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This article was first published in the November/December 2019 China edition of Accounting and Business magazine.

Businesses and their advisers, including accountants, are under increasing pressure to report money laundering as the problem continues to grow. According to the United Nations, between 2% and 5% (US$800bn–US$2trillion) of global GDP is laundered. In response, international organisations and national governments have created rules and guidance to fight the problem.

Among them is the Financial Action Task Force (FATF), a global body to combat money laundering and terrorism financing. Its 40 recommendations on money laundering and nine on terrorism financing are recognised as the global standard, and cover the actions that financial services and other professionals are expected to take, including screening clients and their transactions, and reporting concerns about those that are potentially tainted.

With the problem becoming more pervasive, earlier this year FATF published new, comprehensive guidance for professional accountants and regulators on the use of risk-based assessments to ensure suspect clients come under special scrutiny.

While accepting that no practice will have the same experience of dealing with crime, the guidance lays out general principles, including the need to apply good know-your-customer practice, looking for red flags, and taking note of the prevalence of crime and terrorism locally when deciding how much scrutiny is warranted.

The guidance highlights obvious warning signs that clients may be criminals – such as their use of shell companies and movements of large sums of cash. It points out the sort of clients who deserve more attention than others, such as politically influential individuals who may be more likely to be bribed or involved in corruption than ordinary private sector clients.

It warns that criminals may pose as law-abiding clients seeking financial or tax advice on moving assets between jurisdictions to avoid tax liabilities. Accountants assisting with property purchases or sales need to be aware that these may have been paid for partly or wholly with illegal funds that have been laundered into legitimate accounts. Criminals may also use accountants to directly handle transactions on their behalf, such as making cash deposits and withdrawals on accounts, engaging in retail foreign exchange operations, issuing and cashing cheques, buying and selling shares, and receiving international funds transfers.

Risk-based approach

The risk of exploitation rises where accountants act as gatekeepers (eg setting up companies), given that obtaining accurate beneficial ownership information may also be difficult (eg for clients handling a lot of cash). Similar challenges in determining current and likely future income sources can apply when onboarding clients whose businesses initially seem to have little economic activity, such as startups.

Similarly, for practices dealing with politicians and government officials – ‘politically exposed persons’ (PEPs), in the jargon – the guidance has practical advice on assessing whether more checks are needed. For instance, where a PEP appears to have substantial funds but only a modest official salary and no declared business interests or inheritance, there is a risk they may have been involved in bribery or corruption.

FATF says a risk-based approach means that accountants’ due diligence should scale up to match a PEP’s risk profile – for instance, taking extra steps when a PEP’s business interests could be affected because of their access to official funds or their power to award public procurement contracts. The amount of criminality in a PEP’s home country, the activity a PEP wants an accountant to perform, and whether the PEP works in national or international governance, are all circumstances that should influence the level of caution.

A clear risk policy that guides practices on when they need to make extra checks and when they can be more perfunctory in assessing a client and related transactions can drive resources and energy towards those areas that need additional care, and avoid wasting time on safer business.

FATF policy analyst Ashish Kumar says the project team wanted the FATF advice to be helpful, practical and aspirational. ‘We are trying to provide more narrative, so that understanding becomes more nuanced,’ he explains.

Wesley Walsh, ACCA’s AML supervisory team manager, hopes governments will use FATF’s advice to draft more detailed and descriptive versions for local use, taking into account national laws and professional standards to help small and medium-sized practices (SMPs). ‘Undertaking anti-money laundering screening is not simple,’ he says. ‘SMPs have fewer resources and have to act not only as accountants but also as policemen, so any additional support at local level will be beneficial.’

Ultimately, Walsh thinks AML work needs to be made part of accounting courses and certification, because it is a legal responsibility for accountants. ‘Otherwise the risk of non-compliance will be huge,’ he points out. ‘There are serious consequences if you don’t get it right. Accountants may face jail terms or pay large fines.’ This FATF guidance will be a useful tool to help accountants avoid getting it wrong, Walsh says.

Kumar says governments should take the guidance seriously. While they will not be overtly criticised in FATF reports for failing to follow the new accounting risk assessment advice to the letter in the anti-money laundering and terrorism financing campaign, they can expect criticism if they don’t offer finance professionals advice on the issue.

If as a result of this guidance, governments insist that accounting practices demonstrate how they have developed their risk-based approach to money laundering and terrorism financing, FATF says accounting regulators should be satisfied when practices make ‘reasonable judgments’ about framing these policies. Indeed, FATF says regulators will have to accept  that not all accountants will adopt identical controls to combat money laundering and terrorism financing.

Keith Nuthall, journalist