 10 January 2024, domestic Politically Exposed Persons (PEPs) have been given a lower starting risk status to foreign PEPs.
The rationale behind this change lies, aside from UK politically exposed individuals objecting to being seen as inherently high risk, in the understanding that domestic PEPs operate in a relatively well-regulated political system. As a result, the inherent risk associated with them should, in theory, be lower than that of PEPs from foreign jurisdictions.
Update your AML PCPs
Your AML policies, controls and procedures (PCPs) are a good place to start. If they’re compliant, they’ll already include comprehensive guidance for identifying PEPs, the enhanced due diligence to undertake when employees encounter one and ongoing monitoring and reporting requirements of your business. You just need to make a few small changes.
If you’re an AMLCC user, we incorporated the Regulation change into AMLCC when it was announced. You can simply go to the PEP section of your AML policy and edit the update to align with your business’ situation and processes.
For those of you who have a policy outside of AMLCC, make sure you read the regulations thoroughly and understand what they ask of you. Then incorporate them into your AML PCPs appropriately.
Make sure your employees are aware of the change
If you’re updating an AMLCC AML policy, all users in your business will have to acknowledge they understand the PEP changes you make. The MLRO can see who’s done this and who hasn’t on their live dashboard.
Other businesses need to make sure that they inform their staff of the changes and raise awareness about the new PEP AML PCPs through training.
Updated or new risk assessments
AMLCC users will have noticed that the wording for AMLCC’s business and client risk assessments reflect the new regulations, or you will see the changes when you next conduct a new risk assessment or update your existing ones.
All businesses regulated for AML need to conduct regular risk assessments and, as part of that process, identify potential PEP exposure in your client base. This consideration should reflect the Regulation’s new update.
Customer due diligence (CDD) is a well-known acronym in the industry. It’s often related to checking a client’s government-issued ID and collecting proof of address. But in reality, it’s much, much more than this.
It’s been made part of your AML legal obligations because it safeguards the UK’s financial system from being exploited and being used for money laundering (ML) terrorist financing (TF) and proliferation financing (PF).
Effective CDD processes equip you with an in-depth understanding of your clients. This means delving into details such as the source of their funds, ultimate beneficial ownership and identifying any associated risks, before starting a client relationship.
In this article I’ll look at the steps involved in your CDD, to give you a better understanding of what your processes should entail.
You need to complete a client risk assessment to get a preliminary understanding of the risks that client presents. This allows you to determine the client’s risk level, and then apply the right level of CDD to them.
This is part of the risk-based approach, which is advocated by the current AML guidance and legislation. Using it helps you to efficiently assign resources where they’re needed most.
Please note that if your CDD work reveals hidden risks connected with a client you previously deemed to be lower risk, you’ll need to revisit and update their risk assessment.
To satisfactorily fulfil the CDD part of your AML regulatory requirements, you need a deep understanding of certain key aspects of your client and their business. This information needs to be reviewed and updated regularly and as the client's and your firm’s circumstances change.
Does your client’s identity exist and do they have a right to that identity? In other words, is your client who they claim to be. You can verify this by comparing their likeness to an original government-issued photo ID (a passport or driving licence, for example), and gathering proof of address (like utility bills). You can also run these checks online but that’s not necessary to be compliant. Be careful if using an online check that the process gives proof that an individual has the right to use the identity that they’re claiming.
If you haven’t met a client in person to certify their ID also consider a biometric check, to match a live image of an individual to the image on their government-issued documents.
Understanding the origin of the client's wealth is intrinsic to the CDD process. It involves probing deeper into where their funds originate from and the legitimacy of their wealth.
You need consider their occupation, assets and country of residency as part of this. This is because you must ensure these funds aren’t coming from or through any high-risk jurisdictions with inadequate AML regulations. Any suspicion about funds being the proceeds of crime must trigger a suspicious activity report.
Criminals often use opaque company structures to hide illicit funds and sources of funds. Identifying the ultimate beneficial owner (UBO) is required to maintain transparency. This allows law enforcement to link any reported proceeds of crime with those responsible for generating them.
A nuanced understanding of the kind of businesses your clients are involved in helps you to customise your AML policies, controls and procedures (PCPs). You need to keep in mind the specific risks each sector may pose. Knowing about a client’s business also enables you to spot any unusual activity in their transaction patterns.
Screening clients against politically exposed persons (PEP) lists and sanction lists allows you to identify potential high-risk individuals, entities or vessels.
Screen clients using a Google search of publicly available information like news reports and lawsuits, and for connections to PEPs or high-risk jurisdictions. This provides insightful details about their past involvement in potentially criminal activities.
Audit-worthy records act as proof of compliance when you’re inspected by your supervisor or called on by law enforcement. It involves maintaining copies of identity verification documents, transaction details, source of funds and wealth information, and screening checks, among others.
These records not only serve as evidence of your business’ robust CDD measures but also ensures the accuracy of each client's risk profile. It also protects your reputation and helps avoid potential fines for non-compliance.
AML regulations recommend taking a risk-based approach to your business’ AML. When it comes to CDD, this means tailoring your actions depending on each client's risk profile.
Lower-risk clients may be eligible for simplified due diligence (SDD). While higher-risk clients may demand enhanced due diligence (EDD), which warrants additional information and verification steps.
CDD should never be just a one-off process. To comply with AML regulations and detect any suspicious activities that may indicate ML, TF, or PF, your CDD information needs to be up to date. Transaction reviews, changes in a client’s information and awareness of any a change in their business are all integral parts of your regular monitoring.
Again, you need to keep records of this monitoring. This way, if you’re asked for your client’s information you’ll be able to give a full and detailed picture of their whole relationship with you.
Richard Simms, Managing Director of FA Simms and AMLCC, is a licensed insolvency practitioner, chartered accountant and a leading authority on anti-money laundering. He is a sought-after guest at Accountancy and AML conferences worldwide due to his position at the pulse of changes in guidance and legislation that impact DNFBPs.
For more information on how AMLCC could keep your business AML compliant, please visit https://www.amlcc.com/accountancy/
This won’t be the first sentence you’ve read about how money laundering, terrorist financing and proliferation financing have become a significant issues in recent years.
The scale of money laundering is staggering, with an estimated £100 billion laundered through the UK annually. With the advancement of technology and the global economy, traditional barriers to these illicit activities have mostly been removed. Failure to address this issue impacts the economy, contributes to social inequality and finances other criminal activities.
The benefit of complying with anti-money laundering (AML) regulations to prevent these activities cannot be overstated for the accountancy sector. But adhering to these regulations could also bring with it another benefit.
Is AML regulation good for business?
In short: yes. Preventing and detecting financial crimes can protect your reputation and make you less vulnerable to criminal activities. Firms with lax AML policies are more likely to be targeted by criminals seeking to proceed unchecked.
By staying on top of AML regulations, businesses can mitigate the risks associated with non-compliance, which are fines, having your firm’s name made public by HMRC, loss of membership with your supervisor…and more. Leading to better growth and sustainability.
Compliance with these regulations also demonstrates to clients that your business takes its role as a regulated professional seriously. It can be viewed as a strategic investment that enhances credibility, competitive advantage and fosters a culture of integrity.
An environment built around AML
Comprehensive AML policies, controls, and procedures (PCPs) are the backbone of your firm's activity. They set out how you risk assess your business and clients, carry out due diligence and report any suspicious activity.
Your PCPs also put in place education processes that equip all employees with the knowledge to detect, prevent and report illicit activity or a suspicion of it.
Risk assessments of your whole business, departments and services lines will show you where your higher risks lie. And client risk assessments show you which clients present the higher risk.
Carrying out Client Due Diligence (CDD), including your client risk assessment, is vital during the onboarding stage but should also be updated as your relationship with the client evolves.
It's legally necessary to accurately pinpoint the ultimate beneficial owner (UBO) of a business as part of this process, as is a sanctions and PEP check. Only by truly understanding who your client is and their financial dealings can you accurately gauge their risk.
The recently passed Economic Crime and Corporate Transparency Bill 2023 has further bolstered Companies House with additional authority to scrutinise and oppose information provided to it. This makes the validation of the information held by your clients on the companies register increasingly important.
Finally, maintaining complete records of your AML is a legal must. Preserving transparent records and documentation allows your supervisor and law enforcement to confirm that you’ve taken a thorough approach.
The National Crime Agency (NCA), like other government departments, has shown a clear commitment to ramping up the fight against money laundering (ML), terrorist financing (TF) and proliferation financing (PF).
The latest weapon to be added to their arsenal is the long-awaited new Suspicious Activity Report (SAR) portal, released for general use on Monday 18th September 2023. The AMLCC SAR portal, for making and storing internal SARs, has been fully updated to align with it.
ML, TF and PF are ever-evolving threats
The nature of crime is changing. Criminal enterprises and terrorist groups are using increasingly sophisticated methods to legitimise their illicit gains or fund their activities.
Given the dynamic challenges and the rapid progress of technology, there's a pressing need for a more robust platform for flagging suspicious transactions.
SARs play an essential role in the fight against ML, TF and PF by acting as an alert system for potentially suspicious activities. It's essential that the reporting platform is able to generate a detailed and thorough report for the benefit of law enforcement agencies.
The new SAR platform - what’s new?
You’ll find a lot more data fields, designed to strengthen the quality of your SAR. The important thing is that you already have the correct information on file.
The updated AMLCC internal SAR tool will ask you for the comprehensive information and detail you need to make a useful and actionable SAR report to the NCA. Accessing all this information won't be an issue if you've already completed all your AML obligations and kept records of your work.
You'll need details like these:
Subjects involved: Reporters will need to provide more detailed information about the individuals or organisations involved in suspicious activities. These includes passport details, national insurance number, driving licence number, tax reference, IP address and so on if you have these details available to you.
Suspicious activity details: This is one of the main upgrades. The portal provides free text boxes to provide all known details of the alleged activity. It’s essential to explain why the activity is deemed suspicious and provide the groundwork for potential investigations.
Glossary codes: The new portal provides six groups of glossary codes:
· Vulnerable people
· High risk individuals
· High risk predicate offences
· Money laundering typology
· Economic predicate offences
· National interests
A SAR can have several codes that should be used to categorise your suspicion. Their use is good practice and crucial for enabling the FIU and wider law enforcement to identify money laundering trends, and high risk cases for development and action.
Defence against money laundering (DAML) or terrorist financing (DATF): As you may be aware, where you suspect or know that property is criminal, or suspect or believe that something is or may be terrorist property, and where you intend to carry out an activity which you anticipate could result in committing a principal money laundering or terrorist financing offence, you may request a criminal defence from the NCA in relation to that intended activity. For example, transferring funds from a client account which you know or suspect to be the proceeds of crime.
The new SAR portal allows you to request a DAML or a DATF rather than having to apply separately as before.
Your obligation to submit a SAR
Your ability to submit a detailed and accurate SAR to the UK Financial Intelligence Unit (FIU), which sits within the NCA, is one of the key reasons money laundering regulations have been in place since 2007.
Submitting a SAR provides law enforcement with invaluable information about known or suspected criminal activity that they may not otherwise have access to. It also protects you, your business and you employees from the risk of laundering the proceeds of crime, terrorist financing or proliferation financing.
Please don't forget that internal SAR reports must be made and kept as a key part of your business’ AML records so the MLRO, as well as the employees, should make internal SARs prior to the decision to report to the NCA.
You need to submit a SAR using the NCA secure online portal. It gives you an instant acknowledgement with a reference number. This portal is available via the 'reporting SARs’ link in the top right hand corner of the NCA website.
The UK has £87.9bn (4.3% of our GDP) laundered through its economy every year. This makes us second only to the US in the amount of criminal funds that pass through our country.
This cannot go on. But currently the UK is losing in the global fight against money laundering. The Transparency International Corruption Perceptions Index ranks us in 18th place. This is an embarrassing four places below Uruguay, a country with a reputation for suppressing freedom of speech, sitting in 44th place for freedom of expression in Reporter’s Without Borders ranking.
The accountancy sector, as with all our other regulated sectors, is a gatekeeper of our country’s economy. Clearly, that role is not being performed nearly well enough.
A hypothetical look at the reality of potential AML failings
Modern Slavery estimates that over 130,000 people in the UK are trapped in slavery. As well as criminal industries, these people are in elicit sectors like construction, shops, bars, car washes and manufacturing.
If you’re completing the right AML checks on your clients, their involvement in this criminal activity might present anomalies. But according to the annual reports from various accountancy supervisors, it appears that only around 15% of accountants are currently doing everything they can to comply with the regulations and taking the matter seriously. Unbelievably, an estimated 15% are still doing nothing at all. The remaining 70% may be carrying out some of the necessary steps and work to be fully compliant but are still not doing everything they should be doing.
Imagine that one day you get a call or visit from law enforcement. Some of the workers on your client’s construction site have been referred to the authorities as suspected victims of modern slavery. What happens next depends on whether you’ve fulfilled your AML obligations.
If you’re one of the 15% of firms that does everything it can to comply, you’ll have completed all the required AML steps and have a complete audit trail to prove it. If there were no red flags, or if you’ve shown how you’ve mitigated the risks you did spot, you can hand over the information you have on the client with the peace of mind that you did everything in your power to identify criminal activity.
For the other 85%, the matter is much more serious.
Currently, your firm could receive £10,000s in fines and lose its licence to continue in business. With the Economic Crime and Corporate Transparency Bill going through its final amendments, ‘failure to prevent’, which is what you could potentially have done, brings with it the likely possibility of criminal charges too.
Then you have the ethical issues. I would imagine any potential involvement in modern slavery, albeit unwittingly, would not sit well with you.
Compliance can be easy
As a regulated professional in the accountancy sector and as an AML expert, I’ve seen the challenges that firms have with compliance. UK professionals have got to stop seeing AML risk management and compliance as a nuisance and a waste of their time – there is a much bigger picture.
It may seem onerous unless you fully understand what AML really is and why it exists. It may be that only when faced with the possibility of your AML processes being put under the spotlight that you take the time to analyse what you’re doing and realise that it’s not up to scratch. Often no-where near up to scratch.
The Regulations clearly define the AML obligations that all firms are legally required to comply with. To give you an overview:
Once you have the right processes in place, AML is much easier to keep up with - more like regular housekeeping rather than a once-a-year spring clean. It will also allow you to minimise the risk of yourself and your firm suffering the severe legal and ethical consequences of becoming unknowingly involved in criminal activities.
If all regulated professionals pull together to fight money laundering worldwide it will start to work. If you’re not going to properly comply with AML regulations, you are in the wrong industry.
Research by Transparency International estimates that £6.7 billion worth of property in the UK had been purchased with suspicious wealth, with £1.5 billion bought by Russians accused of corruption or links to the Kremlin.
This demonstrates the significant extent to which foreign kleptocrats have infiltrated the UK's property market and highlights the urgent need for action.
The UK, particularly London, has long been an attractive destination for kleptocrats to launder their illicit funds. Their money laundering is often carried out through complex networks of shell companies, offshore accounts and property investments. These methods allow them to obscure the origin of their funds and integrate them into the legitimate economy.
What’s being done about this critical issue and how does it affect the Accountancy sector?
The Economic Crime (Transparency and Enforcement) Act 2022 (ECA) was introduced to strengthen the UK's AML framework by increasing transparency and enforcement measures.
With the spotlight firmly on the flow of money to the Putin-backed regime after Russia’s invasion of the Ukraine in February 2022, one of the ECA’s main goals was to streamline the process for imposing sanctions.
The ECA allows for individuals and entities to be sanctioned more quickly, especially if the same individuals have been sanctioned by another country. To date, over £18 billion of Russian and other assets in the UK have been frozen, showing the positive impact the ECA has had.
The ECA also strengthened the UK's beneficial ownership register, requiring companies to disclose information about their true owners. This increased transparency makes it more difficult for kleptocrats to use shell companies to launder their funds.
Building on the ECA, the UK government has proposed the Economic Crime and Corporate Transparency Bill. It aims to further enhance the UK's AML framework by delivering the biggest upgrade to Companies House since the UK first introduced a register of companies in 1844. This reform will make it even harder for kleptocrats to create opaque company structures to launder their criminal assets, among other reforms.
Accountants, with their expertise in financial systems and regulations, can unwittingly - or knowingly - play a crucial role in enabling kleptocrats to achieve their aims.
A huge risk to your business is working with a client who has a complex corporate structure. These structures often involve multiple shell companies registered in offshore tax havens, which provide anonymity and secrecy. By establishing a web of interconnected companies, kleptocrats can obscure the source of their funds and make it difficult for law enforcement agencies to trace the money back to its illicit origins.
This is why it’s crucial that you identify the Beneficial Owner (BO) or Ultimate Beneficial Owner (UBO) of your client. Questions regarding ownership form part of the AMLCC risk assessments. If you’re unable to identify the BO or UBO, you shouldn’t act for that client.
Another method employed by kleptocrats is the use of nominee directors and shareholders. These individuals, often with no real connection to the kleptocrat, are appointed to act as company directors or shareholders, adding another layer of anonymity to the corporate structure. This makes it even more challenging for authorities to identify the true beneficial owner of the funds.
Kleptocrats might also look to exploit you for your knowledge of tax regulations and loopholes to minimise the tax liabilities of their companies. This not only helps to maximise the profits from the laundered funds but also reduces the chances of attracting unwanted attention from tax authorities.
If you have knowledge or a suspicion of money laundering, terrorist financing or proliferation financing, you must submit a Suspicious Activity Report to the National Crime Agency as soon as possible.
By strengthening the UK's AML framework and increasing transparency in its financial system, the UK can make it more difficult for kleptocrats to launder their illicit funds and reduce the risk of financial crime. And the Accountancy sector has a duty to uphold these rules and regulations, to protect the integrity of the UK's financial system from the negative social and economic impacts associated with money laundering by kleptocrats.
The UK has long been at the forefront of the global fight against corruption and financial crime. However, digital verification company Credas found that in the UK alone £87.9 billion is laundered annually. This makes us second only to the US for the amount of money laundered through our financial system every year.
As part of ongoing efforts to combat the illicit flow of money into and out of the UK, the government established the Combatting Kleptocracy Cell (CKC) in 2022. We’ll look at the CKC, its mission, its successes and how accountancy firms like yours, as key gatekeepers for the UK’s financial system, also have a vital part to play in the CKC’s work.
What is the Combatting Kleptocracy Cell (CKC)?
The CKC is a multi-agency unit inside the UK's National Crime Agency (NCA), involving collaboration from various UK government departments, law enforcement agencies and financial intelligence units. It deals with financial crimes that include bribery, embezzlement, fraud and tax evasion, often involving politically exposed persons (PEPs) and other high-net-worth individuals (HNWIs).
Its primary objectives are to:
1. Identify, track, and freeze the assets of corrupt individuals and their networks.
2. Facilitate the recovery of stolen assets and return them to their rightful owners.
3. Hold corrupt individuals accountable for their actions through criminal prosecutions and other legal measures.
4. Deter future corruption by sending a strong message that the UK will not tolerate the use of its financial system for illicit purposes.
What does this mean for accountants?
In cases where the CKC is investigating or prosecuting PEPs, individuals or entities involved in kleptocracy, they may require the assistance of accountants, bookkeepers, tax professionals or licensed insolvency practitioners to provide financial records and their full cooperation.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) provide you with guidance on the treatment of PEPs as high-risk individuals. Regulation 33 (6) of the MLR 2017 indicates some transactions which may be high risk, especially where a PEP is involved.
HNWIs in the UK can also be seen as high risk. HNWIs from other jurisdictions who choose to invest in UK-based assets, particularly through tax-efficient structures or offshore holding companies or trusts, may be subject to Unexplained Wealth Orders or freezing orders.
As such, if you have PEPs or HNWIs in your client base you should have already recorded your awareness of the risks they present and the steps you’ve taken to mitigate them. As examples of the steps you should take to protect yourself and your firm from being involved in a PEP’s or HNWI’s potential criminal activities, you should:
1. Conduct enhanced due diligence on those with political connections or from high-risk third countries.
2. Implement robust anti-money laundering (AML), counter-terrorist financing (CTF) and counter-proliferation (CPF) policies and procedures.
3. Stay informed about relevant laws, regulations, and guidance.
4. Train your employees on AML, CTF and CPF requirements, including the risks associated with politically exposed persons (PEPs) and HNWIs.
5. Report any suspicious activities or transactions to the NCA using a SAR.
By taking these steps, amongst your other legal obligations, you’re also furthering your business’ compliance with relevant regulations.
How successful has the CKC been?
Despite being a relatively new initiative, there have already been several notable achievements and ongoing investigations that demonstrate the CKC’s potential to make a significant impact in the UK’s fight against money laundering and corruption.
Working with members of the International Anti-Corruption Coordination Centre (IACCC): The IACCC brings together specialist law enforcement officers from multiple agencies around the world to tackle allegations of grand corruption. In 2018 alone, it received 27 referrals, 14 of which came from Asian countries and 10 from African ones(1). It also identified and disseminated intelligence of 227 suspicious bank accounts found in 15 different jurisdictions and around £51 million of worldwide suspicious assets(2). The CKC plays a vital role in the IACCC’s work(3).
Action against Russian elites: Since its establishment in 2022, the CKC has had significant success investigating and obtaining 100s of disruptions (actions that demonstrably remove or reduce a criminal threat). £billions in assets have been seized from Putin-linked elites, the professional service providers that support and enable them(4), as well as multiple arrests made. This includes the high profile arrest of Mikhail Fridman, in December 2022.
The Global Anti-Corruption Sanctions Regime: In April 2021, the UK introduced the Global Anti-Corruption Sanctions Regime, which allows the government to impose asset freezes and travel bans on individuals and entities involved in serious corruption. Since setting up the CKC has played a key role in identifying targets for sanctions and gathering evidence to support their designation. This includes over 1,100 Russian individuals(5).
In summary
The CKC’s investigations represent a significant step forward in the UK’s efforts to tackle global corruption and money laundering. By targeting high-level corruption and working closely with international partners, the CKC has the potential to protect the integrity of the UK's financial system and promote global stability.
These crimes might seem far away from our day-to-day roles. But, as gatekeepers to the UK’s financial economy, UK accountants, bookkeepers, tax professionals and licensed insolvency practitioners all have a part to play - both legally and morally.
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1 https://mlexmarketinsight.com/news-hub/editors-picks/area-of-expertise/anti-bribery-and-corruption/corrupt-elite-are-very-litigious,-which-complicates-probes,-says-anti-graft-police-chief 2 https://ngm.com.au/combat-grand-corruption-iaccc/ 3 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1147515/6.8300_HO_Economic_Crime_Plan_2_v6_Web.pdf 4 https://www.nationalcrimeagency.gov.uk/news/wealthy-russian-businessman-arrested-on-suspicion-of-multiple-offences 5 https://committees.parliament.uk/publications/30459/documents/175743/default
As an accountant, you already know you have a duty to report suspicious activity under anti-money laundering (AML) legislation. In fact, that’s a key reason - if not the key reason - the AML regulations dictate that client due diligence must be carried out on every client, including a client risk assessment.
The purpose of these Suspicious Activity Reports (SAR) reports is to help law enforcement agencies detect money laundering schemes and other criminal activities before they can cause further harm or damage the economy at large.
It’s crucial that the contents of a SAR are accurate and up to date to enable law enforcement to quickly assess and action those reports. We want those with criminal intent to know that professionals will report any suspicions immediately and effectively.
To do this, it’s important to understand what constitutes suspicious activity, so you don’t miss an opportunity to report something that could be important for law enforcement agencies. It also means you protect yourself and your firm from liability and the consequences of non-compliance.
What is suspicious activity?
Whether it’s a matter of thousands or millions of pounds, a SAR must be submitted by accountants, bookkeepers, auditors, insolvency practitioners and tax professionals who have formed a suspicion of criminal activity that has already, or may, generate proceeds from that crime. Don’t forget that a reduction in a liability is as much the proceeds of crime as the generation of funds.
The government has outlined several indicators that might suggest unethical or criminal activity, such as unusual transactions, incomplete or inconsistent information, and unexplained behaviour. Some of the activity that might indicate money laundering or other financial crimes include:
Though suspicion is referred to in case law, it’s not defined in AML legislation. From my personal experience working as an insolvency practitioner, and from my discussions with accountancy professionals, if you need to ask yourself whether you’ve formed a suspicion…you probably have.
But if you’re still unsure, imagine that someone of the same experience and qualifications as you is sitting next to you and considering the same set of information that you have. What view would they form?
The benefits of submitting a SAR
Submitting a SAR can have several benefits, both for the person submitting the report and for society as a whole.
It helps prevent crime: SARs help law enforcement agencies detect and prevent crime. By reporting suspicious activity, individuals can help to stop criminal activity and prevent harm to others.
It enhances national security: SARs play a critical role in enhancing national security by providing valuable intelligence to law enforcement agencies. By reporting suspicious activity, individuals can help prevent terrorist attacks and other threats to national security.
It maintains a safe and stable financial system: SARs are an important tool in maintaining the integrity of the UK’s financial system. By reporting suspicious activity, individuals can help prevent money laundering and other financial crimes that can undermine the stability of our country.
You fulfil your legal obligations: Last but by no means least, you’re required by law to submit a SAR when you suspect money laundering or terrorist financing. Failure to do so can result in legal action, financial penalties and damage to your reputation.
When and how should accountants submit a SAR?
If you do come across suspicious activity, you must assess the risk of money laundering, terrorist financing, proliferation financing or other criminal activity. It’s important to note that you don’t need to have evidence of criminal activity to submit a SAR. You only need to have reasonable grounds: a suspicion.
In some cases, you may be unsure whether or not to submit a SAR. In such cases, it’s advised to seek guidance from your firm's Money Laundering Reporting Officer (MLRO). It’s also worth noting that failure to submit a SAR when required to do so is a criminal offence that can result in a fine or even imprisonment. Therefore, it’s important to take the reporting of suspicious activity very seriously.
If you’re an employee of a business, you must make a written internal SAR to your MLRO. This needs to be as detailed as possible and include factual information about your clients - names, addresses and account details - as well as your reasoning behind the SAR.
There’s an internal SAR tool integrated into the AMLCC platform. This walks employees through the reporting process, giving guidance about what information to submit to create a comprehensive SAR. This makes it quicker and easier to make an external SAR.
It’s up to your business’ MLRO to make an external report to the National Crime Agency (NCA). If your MLRO decides not to make an external SAR, it’s vital they document why this decision has been made. AMLCC let’s you do this too, so that if law enforcement do come knocking you can show you’ve made every attempt to comply with your AML obligations.
The UN’s Office on Drugs & Crime has found that up to US$2 trillion is laundered globally every year. This is 5% of the world's GDP. This money comes from the kind of illegal activities you read about every day – drugs, fraud and human trafficking to name a couple.
Shocking though it may seem, having a client that's involved in these crimes is not unlikely. The 2020 MLTF National Risk Assessment confirmed this. The trusted reputation of the accountancy sector makes it high risk as a target for criminal activity.
Your AML obligations exist so you can detect and report suspicious activity internally to your MLRO, who then decides whether to make a SAR to the National Crime Agency (NCA).
What are your AML obligations?
Your legally required AML obligations include:
Non-compliance puts your firm's reputation at risk. The accountancy supervisors are really cracking down. Between the ICAEW and AAT alone, 11
members were expelled and 10 had practicing licenses revoked in 2021/2022 as well as fined practices up to £24,500. HMRC also revoked practicing licenses and issued numerous fines including a fine of approximately £17,000 to a small firm for inadequate risk assessments and other non-compliance issues.
How can AMLCC help?
AMLCC, when used correctly, allows you to fulfil all of your firm's AML obligations. Effectively, efficiently and in one online platform. Thousands of UK accountants have already used it to pass their supervisory visits and protect themselves from the consequences of non-compliance.
Comply
Tailor online AML policy & compliance documents that reflect your national guidance. Every document & update is saved to your audit trail.
Manage risk
Online firm & client risk assessments give guidance & mitigation advice where appropriate. Add comments and documents to show your actions and demonstrate your understanding & make internal reports through AMLCC.
Educate
Industry-specific AML training videos give every employee & manager strong, up-to-date knowledge of AML rules & regulations.
Report
If money laundering, terrorist financing or proliferation financing is detected, or suspected, employees and agents can make an internal SAR to your MLRO through AMLCC. Guidance on what information to submit means the resulting SAR from your MLRO is always comprehensive.
AIA members qualify for a discount on their AMLCC subscription. For more information on how AMLCC can enable your firm’s AML compliance, risk management and education, please visit us at amlcc.com
Director of AMLCC, Richard Simms, explains why Suspicious Activity Reports (SARs) are at the root of your AML obligations - and why you need to take them very seriously:
The key issue that so many anti-money laundering (AML) regulated professionals miss is that the Regulations exist primarily so SAR reports can be made whenever necessary. Thereafter, law enforcement can decide whether the report potentially adds further evidence to a situation they are already aware of, or reports a new situation.
The Financial Action Taskforce (FATF) estimates that 2%-5% of the global GDP is laundered, which amounts to over £37bn in the UK alone.
This, and the associated criminal activities, are more of a threat than many UK accountancy firms appear to believe. To support this claim, HM Treasury’s National Risk Assessments for money laundering (ML) and terrorist financing (TF), which includes proliferation financing (PF), has found that lack of awareness of these risks contributes significantly to the sector’s increased risk of exposure.
The Proceeds of Crime Act 2002 created an offence of not reporting knowledge or suspicions of these illegal activities. But if you’re not aware of what to look out for, you won’t spot them to report them.
What is suspicious activity?
You’ll already be aware of what money laundering and terrorist financing are. As a brief recap…
Money laundering is doing almost anything - or planning to do almost anything - with money or goods that are the proceeds of crime. It’s a term that’s rumoured to have its origins in the prohibition era, when Al Capone used laundromats to hide the origin of money gained from the sale of alcohol.
Whether or not this is true, criminals are highly likely to ‘clean’ ill-gotten gains by using legitimate businesses to put a distance between a crime and the proceeds gained from it.
The funds associated with terrorist financing may relate to funds from a legitimate source or from criminal activity. The funds are obtained with the intention of financing terrorism.
In September 2022, counter-proliferation financing was added to your legal obligations. The Financial Action Task Force defines proliferation financing as:
"the act of providing funds or financial services which are used, in whole or in part, for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of chemical, biological, radiological or nuclear (CBRN) weapons and their means of delivery and related materials (including both technologies and dual use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations.”
This is an intentionally broad definition. PF applies to financing every part of the supply chain.
Suspicious activity reports
Your firm must appoint a member of senior management to hold the role of the Money Laundering Reporting Officer (MLRO), also known as the Nominated Officer (NO). This is the person that employees and agents need to make an internal report to.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (The Regulations) require every regulated business to have steps in place that enable each relevant employee and agent to identify and report suspicious activity to the firm’s MLRO.
The ultimate purpose of your firm’s AML activity - from its policies, controls and procedures to client due diligence (CDD) and risk assessments - is to create an environment where ML, TF, and PF can be detected, prevented and reported. SAR reports made by your MLRO to the Financial Intelligence Unit (FIU) in the National Crime Agency (NCA) are the result of this AML work.
It’s your MLRO’s responsibility to decide whether a SAR is necessary. If you’re a sole practitioner, you’re your own MLRO and so should make a report to the NCA directly.
The more information the SAR provides, the more helpful it is to law enforcement. You should be routinely monitoring your clients’ risk and keeping up to date with any changes in their circumstances or transactions. This will enable you to give the NCA valuable information.
Investigations often include multiple SARs from different sources. So although you may feel your report will not add much information, it could prove to be the missing piece to a much larger scenario.
Remember a principal reason for identifying and verifying the identity of clients, and keeping this up to date, is to enable current information to be passed on to the NCA as part of a SAR report.
Reducing risk in your firm
It may seem unlikely that your client will be involved in criminal activity. The generally held belief is that these are the kinds of cases other people experience. But it’s not uncommon for law enforcement to approach a firm to request more information on an investigation into a client that seems completely legitimate. Don’t forget: criminals will work exceptionally hard to appear to be a ‘normal’ client.
This is where your AML policies, controls and procedures can save you from becoming part of the investigation. Every employee and agent must be trained in these, as well as in AML, CTF and CPF.
Your protection starts with having these policies, controls and procedures in place, to empower all of your business’ employees to detect, prevent and report any knowledge, or suspicion, of money laundering or other related criminal activity.
Client due diligence (CDD), including a comprehensive risk assessment, needs to be undertaken during the onboarding process, whenever circumstances change, and regularly for the duration of the business’ relationship with the client. You must ensure you properly identify the ultimate beneficial owner of a business, which is vital to determining the client’s level of risk and the requirement for enhanced due diligence measures.
You legally need to include a sanctions check in this process too. It’s only by knowing who your client really is, and the nature of their financial activity, that you can make an accurate assessment of their risk.
Recent reforms of Companies House give it increased powers to query and challenge information submitted to it. So thoroughly checking for inconsistencies on the companies register has become even more important.
Lastly, the more detailed records you keep of your AML activities, the more protected your firm is. If you keep clear records and documents, your supervisor and law enforcement will be able to see that you’ve taken the best approach. This could shield you from fine, loss of reputation and even criminal prosecution.
About Richard Simms
Richard Simms, MD of FASimms and AMLCC, is a licensed insolvency practitioner, chartered accountant and a leading authority on anti-money laundering. He is a sought-after guest at accountancy and AML conferences worldwide due to his position at the pulse of changes in guidance and legislation that impact DNFBPs.