With thanks to Sara White, Editor, Business & Accountancy Daily. Content has been edited for brevity.
The majority of small accountancy firms fail to identify client risks or perform adequate due diligence checks before taking on new customers, warns ICAS.
Too many firms are not even conducting basic AML checks on high risk clients with wealthy clients and cash-intensive businesses frequently ignored, while decline in face to face meetings is creating issues around verifying client identity.
A review identified weaknesses in the effectiveness of anti money laundering (AML) procedures in firms ICAS considered to be at the ‘lower end of the risk spectrum’, finding that even basic checks were not being conducted.
‘The results clearly show that the vast majority of the participant firms omitted to identify most of their client risks which is of serious concern.
The main risk factors accountants failed to monitor effectively were cash-based businesses, overseas client connections and high net worth clients, while even instances of clients with unusual transactions, albeit a low occurrence event, were not well understood.
A failure to assess risk of cash-based businesses often came down to a misunderstanding of the category, with 88% of firms reviewed ‘missing the risk factor’ as they thought it only applied to old school cash transactions, when it means ‘cash-intensive’ businesses.
‘Many businesses now only have a small proportion of cash, following the use of electronic payment systems, but are still considered risky because they could still be at risk of facilitating illegal transactions given their ability to make payments and accept receipts in cash.’
There was also confusion about clients with overseas connections, with firms failing to take into account critical factors when taking on these customers.
‘When gathering Know Your Client information, firms should gain an understanding of a client’s overseas connections in order to make an informed risk assessment, including transactions to/from the country in question, sources of funding, sources of wealth, etc.’ ‘Firms are also reminded to declare all risk factors present within the client base, even if it is believed that sufficient mitigations are in place.’
The prevalence of online only client contact also raised red flags, reflecting a decline in face-to-face meetings which reduced risk checks and a failure to properly verify the identity of individuals.
‘Firms are reminded that obtaining a photocopy of a client’s ID documentation is insufficient in providing assurance that clients “are who they say they are” in isolation,’ ICAS added. ‘Firms should ensure that they can confirm the individual’s likeness to the ID documentation obtained by meeting the client or by obtaining copies certified by an appropriate party. Firms may wish to use an electronic CDD platform which includes facial recognition for additional security, for example.’
Key findings:
- Client risks – while most firms understood the service risks facing their firm, majority failed to identify all of their client risks on their firm-wide risk assessment and AML declaration.
- Service risks – most firms were more effective at identifying service risks, apart from checks on Trust and Company Service Provision (TCSP).
- Insufficient Customer Due Diligence (CDD) procedures – 21% of firms reviewed overstated effectiveness of their CDD procedures on their AML declaration.
Although the government plans to move all AML supervision to the Financial Conduct Authority (FCA), a timetable for the transition has not been published, nor detailed plans, and it is unlikely to come into effect any time soon. This means that ICAEW /ACCA /ICAS remains the AML supervisory body for member firms. Non-members (who deal with and are regstered with HMRC) are the responsibility of HMRC.
