NCA’s cotton import case underscores the need to understand the source of goods and services.
Key points
- A landmark court judgment has heightened the risk level for money laundering offences.
- Accountants need to ensure both they and their clients understand the sources of services and goods used in business and the activities of suppliers.
- A risk-based approach, including focusing on fostering a culture of compliance and leveraging technology, can help effectively manage anti-money laundering responsibilities.
In a landmark judgement in June, the Court of Appeal found that the National Crime Agency (NCA) acted unlawfully when it decided not to investigate cotton goods imported from the Xinjiang Uyghur Autonomous Region of China. They were allegedly produced using slave labour.
Neil Donovan, a partner in Ashurst global law firm that specialises in criminal and regulatory investigations, says: “The judgement is significant on a number of levels.”
“Firstly, because the Court decided to intervene in the decision making of a prosecutorial authority, the NCA.
“Secondly because it now means that paying market value for goods doesn’t cleanse the property and the criminal nature of goods can pass downstream.”
That said, a person must have requisite knowledge or suspicion that the goods are not legal or ethical. “Nevertheless, that creates a heightened level of accountability and risk in commercial supply chains,” says Donovan.
He adds that the interventionist approach by the court also has other broader, social and business ramifications.
“It makes it more likely that NGOs and other interest groups will challenge the decision making of investigative bodies, particularly in relation to ESG related matters.”
Unfortunately for micro businesses and small to medium-sized enterprises (SMES), as well as accountants who have mandatory reporting obligations in the UK, the test for suspicion under the Proceeds of Crime Act 2002 is low.
In fact, it requires a suspicion which is more than fanciful that a person has been engaged in or has benefited from criminal conduct, not actual proof, for a potential offence to be committed.
It’s worth noting that money laundering offences and related investigations can extend to overseas activities i.e. the legislation has broad geographical scope, says Donovan.
He believes that a potential consequence of this decision is that the number of Suspicious Activity Reports (SARs) and Defence Against Money Laundering (DAML) requests are likely to increase.
“Defensive and precautionary reporting are more probable following this judgement,” he says.
Reducing risk in the supply chain
The Institute of Financial Accountants (IFA) is authorised by HM Treasury as an AML supervisor and included in the money laundering regulations. In this role, it provides reviews, training and enforcement action to a variety of businesses of all sizes.
“We advise our members to have policies and procedures in place that include thorough risk assessments,” says Tim Pinkney, Director of Professional Standards for the Institute of Financial Accountants (IFA).
“Know who the beneficial owners of a company are and/or how the corporate structure works and perform regular due diligence that includes assessing risk, monitoring existing clients and keeping appropriate records. Accountants need to understand fully how goods and services are created and the channels linked to that.”
Tim Pinkney, Director of Professional Standards, IFA
He warns accountants to be aware of the risk attached to “dual purpose goods”. “For example, if a company is importing fabricated steel pipes, what are they being used for? One example recently had a firm involved with supplying drones that could be used for warfare.”
Develop and apply robust policies to understand your client supply chain
Pinkney emphasises it’s not about in-depth investigation. “It’s about asking yourself where things come from and where they are going and if the information you have makes sense,” he says. .
“For accountants, it is about doing everything you could be expected to do and that is covered by policies you have in place. Often, we see that while a firm may have these, they don’t apply them.”
Pinkney says that if accounting firms embed a positive, healthy AML culture across the team it can be embraced by everybody and become second nature.
While it is impossible to avoid all risk in supply chains, Donovan agrees that the way to mitigate it is through effective due diligence procedures that lead to a greater understanding of counterparties’ businesses.
“The money laundering risk needs to be assessed at each stage of the supply chain,” he says. “Companies and their advisors (including accountants) will need to carefully consider whether reporting obligations are triggered where there is a suspicion of tainted goods within the supply chain.”
Training operational teams to identify red flags is key, agrees Donovan, with increased adoption of artificial intelligence to monitor compliance in real time and predict risks before they crystallise.
Besides AML training for staff, clear reporting lines for submitting suspicious activity reports to the NCA are vital, adds Pinkney. “Compliance should be embedded in day-to-day processes and, in reducing or avoiding entanglement in money laundering, professional scepticism is key.”
Interested in brushing up on your skills around compliance and regulation? Learn how to develop fit-for-practice policies and procedures with IFA’s AML Matters: How to create policies and procedures webinar on 9 October 2024
