DRAFT GUIDANCE FOR BUSINESS ON THE PREVENTION OF MONEY LAUNDERING

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1 1 June 2007 Our ref: ICAEW Rep 48/07 By Dear Sirs DRAFT GUIDANCE FOR BUSINESS ON THE PREVENTION OF MONEY LAUNDERING We are pleased to attach the formal response of the Institute of Chartered Accountants in England and Wales ( the Institute ) to your request for comments on your in response to the draft guidance issued in March 2007 Please contact me should you wish to discuss further any of the points raised in the attached response. Yours sincerely Felicity Banks Head of Business Law T +44 (0) E felicity.banks@icaew.com Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ T +44 (0) F +44 (0) DX DX 877 London/City

2 ICAEW Representation ICAEW REP 48/07 DRAFT GUIDANCE FOR BUSINESS ON THE PREVENTION OF MONEY LAUNDERING Memorandum of comment submitted in May 2007 by The Institute of Chartered Accountants in England and Wales, in response to the draft guidance issued by HMRC in March 2007 Contents Paragraph Introduction 1 Who we are 2-4 Major points and Points of Principle 5-8 Drafting points 9-18 Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ T +44 (0) F +44 (0) DX DX 877 London/City

3 INTRODUCTION 1. The Institute of Chartered Accountants in England and Wales (the Institute ) welcomes the opportunity to comment on HMRC s Draft Guidance for business on the prevention of money laundering, contained in Public Notice MLR8, issued on 29 th March. This version of the Draft Guidance is incomplete, in that it does not yet include specific guidance for Accountancy Service Providers or Trust and Company Service Providers, nor on the Role of HMRC. We hope that there will be an adequate opportunity for public comment on these sections of the Draft Guidance. WHO WE ARE 2. The Institute operates under a Royal Charter, working in the public interest. Its regulation of its members is overseen by the Financial Reporting Council. As a world leading professional accountancy body, the Institute provides leadership and practical support to over 128,000 members in more than 140 countries, working with governments, regulators and industry in order to ensure the highest standards are maintained. The Institute will have direct supervisory oversight of its members in practising firms, who will come within the scope of the Money Laundering Regulations by reason of their practice of accountancy. It also has disciplinary oversight of all its members wherever they are employed, whether inside or outside the regulated sector for Anti- Money Laundering purposes, and so hopes to contribute to the fight against money laundering and other economic crime through that means as well. 3. The Institute has been a leading contributor in the policy debate over the fight against financial and economic crime over the last decade or longer. As a professional body for accountants, we are particularly aware of the damaging social and economic effects that are caused by money laundering and other financial crime. Our members provide financial knowledge and guidance based on the highest technical and ethical standards. They are trained to challenge people and organisations to think and act differently, to provide clarity and rigour, and so help create and sustain prosperity. The ICAEW ensures these skills are constantly developed, recognised and valued. 4. We set out below the major points and points of principle we would like to make, followed by drafting comments. MAJOR POINTS AND POINTS OF PRINCIPLE 5. It will be important for the effective implementation of a National Anti-money Laundering Strategy, as well as for consistency, ease of compliance in mixed practices and the avoidance of regulatory arbitrage, for Guidance issued to firms throughout the regulated sector to be as consistent as possible. For this reason, we welcome the note in 1.6 that the guidance is based on and, where appropriate, replicates the guidance produced by the Joint Money Laundering Steering Group (JMLSG). We suggest that HMRC go further, and refer their supervisory population directly to the JMLSG Guidance, especially for more comprehensive Guidance on areas (such as Customer Due Diligence and Evidence of Identity) where the draft HMRC Guidance which, while it may be suitable for the general run of firms supervised by HMRC, may not be

4 sufficient for larger organisations with more complex customer relationships, coming within your supervisory scope. To ensure consistency is maintained, a continuing and careful cross checking will be necessary or a general point will need to be made that compliance with the JMLSG Guidance will be sufficient for members of HMRC s supervised population, provided that it is applied taking into account the particular characteristics of the sector (as well as the particular client and firm) involved. 6. As you will be aware, we are in the process of drafting comprehensive Guidance in conjunction with the CCAB bodies and other organisations, which we hope to be applicable to all accountants and related service providers, whatever their supervisory body. We will be seeking Treasury approval for our Guidance on that basis. Our preference would be for HMRC to refer their population of Accountancy Service Providers (ASPs) to our Guidance from the outset, covering not only the specific Guidance equivalent to that included in the Draft Guidance for High Value Dealers or Bureau de Change, but to the more general aspects of the Guidance as well. Again, this would have advantages of consistency, ease of compliance in mixed practices and the avoidance of regulatory arbitrage. It would also ensure that the higher risk members of HMRC s supervised population (such as accountants who have resigned their membership of a professional body, perhaps to escape our disciplinary oversight) can be held to a consistently high standard. 7. We look forward to seeing the chapter of the Guidance which will address the role of HMRC. We consider that it will be important for this to address the relationship between the AML supervisory arm and the enquiry and collection arms of HMRC. It will be important to provide assurance that the latter will not be entitled to direct the supervisory arm, nor to obtain information from them that they would not otherwise be entitled to, under existing HMRC powers. The supervisory arm should not be authorised to report knowledge or suspicion of money laundering or tax evasion other than through the standard SOCA reporting channels and not on an inside basis to other parts of HMRC. HMRC should set up appropriate Chinese walls within their organisation, to ensure these restrictions operate in practice as well as theory. Failure to action this point risks undermining from the start the relationship of trust between HMRC as a supervisor, and its supervised population, upon which cost effective and reliable supervision must be based. 8. We were disturbed to see some elements of the Draft Guidance, where a potentially misleading summary of the law is given, such as in paragraph 1.13, where a definition of money laundering is given which is not consistent with the Proceeds of Crime Act. The first paragraph in particular appears to ignore that aspect of money laundering which represents the simple possession of the proceeds of crime (including crimes of omission such as tax evasion or saved costs following criminal regulatory breaches). We also question whether HMRC are right to say (in paragraph 1.7) that the Guidance will interpret the requirements of the Money Laundering Regulations. We understood that the interpretation of the law is the province of the Courts, not the drafters of non-statutory Guidance, though the Courts will need to take such Guidance into account (where Treasury approved) in making certain judgements.

5 DRAFTING POINTS 9. It would be helpful to include a contents list and a list of definitions in the final version of the Guidance. 10. The note in paragraph 1.1 is misleading, in that it suggests that only businesses already supervised by another body will be under their supervisory jurisdiction. We expect to be the supervisory authority for all our members or member firms, including newly formed ones. We also suggest that it would be better to draft the note in more general terms, and include a list of other supervisory bodies, especially as there will be more accountants than lawyers who will need to consider the impact of this Guidance on themselves. 11. The drafting of Paragraph 1.4 should be revisited, to take account of the following points: - Chartered Accountant is not a description of any business which will be likely to be within HMRC s supervisory population, as it is reserved to members of Chartered Bodies, all of which we expect to be supervisory bodies in their own right. This is probably also true of Chartered Tax Adviser. - Although the opening part of 1.4 refers to businesses providing the following services, only the second bullet refers to services all the rest describe a person or business, rather than a service. We suggest that a wide and generic definition of accountancy services is provided, such as all activities which pertain to the recording, review, analysis, calculation or reporting of financial information with a similar generic definition of tax advice. - We suggest that law firm offering full business services is in any case removed from this list. Lawyers tend to have differing client bases, ways of working and be subject to differing ethical considerations than accountants or most tax advisers. It would not be appropriate to suggest otherwise, or to refer them to specific Guidance for accountants, rather than the equally good specific Guidance aimed at lawyers. 12. We hope that the cross reference to sector specific material, noted in the last paragraph of section 1.11 will be to our Guidance for accountants and related service providers. This will be complete in its own right, except where accountants are referred to additional Guidance in particular circumstances (such as to the JMLSG Guidance or to Guidance issued for auditors, insolvency practitioners or similar specialisms). We hope that the HMRC Guidance will be amended to reflect that fact (as further commented on in our paragraph 6 above). 13. Paragraph 1.12 could be misleading, since some of these statutes have been amended subsequent to their original form, and there should be at least a warning of this. It would also be more accurate to refer to Statutory Instruments containing financial sanctions, copies of which are available from the Bank of England web site and which are publicised by them in notices and news releases.

6 14. Paragraph 1.13 is misleading in its description and definition of money laundering, as noted in our paragraph 8 above. This is particularly important with the widening of HMRC s supervisory population. While money service businesses and high value dealers may more frequently come across money laundering in the context of money or other assets... exchanged for clean money or other assets, this will not be the case for accountancy service providers who may well more frequently form suspicions of tax evasion and similar criminal activity, where the money laundering is represented by the simple possession of the criminal proceeds, not its exchange. 15. Consideration should be given to inclusion in paragraph 1.14 of coverage of the offence of prejudicing an investigation, set out in Section 342 of POCA, which differs from the offence of tipping off, but which could also be committed by individuals within the regulated sector. 16. Section 5.1 of the Guidance is inadequate, in that it does not give an explanation of the distinction between the identification of a customer and verification of the identity, which is very important to the risk-based approach. The approach taken in section 5.3 is better. 17. The whole of section 7 of the Draft Guidance appears to have been drafted with money service businesses (MSBs) in mind rather than accountancy service providers. This provides an additional reason to refer ASPs to generic Guidance for accountants, which is always likely to be better targeted than this more general Guidance. We have not listed points where suspicion indicators for accountants should be included, or ones that are too obviously targeted solely at MSBs, but let us know if you would like us to do so. 18. The description of the offence of tipping off in section 7.6 of the Draft Guidance does not reflect the legislation well, and could be misleading. felicity.banks@icaew.com Institute of Chartered Accountants in England and Wales 2007 All rights reserved. This document may be reproduced without specific permission, in whole or part, free of charge and in any format or medium, subject to the conditions that: it is reproduced accurately and not used in a misleading context; the source of the extract or document, and the copyright of the Institute of Chartered Accountants in England and Wales, is acknowledged; and the title of the document and the reference number (ICAEW Rep 48/07) are quoted. Where third-party copyright material has been identified application for permission must be made to the copyright holder.