Outsourcing and AML compliance

Accountants in the UK are increasingly outsourcing detailed bookkeeping, accountancy and payroll work – taking advantage of lower staff costs overseas. But what are the implications for the AML compliance requirements on the UK based firm?

Overseas firms providing bookkeeping, accountancy and payroll services may not be subject to local obligations similar to the requirements of the UK Money Laundering Regulations and in particular may have no similar obligations to report suspicions of money laundering based on their review of a client’s detailed financial records and supporting information. The consequence may be that the person actually undertaking the detailed work on the client’s records may have no awareness of money laundering risks or even of the meaning of the term ‘money laundering’ in UK law.

The CCAB AML Guidance

What does the CCAB AML Guidance for the accountancy sector say about this? Not much of use!

The CCAB AML Guidance makes clear that UK accountants are required to ensure adequate AML training for “relevant employees and agents” and must have internal reporting procedures that enable them to report suspicions of money laundering to the firm’s MLRO. But who is an “agent” in this context? The Guidance says:

Agents include any person who, while not an employee of the business, is engaged to carry out work or provide services on its behalf. In general, an agent is likely to carry out such work or services under the supervision of the business. The work or services will be closely integrated with those carried out by the business itself. The agent will frequently be working closely with employees of the business.
Agents for this purpose do not include a person of independent standing who acts for or on behalf of a business to provide a defined service. This may include an independent legal adviser or a professional services firm overseas. Typically, the business will not supervise the provision of such services and the third party will work independently to deliver the agreed services. Such services may form part of the output to be delivered by the business to its client

So it appears that the CCAB Guidance does not envisage the UK accountant having any responsibility to ensure that staff within the outsourced provider have any AML training or any responsibility to report suspicions of money laundering.

Whilst the CCAB Guidance sets out:

Regardless of any outsourcing arrangements, a business will remain responsible for ensuring that CDD is performed to a UK standard.”

This is a reference to “the process by which the identity of a client is established and verified, for both new and existing clients” (which typically is not outsourced) and not the assessment and mitigation of money laundering risk, or the reporting of suspicions based on detailed examination of the client’s financial records. Indeed the CCAB Guidance asserts that:

There is no legal obligation for a third-party outsourcer to report knowledge or suspicion of MLTPF to the business or for the business to put in place for reporting of knowledge or suspicion by the third-party outsourcer.

So does that mean we can simply ‘forget’ about AML compliance in connection with work which has been outsourced?

The problem – and a suggested solution

The problem is that every UK accountancy firm is required to have AML systems and controls in place to assess and manage the money laundering risk arising in relation to the services the firm provides to each of its clients. Those services, to a greater or lesser extent, may actually have been provided by a non-UK outsourcing firm and simply passed through the UK accountancy firm.

The Joint Money Laundering Steering Group guidance for the financial services industry says:

“Firms should also be aware of local obligations, in all jurisdictions to which they outsource functions, for the detection and prevention of financial crime. Procedures should be in place to meet local AML/CTF regulations and reporting requirements. Any conflicts between the UK and local AML/CTF requirements, where meeting local requirements would result in a lower standard than in the UK, should be resolved in favour of the UK.”

That guidance is not written for the accountancy sector firms regulated by their professional body or HMRC. However the logic of that requirement for AML compliance in relation to work outsourced overseas to meet UK AML standards obviously applies to UK accountancy firms. How should UK accountancy firms address that issue?

I would expect that before using an outsourcing firm the UK accountancy firm would have made enquiries concerning the skills, experience and integrity of the outsourcer’s staff.

Even so, I do not think the UK firm should assume or expect an overseas provider to have an awareness and understanding of UK AML requirements. The overseas staff are unlikely to have been trained in UK money laundering law and the relatively onerous AML responsibilities of accountants in the UK. In my view the UK firm has to deal with the problem.

I would suggest the problem can be dealt with by the UK firm:

  1. Carefully reflecting the outsourcing arrangements in its own AML Policies, Controls and Procedures (suitably documented) and in its Firm-wide AML Risk Assessment document,
  2. Selecting which work is outsourced – perhaps retaining in-house any work on clients for whom there may be a higher risk of money laundering issues arising, and
  3. Reviewing the work done by the outsourcer on each client not only for quality of work generally, but also with an awareness of money laundering risk and, of course, documenting that review.

If you are concerned that your firm’s AML compliance is inadequate, or even non-existent, get in touch now using the link below and we can work together to fix this. The hardest part is getting started.

David Winch MLRO support services ltd