An Introduction to the Money Laundering Regulations 2007

31 March 2008

In association with Interim Partners

Thanks to the generous sponsorship of Interim Partners, on 21st February, the Institute and Interim Partners co-hosted this event at the Institute of Directors ‘hub’ in Manchester. The event represents part of the ongoing programme by the IIM to brief Interim managers on their duties and responsibilities under the Money Laundering Regulations 2007 (MLR), which came into effect on 15th December.

The principal speaker for the evening was Tom Brass, Deputy Chairman of the IIM, who has followed the progress of this legislation from its initial beginnings as an EU draft Directive in early 2004, through to its implementation into UK law on 15 December 2007. We were also delighted to welcome to the audience a senior member of the HMRC policy group responsible for implementation of certain aspects of this legislation, who was able to provide very helpful comments and input from the Regulator’s viewpoint.

Background

An important element of the Government’s strategy in countering crime is to detect, deter and disrupt the perpetrators by attacking the transactions which they need to undertake to walk away from a crime with ‘clean’ money. This strategy also addresses terrorist financing – money is often raised in a friendly country, and then moved to, and spent in, the country where the terrorist act takes place.

Contrary to the public perception, money laundering is not just about serious organised crimes such as drugs/people trafficking, arms smuggling, and so on. It also covers all ‘acquisitive’ crime, from simple street mugging, through theft, burglary, robbery and mugging, to the more ‘white collar’ crimes of fraud and forgery, bribery and corruption, tax evasion and false accounting.

The fact that certain Interims are now within the MLR does not mean that they are suspected of participating in criminal activities or of being terrorists. Far from it – they are included in the MLR because their business activities as Interims put them in responsible positions at their clients, where they are able to recognise potentially criminal transactions and blow the whistle to law enforcement. Whilst there are criminal penalties in the MLR for Interims to fall foul of, they are there as ‘back stop’ for use by the regulators against those who persistently ignore, or fail to take seriously, their obligations to help law enforcement in this way. The penalties are not there as a stick to be used by the regulators just because they can.

The Regulated and their Regulators

Interims who fall under the MLR are those who, on a business to business basis, are accountancy services providers (ASPs) or are Trust & Company Service Providers (TCSPs):

• ASPs are those who provide accountancy services or tax advice to the client, regardless of seniority. Accountancy services include bookkeeping, preparing management/financial accounts, business plans, profit/cash budgets or forecasts, due diligence, transaction advice etc. You do not have to be professionally qualified to provide these services.
• TCSPs are those who act as a director or quasi-director (ie as a de facto or shadow director) in any capacity at the client – all disciplines count, whether financial or non-financial (so CEO, CFO, sales/marketing, HR, IT, production, logistics/distribution, etc are all included).
• TCSPs also include those who act as company secretary, even if not a director.

As an ASP or a TCSP, you will be supervised for compliance by a regulator. If you operate through a firm (usually a company (PSC)), it is the firm which is supervised, not you.

The general rule is that if you carry on business as an ASP or TCSP, you must make adequate arrangements to register for supervision, or you will be trading unlawfully – which carries a penalty of an unlimited fine and/or two years in prison. The default is that your regulator will be HMRC, although there are special rules for members of certain professional institutes – these are dealt with elsewhere in this issue of InterIM Insight.

Obligations under the MLR

The principal obligations (other than registration) under the MLR require those subject to the MLR to establish risk-based policies and procedures to achieve certain objectives. For Interims who are ASPs/TCSPs, the key objectives are:

• Customer due diligence (CDD)
• Ongoing monitoring of customer transactions
• Keeping records of CDD and monitoring for the life of the relationship, plus 5 years
• Training yourself and, in the case of firms, your staff in relevant law and in the methodologies used by money launderers/terrorism financiers
• Reporting suspicious transactions on a timely basis to the Serious Organised Crimes Agency (SOCA) – via the firm’s money laundering reporting officer (MLRO), in the case of a firm.

The policies adopted must be written down, as must the facts and rationale for all decisions taken in accordance with them. This will be your defence against prosecution if anything goes wrong – under a risk-based approach, the authorities expect instances of failure, but will only excuse them if they can be shown to have occurred despite a well-reasoned policy to assess and manage the money laundering risk which has been followed in practice.

For the Interim, the ‘customer’ to be subjected to CDD and ongoing monitoring is the end user client, not any intermediary Provider agency. The purpose of CDD and ongoing monitoring is to be reasonably satisfied that clients are who they say they are, to know whether they are acting on behalf of one or more other third parties, and to assist relevant law enforcement agencies, by providing available information on customers or suspicious transactions.

The MLR set out various occasions when CDD must be carried out, which include when the client relationship is established, and when money laundering is suspected. If the client is unwilling to provide whatever information is thought by you to be necessary in the circumstances for adequate CDD, the MLR require you to ‘walk away’ and consider making a report to SOCA.

The MLR recognise that there are certain circumstances where it may be permissible to do simplified due diligence, and circumstances where enhanced due diligence should be performed:

• SDD is usually suitable where you are dealing with a listed company or UK/EU public body, but you should check the MLR to ensure the conditions are satisfied
• EDD requires extra procedures where the client is not physically present to be identified, or where a non-UK/EU Politically Exposed Person (PEP) is involved. In the latter case, particular care must be taken to identify the PEP’s source of wealth and/or funds, to ensure it has not come as a result of corrupt practices or other criminal activity.

Reporting to SOCA

If you know, suspect, or have reasonable grounds to know or suspect that a person is engaged in money laundering and/or terrorist financing, you must make a report as soon as practicable to SOCA. The persons about whom you are required to make report can include anyone, provided the information comes to you in the course of your business dealings.

Suspicions are more that mere speculation. However, provided you have a basis for your suspicions, you do not need to identify the crime or gather sufficient evidence to enable it to be proved in a court of law – that is for law enforcement once you have made your report. The ‘reasonable grounds’ test in the reporting requirement means that you cannot turn a blind eye where a reasonable person would have suspicions – and if you do turn a blind eye, you may become implicated in the transactions as having aided and abetted it.

If you are a sole trader with no employees or associates, you report direct to SOCA. If you operate through a firm, you must appoint someone internally to be your MLRO; the reporting line then becomes member of staff with suspicion>MLRO>SOCA.

Suspicious Activity Reports (SARs) to SOCA can be made in hard copy using their forms, but SOCA prefers electronic reporting using SAR Online.

If you are reporting a suspicious transaction which is being planned or is ongoing, you may ask SOCA for consent to allow it to proceed. SOCA will not volunteer consent unless you ask. If you ask for consent, SOCA has seven days in which to refuse consent, and if you hear nothing in that time, consent it deemed to be granted. If SOCA denies consent in the seven day period, the authorities then have a further 31 days in which to take action; if you hear nothing during the 31 days, again consent is deemed to have been given. The granting of consent is a defence to a charge of money laundering against you on the grounds that you aided and abetted the transaction. If consent is not granted, you must not do anything to assist in the transaction, and you should consider whether you should resign from the assignment.

After you have made a SAR to your MLRO or to SOCA, you must not tip the relevant person off that a report has been made about them. You should not therefore tell anyone that the report has been made, in case the news gets back to the person via a third party. The offence of tipping off is narrow – you can say to the person, “I think this is wrong”; you can’t say, “I think this is wrong and I’ve reported it to SOCA.”