The principles of knowing your customer are currently in sharp focus with the most recent leak of personal financial information of the world’s wealthy and powerful. 

The Pandora Papers, 12 million documents leaked to journalists, detail the wealth, tax affairs, investments, property acquisitions and capital movement of high net worth individuals (HNWs), many of whom are in positions of political power.

While the media focus on evidence of tax avoidance and money laundering, triggering the interest of HMRC, many of the practices and schemes detailed in the leak are legal and used for security and privacy purposes.

It is largely the identification of clients which is making the news so sensational, but the existence of dubious practices raises a reputational risk and reaffirms why it is important, despite client privacy, for accountants to know their customers.

“Do you have a full view of what clients are involved in; who their associates are, and are you up to speed on the special rules for politically exposed people?” asks Sophie Wales, ICAEW Director of Trust and Ethics. It is also important to make sure that any tax planning services are delivered in accordance with Professional Conduct in Relation to Tax (PCRT).

Due diligence

The Pandora Papers highlight why the rules on dealing with politically exposed people exist, which include enhanced due diligence and taking measures to establish a client’s source of wealth.

“It is acknowledged that politically exposed persons are at a higher risk of corruption,” says Wales. “We should be aware of where people’s money has come from, and if what they appear to have is commensurate with their office and salary.”

This includes being aware of what risk factors there may be for wealthy clients, and whether they are, or have links to, politically exposed people.

Factors like their nation of origin and the perceived corruption in that country are key. ICAEW has resources that help on this issue, detailing a corruption index of countries to better view these risks.

Other issues to be aware of include adverse media; including items like the Pandora Papers, although this is dependent on the facts revealed in the reports. Practitioners should also be aware of any illegal or unethical conduct of that client.

Effects of the leaks

There is a balance between the benefits of privacy and security that offshore ownership allows HNW individuals, against it being a mask for money laundering and criminality that needs to be worked through.

Yet there is a general move to transparency over beneficial ownership (ie, who ultimately owns an asset or a house) globally, says Wales, although the UK is further ahead.

One of the potential areas for more detail would apply to Companies House reform, which would include identity verification checks for those wishing to start a business. 

“This would be a key role for chartered accountants wishing to run checks on clients, or provide services to them as part of that process,” says Wales. 

Since last year, members are under obligation to report any discrepancies that they discover with significant control of clients to what is on the Companies House register. 

This is part of a drive to increase accuracy on beneficial control in the UK. 

“The UK is an attractive jurisdiction and people bring a lot of money into the country, but we have a strong regulatory regime for anti-money laundering, and we are further ahead than a lot of other territories on beneficial ownership registers,” says Wales. “We would encourage government to move ahead with further Companies House reform.”

Summary

Key takeaways for managing HNW clients:

• Make sure you understand where your client’s money comes from
• Align your risks based on their background, network and associations
• Manage political risks, exposure and corruption against available indexes 
• Manage your obligations for verifying discrepancies in client beneficial ownership to recorded information at Companies House