Nearly nine out of 10 (89%) financial services compliance consultants surveyed recently by Huntswood Outsourcing believe that UK financial services providers are failing to comply fully with money laundering regulations.
This is a pretty chilling figure but providers have it relatively easy compared with advisers. Money laundering regulation is extremely complex and identifying noncompliant activity is not only challenging but can also be a cause for confrontation with a client before you even start advising them.
While dirty money could come from drug dealing or terrorism it can also be the result of tax evasion or handling stolen goods. We must therefore recognise that some criminals will try to use mortgage intermediaries and the property market as a way to legitimise their ill-gotten gains. And now that money laundering regulation has been extended to accountants, solicitors and estate agents we are likely to become increasingly aware of the activity.
The latest legislation to combat the problem came into force on March 1 2004. All businesses handling cash transactions of over £15,000 are now subject to checks as a result of The Proceeds of Crime Act 2002 (Business in the Regulated Sector and Supervisory Authorities). This Act brought the property professions fully into the fold, putting the activities of estate agents and solicitors under increased scrutiny.
Also, the scope of offences for which the submission of a suspicious transaction report is mandatory were expanded from just drug trafficking to include all criminal offences. Property transactions seem to be a particular area of interest.
However, the duty to combat money laundering is not satisfied merely by complying with regulations. Each and every person involved in a property transaction must assess their own vulnerability to fraud and take effective preventative steps.
Everyone in the property chain must become aware of what makes a transaction suspicious. Failure to fulfil a duty specified in the 2002 Act risks prosecution – and punishments for serious offences include substantial fines and imprisonment.
However, even a compliant party will not find navigating a safe way through the regulations an easy task.
Our survey indicates that over eight out of 10 (82%) industry experts believe, for instance, that the Financial Services Authority should be more specific in outlining the systems and procedures that financial institutions must have in place to comply with money laundering regulation.
Furthermore this problem is not just a coalface issue with nearly one in 10 (9%) of those surveyed feeling that senior management is not fully aware of its responsibilities in regard of money laundering.
According to the National Criminal Intelligence Service financial services products are favoured money laundering vehicles for criminals looking to layer their money. Whilst a normal client might well baulk at losing money through estate agent commissions or Stamp Duty, organised criminals accept it happily in order to clean their money. Recent estimates suggest that £25bn of dirty money gets washed through the UK economy each year.
Fighting money laundering must be moved up the adviser's agenda so here are some steps that advisers and intermediaries can take in order to help themselves and help in the fight against crime.
Firstly, advisers should look out for the following warning signs:
New clients with no obvious reason for approaching the company Anyone looking to make a quick property sale claiming to be capitalising on house price rises A client that is buying a property that seems to be beyond their means Anyone looking at buy-to-let but who cannot demonstrate that revenue generation will cover costs and produce a reasonable yield, factoring in capital appreciation Anyone who refuses to provide or has difficulty in providing information on his/her identity, address or origin of funds A client whose source of money comes from nonco-operative countries.
The best preventative framework consists of appointing a money laundering reporting officer who is responsible for ensuring that suspicious activity is reported promptly to the NCIS. All suspicious activity must be reported to the MLRO. The MLRO needs to keep up-to-date with regulatory issues and should ensure they have access to relevant information.
A report must be kept of any reported suspicious activity and disclosures must be made to the NCIS. The MLRO must decide if the circumstances reported are suspicious and then be responsible for advising staff whether to proceed with transactions or to stall in order to enable further investigation.
With half of those surveyed believing that companies fail to provide staff with effective training this is obviously an area that must be addressed. Training programmes should help staff identify what is and is not suspicious and should be organised at least annually. Staff should also understand the law and regulations surrounding money laundering and what to do in the event of a breach.
It is worth remembering that money laundering skills are continually evolving and serious criminals have considerable resources to throw at it. For large criminal operations it is quite possible that corrupt advisers and other professionals have devised a strategy long before the front-man steps into your office.
For most advisers, the biggest part of the battle is equipping staff with the necessary skills to identify suspicious circumstances and ensuring that these are reported as soon as possible. Our research shows that a quarter of companies are believed to fail to report suspicious activity to the NCIS quickly enough so we must expect more sanctions against providers and advisers who fail to take note of what is required of them.
How to identify the bad guys
Advisers must ensure that clients produce satisfactory personal identification and verification and staff must follow the document identification rules strictly. The best documents with which to establish identity include:
Inland Revenue tax notification etc.
However, it has to be accepted that some people such as recent immigrants may have problems and it is best to refer to the lender at that point.