Guidance

Understanding risks and taking action for accountancy service providers

Published 17 February 2021

About

This risk assessment identifies the key areas that accountancy service providers (ASPs) should consider as they carry out supervised business activities.

You should read this alongside the published ASP guidance and other relevant documents, including the National Risk Assessment (NRA) 2020 (particularly chapters 9 and 11) and guidance produced by the Financial Action Task Force (FATF).

Risk characteristics

ASPs include the following:

• statutory auditors as required by Part 42 of the Companies Act 2016
• local auditors as required by section 4 (1) Local Audit and Accountability Act 2014
• insolvency practitioners within the meaning of the Insolvency Act and Insolvency (Northern Ireland) Order
• external accountants
• tax advisers

The NRAs, published in 2015, 2017 and 2020, assess the risk of money laundering and terrorist financing, because of the easy access and broad range of services provided by ASPs, coupled with their use in every phase of many money laundering to be high. There is little evidence of ASPs being used for terrorist financing.

HMRC’s supervised population is predominantly small single person, single premises businesses with a small client base that they have face to face relationships with. This part of our supervised population is considered a medium to low money laundering risk, however, HMRC does supervise some higher risks businesses, eg those with a high turnover of clients and little face to face contact.

The supervisory regime for ASPs in the UK includes professional body supervisors listed in schedule 1 of the Money Laundering Regulations, the Financial Conduct Authority and HMRC.

The professional bodies will supervise their members, the Financial Conduct Authority its authorised businesses and HMRC will supervise those firms/individuals not supervised elsewhere. The majority of HMRC’s supervised population are external accountants or tax advisors.

The range of services offered by the businesses HMRC supervise can include higher and lower risk activities, and it is important that businesses understand and properly appraise the risk presented by the services in relation to each customer or class of customer in their risk assessment, as well as the individual customer risks.

ASPs must understand and meet their obligations under the Money Laundering Regulations to protect themselves, their community and the UK.

Any weakness in business’ controls can be continually exploited by criminals to use, coerce or control the ASPs to help cover and layer the movement of funds. Often these funds come from drug dealing, people smuggling or modern slavery and cause significant harm to society, communities and the lives of individuals.

HMRC expects ASPs to carefully assess and document the specific risks they face. They must establish policies, controls and procedures to address these risks and review them regularly to help prevent money laundering or terrorist financing.

Risks common to ASPs

All ASPs need to be aware of the following risks:

• the use of accountants to legitimise funds
• organised crime groups trying to infiltrate legitimate ASPs or corrupt their employees
• the use of client accounts to legitimise fund movements
• criminals taking advantage of weak or inadequate risk assessments, policies, controls or procedures.

Common risks associated with all sub-sectors

Key risk indicator	Notes	Comment
Cash dependent or rich businesses.	Unexpected level of cash receipts or payments. Unexplained cash and or other bankings. If this is not what would be expected it could indicate funds from illicit sources.	Whilst many businesses legitimately handle cash, its use is reducing. The amount of cash receipts and/or payments by a business should be assessed considering the nature and trade of the client to determine if this seems disproportionate. Bankings that are unrelated to the normal trade activities may be indicative of money laundering.
Unnecessary transaction splitting.	Transactions may be split unnecessarily across different ASPs, to prevent anyone involved in the transactions getting a full picture and becoming suspicious.	If a service is provided within a supply chain any additional risk associated with being part of a supply chain needs to be assessed.
Provision of services with no face to face interaction.	Historic and ongoing engagement with clients can mitigate risk if they are consistently open and honest with their ASP and financial indicators follow expected trends in their circumstances.
Payment in and out of a designated client account controlled by a client with no restrictions. Operation of pooled accounts.	The provision of a client account provides the opportunity to obscure the source or beneficial owner of funds and can therefore be used to launder funds. This is particularly the case if the ASP is not subject to client rules and independent checks.	This is of particular concern if money is paid in from an unknown or cash source and then repaid into a different account or used to acquire an asset.

Accountancy

Sub-sector risk: medium

Key risk indicator	Notes	Comment
Drawing up accounts or completing returns from incomplete records. Lack of original documents, invoices, bank statements etc.	Accounts and records created from incomplete records/source documents (or from unverified information provided by clients) can provide an apparently legitimate source for illegitimate funds, or to facilitate tax evasion.
Significant changes in transaction patterns.	Moving from non-cash to cash transactions, large/low value transactions. Purchasers and sales apparently unrelated to core business activity. This may occur when a business is under financial pressure and they may be vulnerable to being involved in high risk activity.
Unusual level of requests for financial references for borrowing with no apparent commercial need, and with early repayment.	Illicit funds can be used to pay off debt, with the money flowing in from a lending institution giving a picture of legitimacy.
Limited knowledge of trade practices in client sector, particularly areas that are at risk of exploitation.	Whilst an accountant does not need to have an expert knowledge of the commercial operations of their clients’ businesses, they should have a level of awareness to be able to make a judgment as to credibility of the figures they are being asked to process, sign off or base returns on.	This is particularly important when dealing with trades that can or have been associated with the exploitation of vulnerable persons or public or private institutions. Industries that are labour intensive but with low profit margins can lead to people exploitation. Care is needed when assisting businesses reliant on government support either temporarily or over a long term through grant aid or employment support schemes to make their application/or renewal.
Reluctance by client to allow access to business premises, no interaction with employees, trading location inappropriate for the nature or size of business.	Refusal to hold meetings at business premises, or when on site staff reluctant to discuss business. Premises or location not suitable for level of turnover, absence of capital or physical materials required for trade.	If the business structure, physical assets, employees do not appear support the level of income and expenditure flowing through the accounts of the businesses, this raises concerns regarding whether the premises the ASP sees is the main place of business, if it is how are the funds being generated, if not what activity is taking place elsewhere and is it legitimate?

Audit

Sub-sector risk: low

Key risk indicator	Notes
When part of a supply of multiple services	Audit work represents the lowest risk of ASP services provided and can only enable money laundering when it has already happened by other means.

Bookkeeping

Sub-sector risk: low

Key risk indicator	Notes
Drawing up primary records from incomplete sources.	Records created from incomplete records/source documents (or from unverified information provided by clients) can provide an apparently legitimate source for illegitimate funds or facilitate tax evasion.
Significant changes in transaction patterns.	Moving from non-cash to cash transactions, large/low value transactions. Purchasers and sales apparently unrelated to core business activity.

Company formation

Sub-sector risk: high

Key risk indicator	Notes
See trust or company service provider (TCSP) risk assessment	See TCSP risk assessment – providing these services may also require you to register for supervision as a TCSP and undergo a fit and proper test.

Payroll services

Sub-sector risk: medium

Key risk indicator	Notes
Unusual client requests or difficulty obtaining relevant documents.	Payroll services can enable money laundering by providing an apparently legitimate record of money movement or source of funds.
Services provided without source documents.	Reliance on client information rather than checking or testing original documentation may allow clients to use payroll provider to enable payroll fraud.
No interaction with HMRC.	Client limits or prevents the ASP from directly filing with HMRC or confirming PAYE payments have been made, year-end returns submitted, confirming employee NI number/codes etc. This may be indicative of payroll fraud or abuse of vulnerable persons.

Tax advisers

Sub-sector risk: high

Key risk indicator	Notes	Comment
Pressure to reduce tax costs.	Client willing to take risks to reduce tax bills, open to tax avoidance.	This behaviour could be indicative of a lack of concern about meeting their obligations under SA/CT and other heads of duty, and if so, may be an indicator of tax evasion.
Separation of accountancy and tax advisors	Whilst it may be beneficial to take tax advice from specialist firms it could be used to prevent the whole picture being seen.	Seeking specialist tax advice on specific transactions may be indicative of taking their obligation to get the tax treatment right. But it may also help to obscure the whole picture – for example advising on R&D claims without verification of expenditure may facilitate fraudulent claims.
Provision of services with no face to face interaction.	Historic and ongoing engagement with clients can mitigate risk if they are consistently open and honest with their ASP and financial indicators follow expected trends in their circumstances.
Payment in and out of a designated client account controlled by a client with no restrictions. Operation of pooled accounts.	The provision of a client account provides the opportunity to obscure the source or beneficial owner of funds and can therefore be used to launder funds. This is particularly the case if the ASP is not subject to client rules and independent checks.