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Comments from ACCA
March 2007

ACCA is pleased to comment on the consultation paper on implementing the Third Money Laundering Directive.

Our comments are prepared from the perspective of our interest in this area, which is that of a professional accountancy body whose members acting as accountants in public practice, company auditors and insolvency practitioners have responsibilities with regard to money laundering both under the law and under ACCA's own rules of professional conduct. We have also seen the comments prepared by the Institute of Chartered Accountants in England and Wales in consultation with CCAB and are happy to be associated with those comments.

We consider that the changes being brought in under the Third Directive are not as far-reaching as those introduced in the UK in 2002/2003. Nevertheless, certain of the new detailed provisions, e.g. with regard to politically exposed persons and on-going due diligence, will present new challenges for our members and all other regulated persons. As you will be aware, the current AML legislation has proved a very difficult issue for regulated persons of all kinds to deal with, but especially for professional advisers for whom the reporting obligations constitute an obvious conflict with traditional professional responsibilities of client confidentiality.

In transposing the requirements of the Directive, our primary concern is that the new UK legislation does not impose any additional compliance burdens over and above the requirements of the Directive and is drafted with sufficient precision and clarity so as to ensure that regulated persons and their supervisors are able to understand clearly what is expected of them.

Specific issues

We have the following comments on specific issues raised in the document.

Defining the scope of the regulated sector

(i) Accountants

We welcome the fact that the Government has decided to include in the regulations a definition of ‘external accountant' that sets out to focus on the activities that they carry out rather than on their titles, which would have been unrealistic in the particular circumstances of the accountancy profession.

We suggest however that rather than have two definitions - ‘accountant' and ‘external accountant' - it might be preferable to include in the regulations only a definition of the latter term (the only term that is used in the Directive and the only type of ‘accountant' that is required to be regulated). We also suggest that the definition of ‘external accountant' be made ‘positive' as opposed to being defined by exclusions. The point about the proposed definition of the term ‘accountant' is that it seems effectively to define a practising accountant - viz one who provides accountancy services by way of business - and does not provide a core definition of ‘accountant' per se. Given this, there would seem to be no reason to have a second definition of ‘external accountant'. We suggest therefore that the definition of ‘external accountant' be re-worded so as to refer to any individual or firm that by way of business provides accountancy services: there could follow the excluded cases currently set out in the draft.

The regulations also need to ensure that, in the case of a firm, the obligations imposed under the regulations, especially those under Part 3, apply to it and not to each individual accountant within the firm. The existing regulations address this point by applying the controls, in the case of accountants, to those who provide accountancy services ‘by a body corporate or unincorporate or, in the case of a sole practitioner, by an individual'. A similar reference must be made this time. Establishing beyond doubt that the regulated person is the firm will not only be consistent with the nature of the requirements of the regulations, especially of Part 3, but will create the essential cross-reference for the process of exercising supervisory control over regulated persons.

With regard to the two lists set out in paras 2.4 and 2.5 of the consultation document, we consider that these should be revised at least to the extent that the references in them are to professional titles and not to activities as such. Specifically, the list in para 2.4 includes ‘chartered accountant' and ‘certified accountant'. These are titles which are awarded by the one of the three institutes of chartered accountants or by ACCA respectively to all of their qualified members. The right to refer to oneself by either of these titles does not give the member concerned exclusive rights to carry out particular categories of ‘accountancy' activities: the significance of holding either of the titles is that they indicate that the member concerned has fulfilled the education and training requirements of the body concerned and that, in carrying out accountancy activities, he or she is regulated by that body in accordance with high regulatory standards.

We suggest, therefore, that the lists be revised so as to refer only to activities as such which may be associated with the work of external accountants (and tax advisers). The list in para 2.4 could include, with regard to accountancy activities:

• Preparing annual accounts or management accounts
• Advising on or managing the keeping of accounting records and other financial information
• Advising on or maintaining internal financial controls
• Advising on or dealing with clients' tax and national insurance obligations
• Providing any form of assurance service in relation to a client's financial position

A list of this kind should not, we suggest, be presented as being exhaustive since accountants in practice tend to provide an all-round business advisory service which can comprise activities which go beyond the ‘core' activities outlined above. For example, practising accountants will often get involved with advising businesses on obtaining finance, credit and debt management and the installation and operation of IT systems. Such activities can not, however, be described accurately as being definitive or exclusive skills of the external accountant.

(ii) Insolvency practitioners (IPs)

The definition in regulation 2 refers to persons who have been appointed to act as IPs under the relevant legislation. By virtue of this wording, they would only assume AML obligations under the regulations following their actual appointment in individual cases. We take it that the implication of this is that licence holders who do not accept appointments are not required to comply with the on-going procedural requirements in Part 3 or to be supervised under the new arrangements. There are however two considerations in respect of insolvency practitioners which the Treasury should bear in mind. Firstly, if an insolvency practitioner only assumes AML responsibilities after being appointed in a case, it must be accepted that he or she will only be in a position to carry out CDD checks after that event. Secondly, the ‘client' in the case of an insolvency appointment is of an altogether different character from a client in other types of professional relationships. The IP will invariably be appointed to his position either by groups of shareholders or creditors or by the court. Whether or not the IP is an officer of the court, it does not seem practical or desirable to expect that a practitioner resigns the appointment on the basis of an unsatisfactory post-appointment CDD check.

(iii) Business relationship

The draft definition of this term could without any difficulty add ‘client' to ‘customer' (so as expressly to cover professional relationships). While we understand the Treasury's reasoning for adopting the wording (it being taken directly from the text of the Directive), we consider that the reference to business relationships having to have ‘an element of duration' is unhelpful and should be reconsidered. If, as is presumably the case, the intention is to distinguish business relationships from individual or related one-off transactions, then the definition could refer to the relevant person expecting the relationship ‘to involve a continuing supply of services over a period of time.'

(iv) Beneficial owners

The definition in paragraph 3(b) of regulation 2 will present significant practical problems for any regulated person. By the very nature of the term, ‘shadow directors' of companies are often persons who wish to keep their identities hidden and are liable to go to great lengths to do so. Many professional bodies (such as ACCA) will have professional rules which provide that members should consider resigning from an engagement if they feel that a client is not being forthcoming with them about relevant matters: where such rules exist, an adviser could ask the client whether a shadow director exists and reach his own conclusions about the answer he receives. But it must be understood that it will not be possible for a regulated person to identify a shadow director in all cases.

(v) The definition of trust and company service providers

We have previously expressed concern about the possible extension of the definition of trust and company service provider to, inter alia, group structures and venture capital activities. We are satisfied that the exclusions set out in paragraph 2.83 meet these concerns. It would be helpful though if the list could in due course be made public so that those other than supervisors are made aware of the circumstances in which they will and will not be caught by the definition.

Other provisions in the draft regulations

Part 3 – record-keeping, systems and training

As stated above, the provisions in Part 3, dealing with the in-house arrangements that relevant persons are required to set up and administer, assume that a relevant person will always be a firm (even a sole practitioner firm). If the definition of ‘external accountants' was so wide as to encompass individual accountants within the firm, then theoretically each accountant within the firm would be under a personal obligation to set up these various procedures. This must surely not be the intention. There must be co-ordination between the definitions of relevant persons and the application of these in-house rules. Our preference, to reiterate, would be for the definition of ‘external accountants' to make clearer that the relevant person in these cases would be the firm itself.

With respect to relevant persons who will always be individuals, e.g. insolvency practitioners, it would also be in order for Part 3 to make clear that, where such persons conduct business within a firm which is itself a relevant person (invariably as a firm of accountants, auditors or solicitors), the direct responsibility for complying with the requirements of the Part rests with the firm itself: conceivably the individual could have some residual responsibility to satisfy himself that the arrangements are being complied with.

Enhanced customer due diligence (ECDD)

Under the draft, relevant persons are required to carry out ECDD not only in the specific circumstances listed in paragraphs (2) to (4) of reg 10 but in ‘any other situation which by its nature can present a higher risk of money laundering or terrorist financing'. This wording is categorical and would appear to suggest that, without identifying the range of situations which are intended to be encompassed by the provision, every such situation will present a heightened risk and should in every case be mitigated. There would appear to be no scope for judgment to be applied. It would be more reasonable, in our view, if the passage could be re-worded so as to refer to ‘any situation which by its nature might present a higher risk of money laundering…' This formulation would require regulated persons to consider whether a heightened risk exists in non-specified circumstances but would not pre-judge the action they should take.

Politically exposed persons (PEPs)

Reg 10(4) says that a relevant person must have procedures to determine whether ‘the customer' is a PEP. The wording here clearly needs to refer to a ‘prospective' customer or client.

Reg 10(8) says that, for the purpose of deciding whether a person is a known close associate of a PEP, a relevant person must have regard to any information which is in his possession or is ‘publicly known.' Assuming that it follows that if a relevant person is aware of publicly-available information then it is in his possession, this would appear to suggest that, even if he is not aware of any link between a prospective client and a PEP, he should nonetheless search out whether there is any publicly available information which does point to a link. We think this would be unreasonable and impractical since it would leave unrestricted the steps the relevant person would be required to take. While it would be fair to expect relevant persons to undertake additional diligence work with respect to the PEP himself, there cannot be the same justification with regard to associates of PEPs. We suggest it would be fairer to refer to the relevant person being required to have regard to ‘any information which is in the public domain (and of which he is aware) and any other information which is in his possession.'

Duties of supervisory authorities

Reg 17(c) refers to a designated professional body becoming a supervisory authority ‘in relation to its regulated members'. We suggest that this passage be re-phrased to refer to ‘those relevant persons who are regulated by it' (for the activity in relation to which they are relevant persons). By referring to relevant persons (i.e. persons regulated for AML purposes under the Regulations) it would make clear that the supervisor's responsibility is to supervise those entities and not each of their individual members. By making the reference to ‘persons who are regulated by it' the passage would ensure that, where a person is not actually a member of the supervisory body but accepts its regulatory authority – as happens for example when an insolvency practitioner chooses to be licensed by ACCA rather than his or her own professional body – the supervisor would be entitled to exert supervisory control over that person.

Reg 18(1) says that supervisory authorities ‘must effectively monitor' relevant persons and take necessary measures ‘to ensure their compliance' with the requirements of the Regulations. The Treasury may wish to produce alternative wording so as to correct the split infinitive in the first quoted segment above. With regard to the second passage, the use of the word ‘ensure' is disproportionate in this context: it will not be practicable for supervisory bodies to ensure absolute compliance in each and every case - the supervision in question will invariably be conducted on a retrospective basis, it will be carried out, on the Treasury's instructions, on a ‘risk basis', and in any case the sanctions for non-compliance with the Regulations are a statutory matter.

While we accept that supervision of regulated persons' compliance should be thorough, some alternative expression should be adopted which contains a more realistic expectation for the scope of the supervisor's responsibility. We suggest that an alternative wording might be ‘take appropriate measures to identify and cause the correction of areas of non-compliance' with the requirements of the Regulations.

ACCA will be happy to discuss with the Treasury in due course our plans for the supervision of those persons who fall under our regulatory control in accordance with these Regulations.

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