Accounting for fraud

January 2021

John Dobson explains how accountants can help prevent money laundering – and fulfil their legal responsibilities.

With reforms to Companies House being announced recently, as well as the FinCEN Files shining a spotlight on the vast scale of money-laundering, those entering the accounting profession need to be more aware than ever of the signs of fraud.

Accountants are the gatekeepers to the financial system and need to understand their legal anti-money laundering (AML) obligations, which include identifying suspicious activity and submitting suspicious activity reports (SARs). These reports play a crucial role in identifying the potential fraud issues. However, the FinCEN leaks demonstrated a clear issue with the current system as SARs were being raised, but transactions still went ahead.

Identity verification

One of the key points of the Companies House reforms proposal is an emphasis on identity verification. Previously, to start a limited company there would be little or no background checks to establish on whether the person starting the business was who they claimed to be. However, the reforms will mean all directors, people with significant control (PSCs) and anybody who files information on behalf of a company will need to have their identity verified.

The first step for these will be to run initial know your customer (KYC) checks.

These form part of the required customer due diligence (CDD) checks under money laundering regulations. These will involve identifying and verifying the customer and screening them against politically exposed person (PEP), special interest person (SIP), relatives and close associates (RCA) and sanction lists. But that is not the end of the process. In order to comply with regulations you must also continue to monitor clients for any changes.

The pandemic made these KYC checks more difficult and the Financial Conduct Authority sent a letter out to CEOs stating that identity verification needs to continue.

But at the same time it offered firms a number of suggested workarounds if they are unable to operate their normal processes. Incredibly, this includes allowing firms to accept ‘selfies’ and scanned PDF documents in place of originals.

These decisions will undoubtedly reduce the ability of accountants to detect fraud as selfies and scanned PDFs are much easier to replicate. Fully digital KYC solutions are available that allow firms to continue with ‘business as usual’ in the event of key staff being forced to work remotely. Electronic verification (EV) has been shown to be more secure than traditional document-based checks. Therefore, accountants should look to use these digital systems to effectively do their due diligence.

Due diligence

With the lockdown increasing the potential for fraud via virtual communications, it is more crucial than ever for accountants to be doing their due diligence. Under money laundering regulations, accountants must perform customer due diligence (CDD) on all customers to check they are who they say they are.

However, if the risk of money laundering is high, if a client is on a PEP or SIP list, then accountants are required to carry out an enhanced due diligence check. This is crucial to assess the potential increased risk that a customer may pose to your business. By utilising a digital solution like SmartSearch, it is possible to screen clients against PEP, SIPs and RCAs within seconds and process whether they need further due diligence.

Risk-based approach

A development from a few years ago, but is still relevant today, was the update to the money laundering regulations, which built on the previous regime and added a requirement that every firm must carry out and document a ‘whole-firm’ risk assessment. This firm-wide assessment should consider, clients, the country in which you operate, the services you offer, transactions and delivery channels.

Accountants also must have in place systems and controls (including training) capable of:
• Risk assessment.
• Performing client due diligence (including enhanced for higher risk clients).
• Assessing existing clients.
• Recording appropriate information.
• A system for reporting suspicious activities both internally and externally.

Lack of reporting

Accountants often get to know their clients well, and once trust is formed it becomes an obstacle to reporting anything suspicious. Understandably, some view reporting clients (especially those they know well) as a betrayal, particularly if the suspicious activities are of low monetary value.

Accountants also have argued that HMRC is sometimes already aware of a suspect transaction, so they do not submit a SAR because it would serve no purpose.

This may be understandable, but leaves accountants exposed to the risk of reputational damage, fines and even prison. However small a transaction, it is not exempt from the UK’s money laundering requirements. Failure by an accountant to disclose knowledge or suspicion is itself a money laundering offence. Accountants work in the public interest and must act with integrity and uphold the law at all times.

This is where training is crucial. Every employee who deals with customers or transactions in any way needs to understand the firm’s policies, controls and procedures.

They need to understand the legal requirements, the risk of money laundering, checks they should make, and how to report suspicious activities.

It’s important to carry out regular reviews and updates on AML procedures. Whoever is appointed as money laundering reporting officer and senior management should continually assess the effectiveness of the measures in place. Especially if little or no SARs are reported. This should flag that the procedures may not be working.

The best advice for accountants looking to navigate the money laundering landscape is straightforward: understand risk in the business, submit SARs whenever anything suspicious arrives and continually look to improve.

• John Dobson, CEO, SmartSearch