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Money laundering: how to spot a client who is breaking bad

Neil Arnott explains the responsibilities accountants all have under the Money Laundering Regulations – wide-ranging legislation that you ignore at your peril

May 2016

I ’m sure many of you will have been avid viewers of Breaking Bad, the hit US TV series. If you haven’t seen it, it is the story of Walter White, a chemistry teacher who is diagnosed with terminal cancer. He decides to use his scientific knowledge for nefarious means, manufacturing the illegal drug crystal meth to pay for his medical care.
One of the many problems faced by Walter throughout the six series of ‘Breaking Bad’ is how to account for the millions of dollars his drug manufacturing ‘business’ earns. The main issue is that money earned from drugs is illegal, and the quantities of cash earned could not easily be explained to the tax or criminal authorities. In one scene, an entire garage is filled with money, stacked almost from floor to ceiling!
The series demonstrated a number of ways in which these illegal earnings could be ‘laundered’ – that is, processed through financial transactions to make it appear ‘clean’. Let’s look briefly at how Walter and his wife Skyler, aided by their corrupt lawyer Saul, attempt to launder the money made from his drugs operation:
• A website was set up by Walter’s son, with the aim of raising money for his father’s care. Saul made regular contributions to the appeal using the drug money, with the aid of a computer hacker accomplice.
• Skylar bought a car washing business as a way to launder money. The business was purchased using drugs money, but Walt and Skylar tell their family he won the money playing blackjack. As a cash-driven business it provided a believable reason why Skylar would be able to bank large deposits of cash on a regular basis.
• Walter blackmails a former business colleague (who is a multi-millionaire) to take drug money and then to make a donation in trust for his family.
You should see that the common denominator in all of these schemes was trying to hide the true origins of the money – creating a ‘trail’ of transactions (which also often involve off-shore bank accounts) to make the illegal money appear to be legitimate.
Accountants need to be watchful – they deal with a wide range of clients, and may encounter situations in which they become aware, or suspect, a client to be involved in criminal activities. There is a legal obligation to report any instances that they know, or believe, to be money laundering without notifying their client. In an accounting practice this is most commonly done by completing an Internal Report and submitting this to the firm’s Money Laundering Reporting Officer (MLRO), who will then make a judgement on whether to report this to the National Crime Agency (NCA). Sole practitioners must complete a Suspicious Activity Report (SAR) and submit this to the NCA. Failure to do so – simply ‘turning a blind eye’ – could see the accountant charged with money laundering themselves, which carries a maximum sentence of up to 14 years imprisonment and an unlimited fine.
So how can accountants minimise the risk of becoming embroiled in a money laundering investigation? The most important safeguard is to ‘know your client’, by carrying out robust Customer Due Diligence (CDD) with any new clients, and closely monitoring current clients’ business to identify any indicative events. These could include ‘unusual’ transactions (particularly involving high levels of cash or overseas accounts), new business ventures that are not typical of the core business, or involvement of family members in the business where this would not normally be expected.
Of course, this ‘risk-based’ approach is not bullet-proof, and accountants must be aware that any client who is involved in illegal activities – typically including drugs, smuggling, trafficking, fraud and tax evasion – will be taking steps to ensure their criminal deeds remain undiscovered. Accountants must be particularly aware of the threats of familiarity and intimidation here; it can be difficult to remain objective when dealing with a long-standing client with a previously unblemished record, and the clients may even try to persuade the accountant to become intrinsically involved in the money laundering – either by using threats or offering financial inducements.
And one final tip – avoid having any clients like Walter White!
• Neil Arnott is a course tutor at Premier Training

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