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New money laundering regulations could sour client/adviser relations
by Kevin Miller at 08:00 30/10/03 (News on Business)
Accountants are covered by two pieces of legislation being brought into force in 2003, the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003. These introduce major changes to accountants' responsibilities and potential criminal liability, particularly for accountants working in practising firms. The legislation is likely to result in significant changes in the relationship between clients and their accountants.
Money laundering now includes possessing, or in any way dealing with, or concealing, the proceeds of any crime. This is a very wide definition and details are contained in the Proceeds of Crime Act. A key change is that accountants in practice must report knowledge or suspicions of money laundering (whether involving a client or other third parties) to the National Criminal Intelligence Service (NCIS) or face the prospect of criminal liability. This includes circumstances where such accountants should have been suspicious (i.e., where they have reasonable grounds for suspicion) as well as where they are suspicious.

Professional bodies such as the Institute of Chartered Accountants in England and Wales (ICAEW) have tried in vain to persuade the Government to introduce a de-minimis level below which reporting is not required. While the final regulations have yet to be published it seems likely that accountants will be required to report any suspicion that a someone may have been involved in criminal conduct resulting in funds or property that derives from a criminal offence whether in the UK or overseas (if something that occurred overseas would be a criminal offence had it taken place in the UK).

Freelancers who have no more intention of committing money laundering related crimes than they have of voting Dawn Primarolo politician of the year may wonder why these news regulations should be of concern to them?

However, interim guidance issued by the ICAEW’s tax faculty for its members, illustrates why anyone in business and using the services of an accountant has some cause for concern. A criminal act will include any form of tax evasion. Examples would include taking on a temporary employee and paying them in cash instead of putting them on the payroll, or deliberately or negligently omitting a taxable benefit from a P11D, or omitting to include some overseas income from your tax return.

One of the examples of a possible reporting situation given in the ICAEW guidance is IR35, where it says:

“I have taken on a new client who I believe comes within the IR35 regime but his previous accountants have advised him that is not the case. What should I do?

You must not assist a client in preparing an incorrect return. If you are convinced that IR35 applies and the client refuses to go along with your view you should refuse to act for him. If you reasonably suspect that tax has been underpaid because earlier returns are incorrect you need to tell NCIS. However, bearing in mind that the distinction between employment and self-employment depends on the precise facts of a particular assignment and in most cases involves a fine balancing act, it is hard to see on what basis you can suspect tax evasion in an earlier year if you do not have full knowledge of the facts”

While this indicates that, because IR35 involves such a subjective area as tax status, we are more likely to be dealing with a difference in opinion than in a deliberate case of tax evasion, it nevertheless highlights the need to be able to demonstrate that a decision not to apply IR35 to personal service income was based on a reasonably held view of your tax status and not just a blind intention to ignore the legislation without just cause.

The duty on accountants to report matters applies whether you are their client or not. So, for example, if a business approaches an accountant with a view to appointing them as their accountant or tax adviser, and the accountant becomes aware of facts or suspicions that indicate that the business may have been involved in evading tax then they will have to report their suspicions to NCIS.

These new regulations are likely to make clients less willing to admit to any past indiscretions or errors, because even an error that was made in all innocence becomes a money laundering matter if it is not rectified once it becomes known at a later date that the error was made.

We are likely to see more situations where clients use different advisers to ensure that no one adviser is aware of the complete picture. Hence a freelancer, who is unsure of their tax status, may decide to use someone other than their own tax adviser to review a contract on the basis that they wish to retain the flexibility to ignore the opinion until they have formed their own view based on all the facts. Using their own tax adviser might make it harder for them to reach a different view when that adviser might be under pressure to ensure that their client submits tax returns that are consistent with the adviser’s view of the client’s tax status.

Using a different adviser for an opinion on the contract is more likely not to raise money laundering suspicions because merely advising someone that a contract is caught by IR35 does not create a suspicion of money laundering if that adviser has no knowledge of whether the freelancer then applies IR35 to that contract or not.

What this may well also mean is that freelancers and service businesses choose to form their own views on issues like their tax status – using tools like FO35 to guide them – to avoid possible conflicts with their advisers on matters like this.

It seems inevitable, however, that these new regulations will result in a fundamental shift in client/adviser relations. Businesses that become aware of past tax mistakes will know that honesty with an adviser will inevitably mean that the adviser will under a duty to report the facts or suspicions to NCIS regardless of how minor they might seem.

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Kevin Miller, MA FCA
© Shout99.com 2003

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New money laundering regulations could sour client/adviser relations Kevin Miller - 08:00 30/10/03
One rule for the rich.... mikew - 08:56 30/10/03
One rule for the rich.... skytraveller - 10:32 04/11/03
Criminalization of the masses pooleyr - 11:08 30/10/03
No wonder magicman - 11:30 30/10/03
Anyone? philhutt - 11:36 30/10/03
They won't.. magicman - 11:57 30/10/03
Answer radsoft - 14:31 30/10/03
Paying IR35 ossigeno - 18:39 30/10/03
hmmm radsoft - 19:55 30/10/03
How self-employed are you? MikeM - 17:49 03/11/03
Glorified Permie. radsoft - 08:19 04/11/03
I hope I'm not! MikeM - 09:45 04/11/03
Opportunities... jojo - 19:26 30/10/03
Offshore opportunity MikeM - 17:41 03/11/03
BEST IDEA SO FAR!!!!!!!! malx2 - 12:02 04/11/03
Criminal act ? bwatt - 00:00 04/11/03
Banged up MikeM - 09:47 04/11/03
Re Banged up skytraveller - 10:25 04/11/03
You've all missed the point.... malx2 - 12:43 04/11/03
Not money laundering related! Kevin Miller - 11:40 04/11/03
Now let me see.... malx2 - 12:39 04/11/03

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