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Threat, vulnerability, consequence + risk

Richard Simms explains the latest developments in money laundering legislation.

In October this year, the Home Office and HM Treasury published the second National Risk Assessment of Money Laundering and Terrorist Financing (NRA 2017).

The NRA is required by the recently issued 2017 Money Laundering Regulations (MLR 2017), which gave a deadline of 26 June 2018 to publish the second NRA.

Change and progressive development feels like the norm for Anti-Money Laundering and Counter Terrorist Financing (AML/CTF).

The Financial Action Task Force (FATF), the independent inter-governmental body that takes the global lead in promoting AML/CTF policies, issued its updated 40 recommendations in November this year as well.

What impact does FATF has on us? It is the previous, 2012, version of the FATF 40 recommendations that was incorporated in the Fourth EU Directive on AML/CTF (4MLD) in 2015 that became the MLR 2017 in June this year.

I have not had the opportunity to review the revised FATF 40 recommendations but I would expect development from the 2012 recommendations, otherwise why publish them? As the UK is a founder member of FATF, then whether we’re still in the EU or not it’s likely that the UK will adopt that changes required in the latest 40.

It has been mentioned previously that there a set of proposed amendments already in circulation to the EU 4MLD. The UK will consider theses changes once they have come into force in the EU.

The UK is preparing for Brexit with the issue of the Sanctions and Anti-Money Laundering Bill which will introduce the necessary powers to issue Financial Sanctions.

OFSI guidance

Worth mentioning is the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017, which has included auditors, external accountants, tax advisers and trust or company service providers as relevant businesses or professions within the Financial Sanctions legislation. There is not enough time to discuss this in detail but you can take a look at the Office and Financial Sanctions Implementation website (OFSI) and have a read through their guidance.

FAFT is worth mentioning again as the UK is awaiting its latest Mutual Evaluation Review (MER). This is an assessment of the implementation of the AML/CTF standards within the UK. According to the FATF website the on-site part of the MER will take place in February/March 2018 with the results according to NRA 2017 being due in December 2018.

Naturally it must be assumed that the UK would prefer to have good outcome to the MER. The last MER for the UK was 2007.

From NRA 2017, working together “…..we can ensure that the UK economy is a hostile environment for illicit finance and an open, attractive destination for legitimate business.”

Also “Relevant persons subject to the MLRs must have systems and controls in place to identify, assess, manage and mitigate risk for the purposes of preventing and detecting money laundering and terrorist financing.”

“Central to all of this remains the principle of developing and maintaining a robust and shared national understanding of money laundering (ML) and terrorist financing (TF) risks.”

So, a robust and shared understand of ML/TF risks. What is risk and how will this happen?

The First UK National Risk Assessment Money Laundering and Terrorist Financing (NRA 2015) defines risk as (repeated in the NRA 2017 Methodology): “a function, or combination, of threat, vulnerability and consequence. For a risk assessment to be distinct from other assessments, for example a threat assessment, a measure of judgement on the threats, vulnerabilities and consequence/impact should ideally be included.”

NRA 2015 goes onto define, threat, vulnerability and consequence. In brief a threat is a person(s), objects or activities that can cause harm. Vulnerability is that things can be exploited by the threat; such a vulnerability is a failing in the AML/CTF systems. The consequence refers to the impact or harm that the ML/TF causes.

The NRA 2017 says: “We want the UK to continue to be an attractive country for legitimate business.”

Therein lies the challenge. Creating an AML/CTF environment that discourage criminals but does not push legitimate business away through excessive compliance hurdles.

As members of what is known as the Accountancy Service Providers section then the first aim, in my opinion, is on protecting ourselves against the various risks for us of not following the MLR 2017 correctly. Once compliance is achieved then the benefits of preventing and detecting crime can be more widely considered.

MLR 2017 places responsibility not just on the Home Office and HM Treasury to undertake risk assessments. AML supervisors must also undertake a risk assessment for “its own sector” and provide information to those that it supervises that would assist with their own risk assessment requirements whether from their own work or information passed to them by the Home Office and HM Treasury.

In short information on risks should be more available to us all.

Raise awareness

NRA 2017 says: “Ongoing communications activity will continue to raise awareness of the indicators of money laundering activity, the risks of involvement and the importance of reporting suspicious activity”

NRA 2015 lists the accountancy sector as the 2nd highest risk area for exposure to ML/TF.

NRA 2017 discusses the work done by law enforcement to better understand the role of professionals in high-end money laundering and says:

“Some of those accountants involved in money laundering cases are assessed to be complicit or wilfully blind to money laundering risks, though the majority of these cases are likely to involve criminal exploitation of negligent or unwitting professionals.

Accountancy services are, consistent with NRA 2015, deemed to be high risk by the NRA 2017. Though more reference is made to high end money laundering.

For accountants: “In 2016, the UKFIU reported that the most common areas identified by SARs were the creation and operation of companies, facilitating financial transactions (including through client accounts) and tax evasion. These areas are judged as being at highest risk of being exploited for money laundering.” UK Financial Intelligence Unit (UKFIU) is housed within the National Crime Agency.

The risk areas discussed are company formation and termination, false accounting, misuse of client accounts and tax services. NRA 2017 goes on to discuss Trusts and Corporate Structures as risk areas in themselves.

NRA 2017 provides a useful insight into the views of the UK government but I await seeing some details of cases investigated either by law enforcement of relevant AML supervisors that are set at a level that is relevant to most of the readers of this article.

If you’re a practicing certificate holder with the ICPA, if you don’t already, you’ll get access to AMLCC for up to three staff included in your membership.

The AMLCC update to reflect the MLR 2017 along with a number of other updates will be along soon.

  • Richard Simms is Managing Director of the AMLCC

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