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How firms can ferret out and flag up potential money laundering activity

on Wednesday, 05 April 2017. Posted in Legal

Given the consequences of facilitating money laundering, how can small firms spot potential illegal activity and protect both themselves and their businesses from becoming unwittingly involved?

How firms can ferret out and flag up potential money laundering activity

Regardless of their size, professional service firms are a target for criminals looking to launder money. Despite this fact, awareness amongst smaller businesses about the risk of being a target for money laundering is relatively low. Indeed, many smaller organisations have an ingrained culture that organised crime isn’t something that concerns them and, of course, this indifference only serves to increase their vulnerability. In fact, SMEs and sole practitioners need to be just as vigilant to risk as their larger counterparts when it comes to fending off criminal organisations on the hunt for skilled professionals that will help facilitate their crimes. 

Fortunately, there’s plenty small businesses can do to protect themselves from those looking to launder money. The first step is to recognise possible red flags. This can include anything that doesn’t make business sense such as inconsistencies in information provided or transactions that seem nonsensical in a business context. Another thing to look out for is unnecessary secrecy, whether that’s evasive clients that fail to offer a comprehensive explanation when pressed on perceived discrepancies or complex group structures that are not fully explained or when things are explained as “tax reasons” or “privacy funds”. 

It’s essential to conduct regular checks and due diligence to sweep for any of these risks, both with potential and existing clients, and this needs to be carried out on an ongoing basis to rule out any possibility of wrongdoing. Even if clients are familiar to you, factors such as a change in directorship or foreign ownership should prompt further investigation.

Direct investigation

Asking direct questions can also be another line of investigation when trying to understand anything that may seem suspicious. In particular, if you are approached by a client that is atypical of the work you normally do – for example they’re a construction company but your firm specialises in wills and trusts – then ask “why me?” 

Try to counteract a lack of direct communication. With face-to-face meetings between clients becoming few and far between due to advances in technology, this can only serve to help create the smoke and mirrors needed by a criminal enterprise to disguise themselves as a legitimate business. If you can, arrange a trip to their office or place of business to establish their credibility. Look for indicators that their business might not be quite what it says on the tin. Is it unusually quiet for a time when business should be at its peak? Are there far too few desks for the number of employees their records suggest? While these factors seem subtle, they may be important pieces of the puzzle in helping you form a clear picture about the legitimacy of your client.

Suffering the consequences

The most sophisticated criminal enterprises can seem legitimate at first glance. Therefore, it is essential for accountancy and legal firms to be thorough in due diligence in order to recognise suspicious and indeed illegal activity, especially within smaller firms where dedicated compliance teams are not always present. Regardless of whether your business’s involvement in money laundering is deliberate or accidental, the consequences can be severe, both to yourself as a practitioner and to your business. These consequences can range from reputational damage and heavy fines to loss of licence or even a prison sentence. 

Taking action

If suspicious activity or a red flag cannot be resolved then you need to consider whether to submit a suspicious activity report (SAR). The SAR process is confidential and a legal requirement when faced with suspicious behaviour by your client. The intelligence provided is vital to enabling law enforcement to investigate and disrupt serious and organised crime. By helping to build this intelligence picture, accountants can protect themselves, their businesses and the legitimate economy from the threat posed by criminal organisations who would exploit them. 

 

This article is written by Nigel Davies, owner of Nigel Davies Accountants and a member of the Chartered Institute of Management Accountants, on behalf of Flag It Up, the Home Office campaign providing guidance on how businesses can tackle money laundering.

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