The Regulations

The Money Laundering Regulations 2003

The Money Laundering Regulations 2007

Guidance

Preventing money laundering and terrorist financing (MLR8) is a notice issued by HMRC in August 2008 that provides guidance on the Money Laundering Regulations 2007 (MLR 2007).

The Joint Money Laundering Steering Group (JMLSG) provides further guidance for the Financial Services Industry on good practice for countering money laundering and provides practical assistance in interpreting the UK Money Laundering Regulations.  JMLSG Guidance on Money Laundering has been issued in 2006 & 2007 with further amendments introduced in December 2007  and further proposed in August 2009.

CCAB (the Consultative Committee of Accountancy Bodies) has issued guidance on anti money laundering procedures with specific reference to their application in the Accountancy Sector for those providing audit, accountancy, tax advisory, insolvency or related services in the United Kingdom (including such firms providing trust or company services). ACCA highlight two sections of particular note that cover the “risk based approach” and “customer due diligence”. The key points are as follows.

Risk Based Approach

A risk based approach allows businesses to target resource and effort where the risk is greatest and, conversely, reduce requirements where the risk is low. Businesses must establish adequate and appropriate policies and procedures relating to risk assessment and management in order to prevent operations related to money laundering or terrorist financing.

Business must determine the extent of customer due diligence measures on a risk-sensitive basis depending on the type of client, business relationship, or services to be provided; and

be able to demonstrate to their anti-money laundering supervisory authorities that the extent of customer due diligence measures is appropriate in view of the risks of money laundering and terrorist financing.

Businesses are required to take a risk-based approach and have adequate measures to verify the identity of beneficial owners so that they are satisfied that they know who the beneficial owner is and what the control structure is in respect of a client who is other than a natural person.

Businesses are required to undertake scrutiny of transactions and other activities throughout the course of a business relationship to ensure consistency with businesses’ and individuals’ knowledge of the client, his business and risk profile.

Businesses must also keep up-to-date the information collected in applying customer due diligence measures.

Businesses must apply customer due diligence measures at appropriate times to existing clients on a risk-sensitive basis.

Customer due diligence

Effective “customer due diligence” measures are an essential part of any system designed to prevent money laundering and are a requirement of the Money Laundering Regulations 2007. The level of risk must be assessed before the appropriate level of customer due diligence can be applied.

The prospective customer may be an individual, or a corporate or legal entity. Due diligence measures need to be undertaken on the actual customer and all principal beneficial owners and controllers. The business also needs to maintain a level of confidence that the due diligence undertaken is relevant and up to date throughout the lifetime of the relationship.

Customer due diligence measures need to be carried out:

• when establishing a business relationship,
• when carrying out an occasional transaction,
• where there is a suspicion of money laundering or terrorist financing; and
• where there are doubts concerning the veracity of previous identification information.

Businesses are required to ensure customer due diligence procedures are applied to all clients, both existing and new. Customer due diligence must be applied to existing clients (i.e. those existing prior to the 2007 Regulations coming into force) at appropriate times on a risk-sensitive basis.

Before entering a business relationship, businesses must:

• identify and verify the client’s identity using documents or information from reliable and independent sources,
• identify the beneficial owner of the client (where required), including understanding the ownership and control structure of the client and verifying, according to risk, the identity of the beneficial owner(s); and
• obtain information on the purpose and intended nature of the business relationship.

Verification of identity may in certain circumstances be conducted during the establishment of a business relationship if this is necessary not to interrupt the normal course of business and there is little risk of moneylaundering or terrorist financing occurring, provided the verification is completed as soon as practicable after contact is first established.

During a business relationship, businesses must monitor activity on an ongoing basis. This includes scrutiny of transactions, source of funds and other elements of knowledge collected in the customer due diligence process, to ensure the new information is consistent with other knowledge of the client and keeping the documentation concerning the client and the relationship updated.

Businesses can use a variety of tools and methods to conduct customer due diligence; the onus is on them to satisfy themselves and to be able to demonstrate to their anti-money laundering supervisory authority the appropriateness of their approach.

Disclaimer: The information contained on this webpage is provided for general guidance only. It is not intended to provide you with professional advice nor is it intended to substitute you obtaining professional advice.

Money laundering is perceived by governments throughout the world as a major threat to the market economy. To combat this threat, lawmakers have attempted to make money laundering more difficult by restricting criminals’ access to the professional expertise which is often required to introduce dirty money back into the legitimate economy (AAT, 2009).

In the UK, anti-money laundering controls are provided through a package of legislative measures that include the Proceeds of Crime Act 2000 (Proceeds of Crime Act 2002), the Terrorism Act 2002 (Terrorism Act 2006), and the Money Laundering Regulations 2007.

HM Revenues & Customs advise that new businesses are required to have anti-money laundering controls in place and have to be registered with HMRC before the business starts to trade.

Anti-money laundering controls are policies and procedures that you must put in place within your business in order to prevent activities related to money laundering and terrorist financing.

They include assessing the risks of your business being used by criminals to launder money; verifying customers’ identity; monitoring customers’ transactions and reporting suspicious activity to the Serious Organised Crime Agency (SOCA); keeping the right records; and ensuring you have appropriate internal management controls.

Your business should establish and maintain appropriate and risk sensitive policies and procedures relating to:

• customer due diligence measures and ongoing monitoring
• reporting
• record keeping
• Internal control
• risk assessment and management
• the monitoring and management of compliance
• the internal communication of such policies and procedures.

Customer due dilligence – Know Your Customer (KYC) – and giving attention to the level of risk in business are two focus areas in anti-money laundering controls.

Customer due diligence is the term used in the Regulations for the steps that businesses must take to:

• Identify the customer and verify their identity using documents, data or information obtained from a reliable and independent source.
• Identify any beneficial owner who is not the customer. This is the individual (or individuals) behind the customer who ultimately own or control the customer or on whose behalf a transaction or activity is being conducted.
• Where a business relationship is established, you will need to understand the purpose and intended nature of the relationship, for example details of customer’s business or the source of the funds.

You must also conduct ongoing monitoring to identify large, unusual or suspicious transactions.

A risk-based approach means directing resources in accordance with priorities so that the greatest risk receives the highest attention.

This has been introduced to:

• allow public authorities and businesses to concentrate resources in the areas of greatest risk
• to avoid a ‘tick-box’ approach which can focus on a rigid system of control rather than the actual risks, which are in practice different for each business.

By adopting a risk based approach businesses are able to ensure that measures to prevent money laundering and terrorist financing are appropriate to the level of risk identified.

Applied appropriately this approach should allow businesses to be more efficient and effective in their use of resources, and minimise burdens on their customers.

Advice from HM Revenue & Customs, 2009. See: http://www.hmrc.gov.uk/mlr/controls.htm.