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Understanding money laundering risks

Author: ICAEW Insights

Published: 02 Mar 2021

3 March 2021: A shared understanding between law enforcement, supervisory bodies and firms of money laundering and terrorist financing risks is crucial to ensuring firms recognise when they are at risk of being used to facilitate money laundering.

The ways in which criminals operate are constantly evolving. By maintaining awareness and applying professional scepticism, accountants can be more effective in identifying and reporting a suspicious activity when it arises.

Following on from instalment two of the IFAC series, ‘A Risk-Based Approach’, several key resources have been published which should inform firm-wide risk assessments. These include the National Risk Assessment (NRA) of Money Laundering and Terrorist Financing. The NRA assessment is a stock-take of the UK's collective knowledge of money laundering and terrorist financing risks in the UK. It concludes that the risk accountancy service providers could be used to facilitate money laundering is high.

Services most at risk are identified as:

  • Company formation and termination: Firms that offer registered office or nominee directorships are at risk as these can be used to conceal beneficial ownership or be used to facilitate the movement of money to offshore jurisdictions.
  • Mainstream accounting: The principal risk is false accounting.
  • Payroll: Can provide criminals with a legitimate-looking record of money movement.

More detailed information on what the NRA says about accountancy services is contained within ICAEW’s summary. As well as the most at-risk services, it also highlights which countries and business sectors are considered high risk.

Additionally, the Accountancy AML Supervisors Group Risk Outlook has been put together specifically for accountants. It includes guidance and red flags relating to the high-risk areas identified in the National Risk Assessment.

The impact of COVID-19

The social distancing and lockdown measures implemented in the UK has reduced the money launderer’s ability to move cash across borders. This has led criminals to use other known methodologies to move cash via freight, use of crypto assets and trade-based money laundering.

The NRA highlights the concern that organised criminals may exploit businesses who through no fault of their own have fallen into financial difficulty. This is particularly relevant in 2021 as companies who received Bounce Bank loans begin making repayments. 

It has been well publicised that there have been many fraudulent claims for business interruption loans and COVID-19 grant claims. 

Other emerging risks to be aware of include:

Independent schools

If you have independent schools as clients you should be familiar with the alert: Bribery and Corruption Risks to UK Independent schools – Case Studies and Red Flags

The article highlights money laundering red flags such as school fees being paid by third parties on behalf of parents, students who come from higher-risk jurisdictions, cash deposits to pay school fees, payments out of custody accounts and large deposits of payments of fees in advance.

Chinese underground banking

It is very difficult to move money out of China and there are significant restrictions on what money coming out of China can be spent on. This means that 'underground money shops' have been created to facilitate the movement of money out of China.

If you have Chinese clients you need to be alert to the risk that you may be handling or facilitating the handling, of the proceeds of crime.

More information on the subject is available in this NCA publication on Chinese Underground Banking and 'Daigou'.

Further resources