This article was first published in the June 2011 Ireland edition of Accounting and Business magazine.
The IMF estimates that laundered funds account for 5% of the world’s GDP. That’s equivalent to US$5.25 trn a year or over $10m a minute! To say the least, this is a serious business.
Money laundering activity may range from a single act, e.g. being in possession of the proceeds of one’s own crime, to complex and sophisticated schemes involving multiple parties, and multiple methods of handling and transferring criminal property, as well as, concealing it and entering into arrangements to assist others to do so. How does it work?
There are three aspects to most money laundering operations known as placement, layering and integration.
Placement is the transfer of the actual criminal proceeds into the financial system (e.g. via the purchase of a single premium life policy or a work of art). Layering is where a smokescreen is created to distance the illicit funds from their source through layers of real or imagined transactions and/or entities designed to hide the trail and provide anonymity.
Integration is where the funds come back into the financial system as if from normal business transactions or as investment funds to purchase legitimate assets, e.g. the work of art is sold and the proceeds reinvested in a business, which may or may not be legitimate.
Although all crime is essentially about money, money laundering does not always involve money at first sight. It also includes employee fraud (exacerbated by the recession), people trafficking and organ trafficking (the latter opportunity for crime created by an ageing/healthier population in the West).
It also includes breaches of health and safety and licensing laws which create ‘proceeds’ of a crime, because of the illegitimate saved costs, i.e., a pub operating without a liquor licence.
Accountants should also note that there is no de minimis threshold below which reports don’t need to be made, so everything suspicious is material and may be reportable.
The Criminal Justice (Money Laundering and Terrorist Financing) Act, 2010, which came into force on 15 July 2010, is the latest legislation with which accountants in practice must comply.
It repeals and re-enacts the earlier legislation and is divided into 122 sections. The most important for accountants are sections 24 to 109, which deal with the financial services industry, professional service providers and others.
Obligations and procedures
Accountants are obliged to:
- Identify and verify all clients and the ultimate ‘beneficial owners’ of those entities, known as customer due diligence (CDD) (dealt with in section 33) along with risk profiling each client into ‘low’, ‘medium’ and ‘high’ risk, giving proportionately more attention and obtaining more corroborative evidence of the sources of wealth of those at the upper end of the scale. Clients who were ‘grandfathered’ into the system when it first applied to accountants on 15 September 2003 are now also subject to the same due diligence retirements as all clients;
- Monitor the ongoing business relationship with all their clients;
- Specifically identify ‘politically exposed persons’ (PEPs) (defined in section 37), which automatically attract a high risk rating and, therefore, merit proportionately more attention than a low risk client. A PEP may include:
(a) A specified official (head of state, government official minister or deputy minister, member of parliament, etc.).
(b) A member of the administrative, management or supervisory body of a state-owned enterprise.
- Report suspicions of money laundering and terrorist financing (including overseas terrorism);
- Carry out and maintain records of the compulsory internal staff training;
- Appoint a money laundering reporting officer (MLRO – a title used in the industry though not specifically mentioned in the law) who is usually a senior partner, to take responsibility for all the procedures, documentation and training; and,
- Have in place appropriate preventative policies and procedures.
Non face-to-face contact with a prospective client is heavily discouraged, but where it is unavoidable, specific identification protocols should be followed before providing any service.
Certain organisations like listed companies and other designated bodies (e.g. accountants, solicitors, insurance brokers etc) attract a much lower level of authentication when taking them on as clients.
What to report?
Suspicious transactions that might be reportable could include:
- A sudden and unexplained drop in income of a cash business after a change in ownership.
- Dividing large transaction values into smaller amounts for no apparent reason.
- Clients using more bank accounts than necessary (but how many bank accounts is ‘normal’ anyway?).
- A client preferring cash rather than cheques in their business.
- A senior manager being the sole signatory on a client account and authorisation procedures not followed.
- Lodgements made at distant bank branches for no real reason.
- Client reluctant to give the ‘know your client’ (KYC) information.
- Third party payments for no apparent reason.
Who does what?
- Employees/partners – report suspicions internally, in writing, to the MNRO.
- It is regarded as best practice that the MNRO acknowledges receipt of the internal report.
- The MNRO then decides whether there are sufficient grounds to report externally or not, having taken legal advice, if appropriate.
- The external report is made simultaneously in writing to specific addresses of the Garda and Revenue.
There are severe penalties for noncompliance with the record-keeping, suspicion reporting and training requirements. Fines and/or imprisonment of up to five years can be imposed.
There is also a five-year prison term for ‘tipping off’ the client that a report has been made, by making a disclosure likely to ‘prejudice an investigation’ (section 49).
Professional enquiry letters
One last point to be aware of is that accountants, when replying to a professional enquiry request from a successor accountant, are not allowed to make any mention of the fact that their former client may have been reported for money laundering, as this could constitute a tipping off offence.
John McCarthy is MD of John McCarthy Consulting Ltd