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Money laundering is here

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by Heather Brehcist

T he 1 March 2004 has come and gone and tax advisers are finding out what life is like under the new money laundering

regime. This article looks at some of the areas where members have sought advice in recent months. It is largely based on the CIOT and ATT anti money laundering guidance which can be found on the CIOT’s and ATT’s websites.

Members should keep at the front of their mind that any clients who are engaged in tax evasion are potentially money launderers. Suspicion of tax evasion will give rise to money laundering reporting obligations for the tax adviser.

Engagement letters

Some members have asked whether they need to issue to clients

a new engagement letter which would include a paragraph

setting out a tax practitioner’s obligations as a result of the new

money laundering legislation.

Some feel it is important that their clients are made fully aware of the reporting requirements under the money laundering legislation; others feel that there is no need to draw a distinction between that legislation and any other legislation which could require a member to supply information to the authorities, for example as a matter of public interest disclosure.

Ultimately this is a matter of practice policy. A practitioner is under no obligation to advise clients in the engagement letter that he may be required, at some time in future, to submit a report to the National Criminal Intelligence Service (NCIS) should he have knowledge or suspicion of money laundering. The Proceeds of Crime Act 2002 (POCA 2002) makes it clear that the duty to report overrides the duty of client confidentiality (POCA 2002, s. 337) and the member would be protected should his client claim he has been negligent provided there were reasonable grounds for the report. However, for business reasons

a member may feel more comfortable including an appropriate

paragraph in the engagement letter and some suggested wording

is set out below.

Suggested wording

If a member wishes to make general reference to his money laundering reporting obligations before agreeing to act for a client, he may do so provided that no suspicion of money laundering has been presently aroused (otherwise he will run the risk of tipping off the client). The following wording could be used, amended as appropriate to fit the nature of your practice (e.g. sole practitioner, partnership or company)

‘This firm/practice is/I am required under the Proceeds of Crime Act 2002 to make a report to the National Criminal Intelligence Service if we/I become aware during the course of our/my professional work, of any circumstances which give rise to knowledge or suspicion or reasonable grounds for suspicion of a money laundering offence. The offence of money laundering may be committed by concealing, arranging or acquiring the proceeds of any criminal conduct including the proceeds of tax evasion, even if the conduct occurs outside the UK.’

The need to exercise caution

However, members should take great care to avoid the offence of tipping off, or facilitating the acquisition, retention etc. of criminal proceeds, both in any warning given and in any follow-up discussion concerning the particular tax matter in point.

No warning about money laundering reporting requirements should be given if any concerns have already emerged. Equally no advice should be given to clients on how to avoid a money laundering report to NCIS since to do would be both unethical and might constitute a criminal offence.

If your client asks you whether you have made a money laundering report you should decline to answer. Members should generally refrain from discussing money laundering reporting obligations and any form of words used in the engagement letter should be settled by the practice’s legal advisers.

Notice in reception/leaflet for prospective clients

Some members asked whether an alternative approach could be to place a notice setting out the money laundering reporting obligations in the reception area of their office or to prepare a leaflet which is given to prospective clients before any discussions take place. The intention would be to make it clear to prospective clients that the practitioner has regulatory obligations in respect of money laundering including the reporting requirement. Again, while giving notice in this way is unnecessary in terms of the law and the Money Laundering Regulations 2003, this is ultimately a matter of practice policy in the same way as giving notice in the engagement letter is. Members, however, should be careful not to be seen as overtly deterring prospective clients from seeking advice just because they may be money launderers as it is unprofessional to take any approach which encourages cover-up.

Alternative suggested wording

There are other situations in which members may be obliged to make disclosures of what would otherwise be confidential information, in some cases without informing their clients; for example where a Taxes Management Act 1970 (TMA 1970), s. 20BA notice is issued. Members might therefore prefer to use a more all-embracing form of words in their engagement letters, rather than expressly referring to proceeds of crime obligations, for example:

‘Neither we nor you will be prevented from disclosing confidential information which is required to be disclosed by law or any professional or regulatory obligation.’

Summary

As noted above, it is a matter of practice policy whether the engagement letter includes a reference to the money laundering reporting requirements or not. What is critical is that there is a signed engagement letter in place which sets out clearly the scope of the work to be carried out and the terms and conditions of the assignment.

Tax Tax Adviser Adviser March March 2004 2004

Record keeping

There are a number of record-keeping issues arising from the new

regime. Members have asked how long the records specified by the legislation need to be kept. The regulations require records to be kept of evidence obtained when carrying out identification checks.

A copy of that evidence must be kept or information should be on

file giving clear reference as to where in the practice a copy of that evidence may be obtained.

Identification records must be kept for a period of five years from the date the relationship with the client comes to an end. Records must also be kept of all the transactions that have taken place for a particular client. Here the retention period is broadly five years from completion of the transaction.In most cases this requirement should be met by the client files and the work in progress (WIP) records.

Firms would also be well advised to keep records of money laundering training, so that they can demonstrate that they have complied with the obligation to train relevant principals and staff.

Firms, and indeed every individual within the firm, should for their own protection keep records of money laundering reports made and matters considered in deciding whether to make a report. In particular, either the individual client handler or the money laundering reporting officer (MLRO) might be called upon at a later date to justify why a report was not made in a particular case (for example where another adviser involved did make a report). Hence any consideration of possible reports should be documented. It is preferable for these records to be kept confidentially and not on client files to minimise any risk of the alleged offender inadvertently being tipped off – the fewer people who know the better.

Knowledge or suspicion and reasonable grounds for knowing or suspecting

Under the new legislation, as a tax adviser you are obliged to make

a report to your firm’s MLRO or directly to the NCIS if a sole

practitioner if, in the course of your business, you have knowledge

or suspicion of money laundering or have reasonable grounds for knowing or suspecting money laundering.

What is suspicion?

Suspicion has been defined as requiring a degree of satisfaction, not necessarily amounting to belief, but at least extending beyond speculation as to whether an event has occurred or not. It is not necessary to have actual knowledge of the underlying criminal activity.

If you are in doubt whether there are sufficient grounds for

suspicion you should make a report to your MLRO (or NCIS where appropriate).

The reporting obligation is personal to every member as a practising tax adviser. However, it would be appropriate to discuss the particular circumstances with the partner responsible for the client work before making the report if only to test your conclusion.

What are reasonable grounds for knowing or suspecting?

This is an objective test and involves asking whether a reasonable person would have known or suspected even if you did not i.e. what you ought to have known even if you did not.

This could include

Tax Adviser March 2004

shutting your mind to the obvious;

deliberately avoiding asking a question for fear of getting the ‘wrong’ answer; and/or

ignoring matters which would indicate the facts to an honest and reasonable person.

Illustration Are there reasonable grounds for knowing or suspecting money laundering?

Imagine the following situation: a new client comes in to your office to discuss his tax affairs. As you are going through his various sources of income it emerges he is about to invest £200,000 in a friend’s company. From what you know about the client you are surprised that he has available funds of this magnitude and he is very vague about their source. Your usual identity checks have not revealed anything untoward about him, but you remain uneasy because of his reticence to provide any information about his £200,000. His response to your questions is: ‘Don’t worry – it’s all above board.’

Do you have reasonable grounds for knowing or suspecting?

You do not have knowledge of criminal activity in this scenario. The facts are solely that a client has a substantial sum of money which is derived from an unknown source.

You may or may not have suspicion – there is insufficient information to form an objective view. Additional enquiries could be made to try and elicit more details. However, you are not required to carry out investigative work beyond what you would normally do. Indeed to do so might well risk your committing the offence of tipping off. In the absence of any more conclusive evidence you may conclude it would be prudent to submit a report to protect yourself and your practice’s position. However, it is a judgement call and equally you might, after careful consideration of the available facts, conclude a report was not necessary.

In the event of any allegation that the tax adviser had failed to make a report when he should have done so, it would be for the courts subsequently to decide whether a report should have been made, but it would seem harsh for the court to criticise a tax adviser who had carefully weighed up what little evidence was available and had concluded there were insufficient grounds to trigger a report. In any event you may be well advised to keep a record of the reasons why you reached your decision.

From a practice perspective, it would be advisable to decline to act unless your client was prepared to reveal the source of the £200,000 – it is essential that client and adviser are able to trust each other and your enquiries would be regarded as reasonable enquiries to make in the course of acting in respect of a private client’s tax affairs.

Defences

What happens if you fail to make a money laundering report when you should have done so? Such a failure is potentially a criminal offence, but there are three statutory exceptions which might be used in your defence.

It will not be an offence if one of the following applies:

(1) Reasonable excuse

You have a ‘reasonable excuse for not disclosing the information or

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other matter’. Precedent has yet to emerge as to what might be regarded as reasonable excuse. However the courts would be likely to take into account whether you have followed the CIOT’s and ATT’s (and possibly other professional bodies’) guidance when determining whether an excuse is reasonable or not.

(2) Professional legal adviser

You are a professional legal adviser and the information or matter came to you in privileged circumstances. Current interpretation of the legislation is that this opportunity for not making a report will not be available to you unless you are a practising solicitor or barrister.

(3) Lack of training

You do not know or suspect that another person is engaged in money laundering and you have not been provided with training in accordance with the Money Laundering Regulations 2003 by your employer. If you are practising as an employee in a firm, your employer has obligations to train you properly and it would be a

The Tony Arnold Library at the Maughan Library, King’s College, London

The CIOT Library is now based in the Maughan Library in Chancery Lane, London, WC2A 1LR. Telephone enquiries:

General: (e.g. opening hours, holdings) Taxation:

020

7848 2424

020

7848 1942

e-mail ciotlibrary@kcl.ac.uk

The Library was moved from The Chartered Institute of Taxation’s headquarters at Upper Belgrave Street in September 2001. Most of it has been re-catalogued by KCL staff and incorporated into the taxation section of the King’s College Library at Chancery Lane.

Members of the CIOT and ATT who wish to use the Library are reminded that they need to obtain a free card identifying them as members. Cards can be obtained from the Membership Department at Upper Belgrave Street.

The current material is now shelved in the Law Books area on the 1st Floor. Periodicals are shelved in the Law Journals and Law Journals Folio sections. Most of the archive material has been taken to KCL from our archive store and is housed in the Law Store on the Lower Ground Floor. All the catalogued material is recorded on the KCL catalogue and can be accessed from their website on www.kcl.ac.uk. Members have access to all the KCL material which is also indexed there.

Members may photocopy material (subject to the copyright laws) on machines in the Library – a card needs to be purchased from the Enquiry Desk to pay for this.

All material is for Reference only. Members unable to visit can contact the Librarian for help and information can be faxed or posted for a small charge. The CIOT Librarian is at the Library on Wednesdays and on other days KCL staff are available to help.

defence to say you did not realise a report was needed if you have not received proper training. It is likely, however, that this defence would be difficult to rely on if you have a professional qualification.

Conclusion

New legislation can be daunting to deal with. This legislation is particularly challenging not least because of its wide-ranging scope and complexity, but also because of the stringent penalties and prison sentences which can be imposed for failing to ‘get it right’. There remain areas which present practical difficulties and the Institute and the Association are continuing their discussions with various government departments on these. As soon as an agreed position is reached we will put this information on our websites. In the meantime, if there are any areas which you would like to see covered in a future Tax Adviser article, please let us know by e-mailing: askstandards@ciot.org.uk.

Heather Brehcist is Standards Officer at the Chartered Institute of Taxation.

THAMES VALLEY BRANCH

HALF-DAY CONFERENCE 2004

Nigel Eastaway and Nicholas Hughes

discuss

Frontline Tax Changes

at The Blue Mountain Golf Club Reading

Wednesday 21 April 2004 1.30pm for 2pm until 5.30pm Cost: £120 per delegate

For more information or to book a place please contact: Michelle Cazeaux, Horwath Clark Whitehill, Kennet House, 80 Kings Road, Reading, RG1 3BL; Tel: 0118 959 7222; E-mail: michelle.cazeaux@horwath.co.uk

Qualifies for CPE points and CPD hours

Reading, RG1 3BL; Tel: 0118 959 7222; E-mail: michelle.cazeaux@horwath.co.uk Qualifies for CPE points and CPD hours

Tax Adviser March 2004