The international effort to try to stem the movement of money from criminal activities affects many businesses and isn’t limited only to large financial institutions.
The purpose of anti-money laundering regulations is to prevent money from illegal activities from entering the financial system, but also to prevent it being used to fund terrorist organisations and serious organised crime.
So, it is there to benefit all of us. If you own a business, you need to be aware of how anti-money laundering rules affect your business and, importantly, how you can protect your business from criminals who may try to involve it in processing the proceeds of crime.
As a business owner you can be held responsible if you fall foul of any of the legislation relating to anti-money laundering, even if it was inadvertently. The agencies that deal with anti-money laundering and the proceeds of crime have wide-ranging powers, and the legislation has some serious ‘teeth’.
The penalties can be severe. The phrase “ignorance is no excuse” definitely applies to this legislation. We’ll highlight the types of businesses that are most affected, and what they need to do to protect themselves. We’ll also look at how it affects businesses in general, and how they can deal with it.
What is money laundering?
We’ve all heard of it, but most people probably don’t understand the scope of what authorities consider to be money laundering, particularly in the UK.
As a business owner it’s important to understand what is considered to be money laundering so that you can, at the very least, be alert to any suspicious activity. Some types of businesses are also required by law to have anti-money laundering procedures in place.
Essentially money laundering it is any activity carried out to disguise the proceeds of crime.
This can involve using funds to purchase goods or services, but it can also involve moving illegally obtained funds into the financial system so that they appear legitimate.
The term “proceeds of crime” doesn’t just refer to cash from drug dealing or theft
It also encompasses funds or assets obtained as the result of fraud, bribery, corruption or tax evasion by individuals, organisations, or states.
It’s important to understand that when law enforcement agencies discover money laundering activities there is a “cascade effect”. This means that they will follow the funds, and any business that has processed those funds, at any stage, could potentially be held accountable.
Money launderers are extremely sophisticated in their methods. They will often disguise their activities under layers of transactions, with each layer designed to distance the eventual “legitimate” funds from the original source.
Which businesses are most affected by anti-money laundering rules?
Certain types of business have a direct responsibility to implement anti-money laundering procedures, and come under Money Laundering Regulations (MLR). There is guidance on the HMRC website as to which businesses are affected by MLR.
Essentially, any business regulated by the Financial Conduct Authority (FCA) is already subject to MLR. There is also a list of other regulatory bodies who require their members to be supervised under MLR.
The main types of business that have strict responsibilities are:
Financial sector businesses
Property sector such as estate or letting agents
Trust or company service providers
Bill payment service providers
Art market participants – Any business dealing in works of art, or offering storage facilities (such as freeports), need to check whether they are subject to MLR.
High Value Dealers – Businesses dealing with transactions of €10,000 or more need to consider whether they are subject to MLR. There are a few exceptions such as businesses that only take payments by debit card, credit card or cheque.
Many of these businesses will already be supervised for MLR purposes by their regulatory body, but if they aren’t part of a body recognised by HMRC they may need to register directly with HMRC.
The effects of Money Laundering Regulations on businesses in general
Dealings with MLR supervised businesses
For most businesses that aren’t in the above categories the most noticeable effect of anti-money laundering rules will be having to meet extra requirements in dealings with banks and any of the businesses that fall into the regulated group.
For example, when you open new bank accounts you must provide details about the business and its directors, along with evidence that they are who they claim to be. If you or any of the directors are non-resident in the UK, there will be additional compliance requirements.
If a business deal with another business which is regulated under MLR, they may find that they’re asked to prove the source of funds.
This information will be required whenever a business seeks to appoint an accountancy or law firm to act for them, or when they get involved in property transactions.
If your business is owned or controlled by a non-resident entity or directors there can be extra hurdles when opening bank accounts in the UK. This can be overcome by using one of the larger banks with international operations.
So, for example, if the non-resident holding company or directors have accounts with a bank that also operates in the UK, the process is simpler.
Carrying out a money-laundering risk assessment
The first step in protecting your business from money launderers and the rules in place to detect them is to carry out a risk assessment on the business.
This should identify whether there is any significant risk that your business could be a target for money laundering activity. Warning signs could be:
High levels of cash transactions
Dealing in high value assets, such as vehicles, artwork, or luxury items
Direct transfers to your bank
Poor record keeping by employees
High staff turnover
This is obviously not exhaustive, and you should look at your business activities as an outsider looking in to get a clear view of any weaknesses. Any risks you identify should be addressed and documented.
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The importance of due diligence
Applying common-sense and being aware of what is going on within your business will go a long way towards protecting it from money laundering activity.
Documenting any action you take will also demonstrate to law enforcement agencies that you have taken sufficient steps to reasonably ensure that your business is not exploited by money launderers.
Business owners need to be especially careful when they appoint new directors or senior managers
It’s always a good idea to carry out checks on potential new directors or senior employees through one of the business search agencies. This will verify that they are not disqualified from being a director, and will also show any other directorships they hold, and whether any of these companies have become insolvent.
This has dual benefits. Firstly, you are ensuring that they are legally entitled to be a director and therefore that you aren’t breaching company law. And, secondly, you are protecting your business from people whose motives might not be in its best interests.
It’s also extremely important to carry out sufficient due diligence on any individual or organisation that expresses an interest in investing in your business. One of the main methods money launderers use is to invest the proceeds of crime into otherwise legitimate businesses.
How Anti-Money Laundering rules affect cash transactions
Any business that accepts cash payments is potentially vulnerable to money laundering activity. As the owner of such a business you need to ensure that all transactions can be accounted for and keep meticulous records of what is taken and what is banked. Bookkeeping software which connects to your bank accounts can be useful.
Money launderers are known to “persuade” employees who handle cash to bank extra amounts which, once in the banking system, can then be transferred as apparently legitimate funds. These amounts are often relatively small, but regular. So, you need to be suspicious of any increase or change in cash activity in your business.
Larger-scale cash transactions are an even bigger risk and should be monitored closely. If this is a concern then it is worth considering only allowing payments by credit card, debit card, or cheque.
Record keeping for businesses at high-risk of money laundering
Any business needs to keep clear records of its activities. But certain businesses, particularly if they are potentially at higher risk from money laundering, should take extra care to ensure that all transactions are recorded and can be accounted for.
Clear and thorough record keeping will also help demonstrate to law enforcement agencies and regulators that every step has been taken to prevent your business from being used by money launderers, should you ever come under scrutiny.
How Can The Accountancy Partnership Help?
The Accountancy Partnership helps businesses of all types and sizes to comply with tax, accounting, and anti-money laundering regulations. As a client you will have a dedicated accountant to help you identify any risks to your business from money laundering or anti-money laundering rules. Call us on 020 3355 4047, or get an instant quote online.
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About The Author
A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.