Accountants and Tax Advisors Sector Specific AML/CFT Guidance Notes December 2015 Whilst this publication has been prepared by the Financial Services Authority, it is not a legal document and should not be relied upon in respect of points of law. Reference for that purpose should be made to the appropriate statutory provisions. Contact: AML Unit, Enforcement Division Financial Services Authority PO Box 58, Finch Hill House, Bucks Road, Douglas Isle of Man IM99 1DT Tel: 01624 646000 Fax: 01624 646001 Website: www.iomfsa.im Email: aml@iomfsa.im
Contents 1. Foreword... 3 2. Introduction... 3 3. Risk Guidance... 4 4. High Risk Indicators... 4 5. Customer Due Diligence... 6 5.1. Source of funds... 6 5.2. Generic designated business... 7 6. Case Studies... 8 6.1. Financial management of a criminal organisation... 8 6.2. Tax evasion... 9 Page 2 of 9
1. Foreword For the purposes of this sector specific guidance, the term Accountants and Tax Advisors sector refers to businesses conducting activity described under sub-paragraphs 1(f) and (jj) of Schedule 4 to the Proceeds of Crime Act 2008 ( POCA ) as detailed below: (f) the business of an external accountant, where external accountant means any person who, by way of business, provides accountancy services to third parties. However, external accountant does not include accountants employed by (i) (ii) public authorities; or undertakings which do not by way of business provide accountancy services to third parties; and, for the avoidance of doubt, does not include an employed person whose duties relate solely to the provision of accountancy services to his or her employer; (jj) the business of a tax adviser as defined by the Income Tax Act 1970. By virtue of being included in Schedule 4 to POCA this sector is subject to the requirements of the Anti-Money Laundering and Countering the Financing of Terrorism Code 2015 ( the Code ). Also, this sector is included in the Designated Businesses (Registration and Oversight) Act 2015 which came into force in October 2015. The Financial Supervision Authority now has the power to oversee this sector for Anti-Money Laundering and Countering the Financing of Terrorism ( AML/CFT ) purposes. The Authority would like to thank the Isle of Man Society of Chartered Accountants, the Isle of Man Association of Chartered Certified Accountants and the Isle of Man Chartered Institute of Taxation for their assistance in developing this sector specific guidance. 2. Introduction The purpose of this document is to provide some guidance specifically for the accountants and tax advisors sector. This sector specific guidance should be read in conjunction with the main body of the AML/CFT Handbook. It should be noted that guidance is not law, however it is persuasive. Where a person follows guidance this would tend to indicate compliance with the legislative provisions, and vice versa. This document will cover unique money laundering and financing of terrorism ( ML/FT ) risks that may be faced by the sector and will provide further guidance in respect of customer due diligence ( CDD ) measures where a once size fits all approach may not work. Also, some case studies are included to provide context to these unique risks. The information included in this document may be useful to relevant persons to assist with their risk assessment obligations under the Code. Page 3 of 9
This document is based on the 2008 FATF report Risk Based Approach for Accountants 1 and the 2013 report Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals 2 (which includes details on accountants and tax advisors). The Authority recommends that relevant persons familiarise themselves with these, and other typology reports concerning the accountants and tax advisors sector. 3. Risk Guidance Guidance in relation to conducting risk assessments is provided under Part 3 of the AML/CFT Handbook. This section aims to provide further guidance to the risks generally unique to this sector. The services of the accounting sector may be used by money launderers to provide an additional layer of legitimacy to the criminal s financial arrangements, especially where the sums involved may be larger. Accountants and tax advisors do not (ordinarily) handle funds or even participate in a financial transaction; they will, however, often be able to see a bigger overall picture of a customer s affairs than a single financial institution or other Designated Non-Financial Business and Professions ( DNFBP ) in isolation. The risk factors included in section 4 of this document cover a wide variety of scenarios that an entity in this sector could come across. In terms of vulnerability, money launderers or terrorist financiers may attempt to use the services of an accountant or tax advisor to provide an additional layer of legitimacy to their financial arrangements, especially where the sums involved may be larger or revenue more frequent. Certain activities that can be performed by accountants are more susceptible to ML/FT and businesses offering such services should consider and document the risks as part of their business risk assessment required under paragraph 6 of the Code. Such activities include: The use of pooled client bank accounts; Carrying out transactions on behalf of customers such as depositing/withdrawing cash or issuing/cashing cheques; and / or; Providing introductions to financial institutions. 4. High Risk Indicators As with the basic elements of a risk assessment discussed under Part 3 of the AML/CFT Handbook, the following list provides examples of factors or activities that are likely to indicate a higher risk of ML/FT and should warrant further attention or scrutiny by the firm (just because a feature is listed below it does not automatically make the relationship high risk, provided suitable controls are in place. 1 http://www.fatf-gafi.org/media/fatf/documents/reports/rba%20for%20accountants.pdf 2 http://www.fatfgafi.org/media/fatf/documents/reports/ml%20and%20tf%20vulnerabilities%20legal%20professionals.pdf Page 4 of 9
As with all types of risk assessment, a holistic approach should be taken and the indicators below should be taken into consideration along with a wide range of other factors: 1. the customer: (a) uses an agent or intermediary without good reason; (b) actively avoids personal contact without good reason; (c) is reluctant to provide or refuses to provide information, data and documents usually required; (d) provides false or counterfeited documentation; and /or; (e) consideration should be given as to whether customers who demand strict confidentiality relating to their financial and business affairs are evading tax or seeking to mask the true beneficial ownership of their assets. 2. the customer is known to have convictions for an acquisitive crime (meaning a crime that generates proceeds), known to be currently under investigation for acquisitive crime, or have known connections with criminals; 3. there are attempts to disguise the true ownership of legal persons or related parties; 4. transactions involve a disproportional amount, bearer instruments or cash without any logical reason; 5. the transactions are inconsistent with the socio-economic profile of the individual or the businesses economic profile; 6. the customer or a third party is contributing a significant sum in cash as collateral provided by the borrower/debtor rather than simply using those funds directly, without logical explanation; 7. the source of funds is unusual; such as a third party funding asset purchases, fees or taxes involved especially with no apparent connection or legitimate explanation; 8. the customer is using multiple bank accounts or foreign accounts without good reason; 9. private expenditure is funded by an unrelated person, business or government; 10. mortgages are repeatedly repaid significantly prior to the initially agreed maturity date, with no logical explanation; 11. asset(s) are purchased with cash and then rapidly used as collateral for a loan; 12. finance is provided by a lender, either a natural or legal person, other than a credit institution, with no logical explanation or economic justification; 13. there has been a significant increase in capital for a recently incorporated company or successive contributions over a short period of time to the same company, with no logical explanation; 14. there has been an increase in capital from a foreign country, which either has no relationship to the company and/or is high risk; 15. the business receives an injection of capital or assets in kind which is notably high in comparison with the business, size or market value of the business performing, with no logical explanation; 16. taking on work which is outside the firm s normal range of expertise can present additional risks because a money launderer or terrorist financier might be using the firm to avoid answering too many questions. An inexperienced accountant might be influenced into taking steps which a more experienced accountant would not contemplate. Accountants should be wary of highly paid niche areas of work in which the firm has no background, but in which the customer claims to be an expert; 17. there is an excessively high or low price attached to assets or liabilities transferred, with regard to any circumstance indicating such an excess (e.g. volume of revenue, trade or Page 5 of 9
business, premises, size, knowledge of declaration of systematic losses or gains) or with regard to the sum declared in another operation with no logical explanation; 18. large financial transactions, especially if requested by recently created companies, where these transactions are not justified by the corporate purpose, the activity of the customer or the possible group of companies to which it belongs or other justifiable reasons; 19. instruction of an accounting professional at a distance from the customer or transaction without legitimate or economic reason; 20. instruction of an accounting professional without experience in a particular specialty or without experience in providing services in complicated or especially large transactions; 21. the customer is prepared to pay substantially higher fees than usual, without legitimate reason; 22. the customer has changed advisor a number of times in a short space of time or engaged multiple advisers without legitimate reason; and / or; 23. the required service was refused by another professional or the relationship with another professional was terminated without logical reason. 5. Customer Due Diligence Please see the Code and the AML/CFT Handbook for the general requirements in relation to CDD. This section sets out some further considerations for the accountancy and tax advisor sector. 5.1. Source of funds Paragraph 10 of the Code requires the taking of reasonable measure to establish the source of funds for all new business relationships. Part 3 of the AML/CFT Handbook provides further details on how to establish source of funds. However, as noted above the relationship accountants and tax advisors can have with their customers from a ML/FT risk perspective is different than other sectors therefore further guidance is provided below. Where the sector is dealing with client monies the source of funds must be identified in line with Part 3 of the AML/CFT Handbook and the Code. However where no client monies are taken, or held, the business will still typically be receiving funds from customers in the form of fees. It is the source of the funds used for the payment of the fees which needs to be established. The source of funds will typically by from the customer themselves or from a third party. Where fees are being paid by a third party, the business should identify and verify the identity of this third party where necessary. It should also seek to establish the relationship between the customer and the third party and consider the rationale for the payment and whether this appears reasonable. In the cases of a direct wire transfer or a cheque payment the source of funds is selfexplanatory. There are instances where payments are made, such as by BACS, where the sender information is not ordinarily attached but is available upon request the business does Page 6 of 9
not have to hold that information file, however must to be able to obtain it within 7 business days of a request from a competent authority. 5.2. Generic designated business Accountants and tax advisors, as DNFBPs, may avail themselves of the concession at paragraph 22 of the Code which states that a customer s identification need not be verified provided the following conditions are met: (a) (b) (c) (d) (e) (f) The activity is providing advice where the advisor is not participating in any financial transaction on behalf of the customer; The advisor has identified the customer and the beneficial owners (if any) and has no reason to doubt those identities; Has not identified the relationship as a higher risk* for money laundering or terrorist financing; knows the nature and intended purpose of the business relationship; has not identified any suspicious activity; and has identified the source of funds. *Please note that where the customer has been identified as a politically exposed person ( PEP ), the concession need only be disapplied if they have also be assessed as posing a higher risk of ML/FT. PEP status should be considered a high risk factor but does not automatically make the customer higher risk. If any of the above conditions are not met, full identification, and verification of that identity must be carried out in line with both Part 4 of the Code and the AML/CFT Handbook. Generally, accountants and tax advisors seldom participate in financial transactions, albeit they will frequently advise on aspects of a financial transaction. Similarly most accountants and tax advisors will rarely handle client monies. As such it is expected that the majority of work conducted by accountants and tax advisors will be considered generic designated business. Whether or not a particular engagement with a customer falls within the definition of generic designated business will of course very much depend upon the specific facts. However, set out below are a number of common examples where, typically, it is considered that the client engagement either would or would not be considered to fall within the generic designated business definition. Examples of services performed by accountants/ tax advisors that are considered to fall within the generic designated business definition include: 1. The preparation of management accounts or statutory financial statements from the customer s underlying books and records. 2. The provision of book-keeping services. 3. The issuance of an accountants report on a set of financial statements. 4. The issuance of an audit report on a set of financial statements. Page 7 of 9
5. The provision of tax advice to an individual customer in relation to the tax residency rules in the Isle of Man and the UK. 6. Undertaking the annual tax return preparation process for a UK resident individual or corporate customer. 7. The provision of tax advice to an individual on the manner on which the ownership of a UK residential property could be structured. 8. The provision of payroll services, where such services do not involve the handling or managing of customer assets. It should be noted that if customer funds are being handled the business would be a payroll agent as defined in Schedule 4 of POCA and would have to register under the DNFBP Bill as such. 9. The provision of liquidation/ insolvency services. 10. The provision of tax advice to a customer on how to structure their business and detailed advice on the implementation of that structure. 11. The provision of an accounting opinion to a company on the treatment of a specific item under accounting standards. 12. The undertaking of a share or business valuation for tax purposes. 13. The undertaking of a share or business valuation for the purposes of a sale of shares to a family member or existing participant in the business. Examples of services performed by accountants/ tax advisors that are not considered to fall within the generic designated business definition include: (a) (b) (c) (d) Any transaction involving the handling of customer s funds by the accountant or tax advisor. The incorporation of a company on behalf of a customer to facilitate a transaction. The acting as reporting accountants on a stock market admission. Undertaking a share valuation for the purposes of obtaining new bank finance. 6. Case Studies The typologies below are real life examples of risks that have crystallised causing losses and/or sanctions (civil and criminal) against the accountancy / tax advisor sector: 6.1. Financial management of a criminal organisation A law enforcement operation identified an accountant, J, who was believed to be part of the criminal organisation involved in money laundering and re-investment of illicit proceeds derived from drugs trafficking led by X. J s role was mainly that of a financial consultant. His task was to analyse the technical aspects of the investments planned by the organisation and identify the most appropriate financial techniques to make these investments appear legitimate from a fiscal stance. He was also to try, as much as possible, to make these investments profitable. J was an expert in banking procedures and most sophisticated international financial instruments. He was the actual financial mind of the network involved in the re-investment of proceeds available to X. J operated by sub-dividing the financial transactions among different geographical areas through triangle transactions among companies and foreign credit institutions, by electronic transfers and stand-by credit Page 8 of 9
letters as a warrant for commercial contracts which were later invested in other commercial activities. (based on an example from the FATF s report on Money Laundering and Terrorist Financing Typologies 2003-2004) 3 6.2. Tax evasion A Chartered Accountant provided services to clients whereby the income they derived in Australia was transferred into overseas bank accounts operated in an off shore banking centre in the name of the companies based there (the chartered accountants husband acted as nominee director and shareholder). The money sent offshore was recorded as business deductions in the accounting records of the clients, from which the chartered accountant prepared and lodged income tax returns. The off shore banking centre companies were administered by an accountant based in the jurisdiction. The money sent offshore were then returned to Australia via the chartered accountant s trust account, disguised as loans from the off shore banking centre based company to the chartered accountant clients, and used for private purposes, such as real estate purchases. This alleged scheme offered the client the benefit of obtaining their income tax-free and afforded them the opportunity to claim interest payments as tax deductions. These back to back loans included the fabrication of loan agreements and other accounting records to support the loans. Foreign companies were also used by the chartered accountant s clients for the purpose of share trading in the name of the company, thereby hiding capital and/or trading profits and dividends received as a result of the share trading. Another service provided to the clients of the chartered accountant involved the creation of personal superannuation funds to allow clients early access to retirement benefits. Preserved superannuation benefits, belonging to clients of chartered accountant, were deposited into the chartered accountants trust account and labelled an investment from the fund to an off-shore banking centre based company incorporated by her husband. The funds were then forwarded from the chartered accountants trust account to a financial institution in the name of the individual who was a member of the fund. This scheme allowed early access to preserved superannuation benefits to the members of the fund well before retirement. Clients of the chartered accountant also made payments to an off-shore banking centre -based company for services which were not provided by the company. This effectively provided a tax deduction for the client, to which the client was not entitled. 3 http://www.fatf-gafi.org/media/fatf/documents/reports/2003_2004_ml_typologies_eng.pdf Page 9 of 9