Money laundering rules sow mistrust between clients and advisers

As I reported back in October 2003 new regulations - The Money Laundering Regulations 2003 - have been introduced. Along with the Proceeds of Crime Act 2002 they came into effect from 24 February 2004. These new requirements place onerous responsibilities on various types of business, and advisors to businesses, to report suspicions of money laundering.

These requirements came into effect on 1 March 2004. As I predicted back in December these new requirements look likely to have a significant impact on client relationships between businesses and their advisers, such as accountants and tax advisers.

What is money laundering?

Money laundering now encompasses a very wide range of activities. It now includes possessing, or in any way dealing with, or concealing, the proceeds of any crime, including the possession of the proceeds of an offender's own crime. Some examples that illustrate how wide is the scope of the legislation include cost savings resulting from breaches of health and safety regulations, property acquired by theft, cartel offences under the Enterprise Act, and tax evasion (both of direct and indirect taxes).

Certain 'relevant businesses' have a duty under the legislation to report suspicions of money laundering and to take various steps to deal with money laundering issues including, amongst other things, obtaining formal evidence of identity for their clients.

These relevant businesses include, as expected, banking, deposit taking and investment businesses and businesses that handle large sums of cash such as casinos. But they also include estate agents, any business that accepts cash for goods in excess of €15,000 and a wide range of professionals including solicitors, insolvency practitioners, accountants and tax advisers.

Finally, it also includes anyone involved in "the provision by way of business of services in relation to the formation, operation or management of a company or a trust". This will include managers of composite and umbrella companies and in some circumstances could include freelancers who are working in a management role within their end client.

Suspicion?

These businesses all have a duty to report suspicion of money laundering. Case law and other sources indicate that suspicion is more than speculation but it falls short of proof or knowledge.

Generally speaking, knowledge is likely to include:

· Actual knowledge

· Shutting one's mind to the obvious.

· Deliberately refraining from making inquiries, the results of which one might not care to have.

· Deliberately deterring a person from making disclosures, the content of which one might not care to have.

· Knowledge of circumstances which would indicate the facts to an honest and reasonable person.

· Knowledge of circumstances that would put an honest and reasonable person on inquiry and failing to make the reasonable inquiries which such a person would have made

Accountants

Some accountants and tax advisers have been reported as saying that they intend to adopt the extreme approach of reporting all their clients on the basis that everyone will have something that ought to be reported and this is the only way the adviser can avoid the risks of the penalties for failing to report suspicions! There have already been press reports that accountants are making 100 reports a day to NCIS.

Part of the problem being faced by these advisors is that money laundering reports need to be made irrespective of the monetary size of the benefits derived from, or the seriousness of the offence. This is because there are no de-minimis concessions contained in the Act, the TA 2000 or the 2003 Regulations. Hence, in theory, even the deliberate or negligent claiming of a £5 expense in the business's tax returns that was personal rather than for the business would result in a requirement to make a report.

However, disclosure without reasonable grounds for knowledge or suspicion will increase the risk of a business or an individual being open to an action for breach of confidentiality. So advisers who take a blanket approach to reporting matters will be at risk from actions by their clients if the clients become aware of what has happened.

There is no difference between the treatment of money laundering that results from tax offences and those involving the proceeds of theft, drug trafficking or other criminal conduct. In addition, tax offences committed abroad will also have to be reported if the action would have been an offence were it to have taken place in the United Kingdom. There is no need for there to be any consequential effect on the United Kingdom's tax system.

Because the duty to report exists in a wide range of circumstances, and because of the broad definition of money laundering, there is what has become known as the 'brothels and bullfighters' argument. If a bullfighter from Spain (where the activity is legitimate) were to instruct a solicitor and pay his earnings into the solicitor's client account in the UK (where bullfighting is a criminal offence), the solicitor would be under a duty to report the transaction to the National Criminal Intelligence Service (NCIS) as a suspicious transaction! Once a report is received by NCIS they will refer the matter to the most appropriate authority. In the case of taxation matters that will be the Inland Revenue.

Offences?

For direct tax, common criminal offences generally involve some criminal intent or dishonesty. For indirect tax, section 167(3) Customs and Excise Management Act 1979 provides that a wide range of innocent or accidental errors are criminal offences even though they are, in practice, generally dealt with under the civil penalty regime. The effect of Section 340 of the Act is that there cannot be a money laundering offence where the person involved does not know or suspect that a benefit results from criminal conduct.

Offences under the Act may be tried in a Magistrates' Court or in a Crown Court depending on severity. Cases tried in a Magistrates' Court can attract penalties up to the maximum fine (£5,000), up to six months imprisonment, or both. Cases tried in the Crown Court can attract unlimited fines and the following terms of imprisonment:

· up to fourteen years, for the main money laundering offences

· up to five years, for the failure to report offence and the tipping off offences, and

· up to two years imprisonment for contravention of the systems requirements of the Regulations.

Practical procedures

In order to comply with the new regulations accountants, tax advisers, lawyers and those who provide company management services will need to verify the identity of new clients by obtaining such evidence establishing the client's full name and permanent address - such as a new style driving licence or a passport, with a separate document being used to confirm the address, such as a recent utility bill. There are legal restrictions on the copying of passports and photocopies of passports should be in black and white, and limited to the personal details pages and should not be used other than for purposes of identification under the Regulations.

Advisers will need to keep this evidence for five years after the termination of a client relationship by any part of the firm. The definition of who is a client is based upon whether the prospective client and the adviser form a 'business relationship', which is defined in the Regulations as:

" any arrangement the purpose of which is to facilitate the carrying out of transactions on a frequent, habitual or regular basis where the total amount of any payments to be made by any person to any other in the course of the arrangement is not known or capable of being ascertained at the outset;"

One-off transactions may also be caught by the Regulations if:

"in respect of any one-off transaction -

(i) A knows or suspects that the transaction involves money laundering; or

(ii) payment of €15,000 or more is to be made by or to B; or

(c) in respect of two or more one-off transactions, it appears to A (whether at the outset or subsequently) that the transactions are linked and involve, in total, the payment of €15,000 or more by or to B.

Conclusions

As a taxation advisor myself I have had to consider my responsibilities with regard to these regulations. I have concluded, for example, that a one-off piece of advice such as a contract review does not constitute "the carrying out of transactions on a frequent, habitual or regular basis" between me and the business whose contract I review. Clearly, however, when a freelancer employs an accountant to provide management accounting, taxation or payroll services to his business then this will require the accountant to verify and document the identity of the business and the director(s) with whom the accountant is dealing.

It seems inevitable that these new regulations will introduce a degree of tension between clients and their advisers that has not existed before. Advisors will want to tread carefully so that they do not establish as a fact or strong suspicion that a client has breached the regulations in some small way that, nevertheless, requires them to report the matter to NCIS.

Clients are likely to be more cautious about what they tell their advisers about their business affairs. And clients are likely to wonder if notification of a Revenue investigation means that their accountant has made a report to the NCIS on some minor issue or not.

I suspect that time will show that this legislation has not been fully thought through and that its scope has been set too widely - so that an unhelpful climate of fear, mistrust and suspicion is likely to arise between innocent businesses and their advisers.