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Coming clean on launderers

Every IFA firm in the UK could inadvertently be laundering an average of £1.5m each year – a staggering £11bn in total – according to a study by Compliance Consultants presented at Sofa&#39s recent forum on money laundering.

Such statistics make shocking reading and most IFAs would vehemently deny that their firm has any involvement with money laundering.

However, of 56,000 disclosures of money-laundering activity to the National Criminal Intelligence Service since September 11, 2001, only 0.36 per cent (just over 200) were reported by IFAs, which seems unrealistically low.

While “dirty money” that needs to be laundered might be the proceeds from drug dealing or terrorism, it is equally likely to be the result of tax evasion, burglary or handling stolen goods. The definition of money laundering is “the process by which criminals attempt to hide and disguise the true origins and ownership of the proceeds of their criminal activity”.

Certain IFAs may know very little about their clients and the origin of their funds, which can make the laundering of money through IFAs relatively easy.

At the recent Sofa forum, Compliance Consultants chairman Marc Egerton highlighted the fact that most IFAs are not taking adequate steps to recognise and report suspicious activity. He said: “We know that criminals use IFAs to create smokescreens to disguise the true provenance of their money and it is, therefore, highly likely that almost every IFA in the UK will have inadvertently laundered some money at one time or another.”

Following the terrorist attacks of September 11, the FSA&#39s statutory objective of reducing financial crime has moved higher up the agenda and, as a result, it has introduced and revised a number of rules to counteract money laundering that firms must adhere to.

In the first instance, all IFA firms must appoint a money-laundering reporting officer who is responsible for ensuring that any suspicious activity is reported promptly to the National Criminal Intelligence Service. All suspicious activity must be reported to a firm&#39s MLRO. The responsibilities of the MLRO include regularly checking the updated list of non-cooperative countries on the FSA&#39s website and FBI terrorist lists and considering any significance to their business.

A detailed report must be kept of any reported suspicious activity and disclosures made to the National Criminal Intelligence Service. It is up to the MLRO to decide independently if the circumstances reported to him or her are suspicious. They are then responsible for advising staff to proceed with transactions if they decide the circumstances are not suspicious or to advise them to stall if they think it will enable further investigations to be made.

Training programmes to help all staff identify what is and is not suspicious must be organised annually to ensure they have a full understanding of the law and regulations surrounding money laundering. They should also be aware of the responsibilities of staff and the effect of breaches.

One of the immediate impacts on IFAs is that they must ensure that clients produce satisfactory personal identification and verification of a home address whenever a payment is made.

In addition, IFAs must find out the source of the client&#39s funds, who made the payment, where it was made and how. For high-risk transactions such as small self-administered schemes and self-invested personal pensions, IFAs must also ascertain the origin of the funds, for example, from maturity statements, lottery notifications, letters advising of inheritances and so on.

What amounts to suspicion? This is defined as “a degree of satisfaction, not necessarily amounting to belief, at least extending beyond speculation, as to whether an event has occurred or not”. How does this help IFAs identify potentially laundered money? They should be receptive to the following alarm bells:

•A portfolio is only active at certain times rather than never or regularly.

•A client makes a significant investment followed by regular small withdrawals (not by a retired investor).

•A client makes many small investments not compatible with their status.

•A client makes regular withdrawals just below the £9,300 identification threshold.

•A client refuses to provide information on his/her identity, address or origin of funds.

•A client makes transfers to third parties in non-cooperative countries.

Any training scheme developed by the MLRO should cover all these alarm bells in detail to provide staff with the necessary skills and confidence to enable them to identify potential instances of money laundering.

As the small number of disclosures since September 11 highlights, IFAs need to become more alert to the possibility that dirty money could be passing through their hands and take the necessary steps to ensure that any potential money laundering is uncovered. Money laundering is a huge global problem and, while the FSA&#39s guidelines appear stringent, no one would doubt that they are necessary.

For most IFAs, the biggest part of the battle is equipping staff with the necessary skills to identify suspicious circumstances and ensure that they report them as soon as possible. However, the FSA&#39s new guidelines do have to be taken seriously by all members of staff as failure to report suspicions to the National Criminal Intelligence Service is a criminal offence.

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