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Identification, assessment and mitigation of proliferation financing in the accountancy sector


From 1 September 2022, the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 created a new requirement for regulated entities. This being to identify, assess and mitigate the risk of proliferation financing which may impact upon their firm. The requirement now being Regulation 18A of the Money Laundering Regulations 2017 (MLR 2017), as updated.


There is no requirement to produce a standalone risk assessment, however proliferation financing must be considered as a risk independent of the risks of money laundering and terrorist financing within your firm wide risk assessment. Any risks identified need to then be included in your Policies, Controls and Procedures document as per Regulation 19A, ensuring a risk-based approach is applied.


 

What is proliferation financing?


Regulation 16A (9) of the MLR 2017 provides the following definition:

“the act of providing funds or financial services for use, in whole or in part, in the manufacture, acquisition, development, export, trans-shipment, brokering, transport, transfer, stockpiling of, or otherwise in connection with the possession or use of, chemical, biological, radiological or nuclear weapons, including the provision of funds or financial services in connection with the means of delivery of such weapons and other CBRN-related goods and technology, in contravention of a relevant financial sanctions obligation”


What are the stages of Proliferation financing?

  1. Program Fundraising

  2. Disguising the funds

  3. Procurement of proliferation sensitive materials and technology.


 

So, what does this mean for you as a supervised firm in the accountancy sector?


As per Regulation 18A Risk Assessment by Relevant Persons in Relation to Proliferation Financing MLR 2017. You must take appropriate steps to identify and assess the risks of proliferation financing to which your business is subject taking into account information and guidance included in the most recent national risk assessment of proliferation financing and the following familiar risk factors:

  1. customer

  2. countries or geographic areas of operation

  3. products or services

  4. transactions, and

  5. delivery channels

Once you have completed this you must, as per Regulation 19A Policies, Controls and Procedures in Relation to Proliferation Financing MLR 2017 update your controls, policies and procedure document to set out how you will effectively mitigate and manage any risk of proliferation financing which has been identified in the firm risk assessment. This document must be regularly reviewed and updated as new risks are identified.


 

It is also important to keep written records of any changes made to the controls, policies and procedures and the steps taken to communicate the controls, policies and procedures or any changes made to them to any relevant staff.


Your business should assess the risks of how it is most likely to become involved in proliferation financing.


You need to ask yourself:

  1. What risk is posed by your customers?

  2. What risk is posed by a customer’s behaviour?

  3. How does the way the customer comes to your firm affect the risk?

  4. What risk is posed by the products/services the customer is using?

  5. What are the risks of new products offered?

  6. Are there any new business practices, including new methods of delivery of services?

  7. Are you using new technologies for new and pre-existing products?

This list is by no means exhaustive but it goes back to the cornerstone of your AML strategy and compliance culture, how well do you know your client and their business activities.


 

It is vital that you fully understand who your customer is and what they do by following the 5WH:


Who – is your customer?

What – do they do?

Why – have they come to your business?

Where – do they do business?

When – do they do business?

How – do they do business?


Managing risk in any situation is in the main a continuous process and should be carried out in a dynamic, holistic way. It is not a one-time exercise that can be completed and forgotten about, that box ticked nor is it a one size fits all.


Risks can change, evolve, disappear and reappear as the same or in another guise. Businesses must ensure that risks are kept under regular review. It is important to know what the norm is and then when the abnormal happens or you move away from the norm you are alert to it and can react in a timely fashion.


You must not lose sight of why we do all this, why, as many will say “but it’s not fee earning” or “it’s a burden” and yes it may be both but if you don’t get it right the implications can be huge with large fines, loss of supervision, negative impact on your livelihood and reputation.


The core reason for the legislation is to prevent criminals from laundering their dirty money and for the purposes of this article the three stages of Proliferation financing; program fundraising, disguising the funds and procurement of proliferation sensitive materials and technology.


 

The accountancy sector is seen as being the gatekeepers of the financial sector, being in the right place to identify money laundering, terrorist financing and proliferation financing, a statement we know that many we have spoken to within the sector disagree with; believing that it is not their responsibility “why are we doing their job for them”. The truth of the matter is that we all have a role to play and the unique position the accountancy sector finds itself in as professionals, who the proliferation financing actor may seek out to help to legitimise their criminal activity, places the sector in that position.


It is accepted that no system, checks or assessments employed will detect and prevent all proliferation financing however a culture of compliance and a risk-based approach will help to balance the “non fee earning” activity with helping to prevent attracting criminal customers from using your business. Making your business unattractive to criminal actors will encourage them to look elsewhere, it then being any subsequent accountancy business’ responsibility to do the same. In this way you displace the risk to you, your business, reputation and livelihood.


It is therefore important that all your relevant employees, those that may be in a position to identify proliferation financing, are trained as per the regulations in how to identify such activity and report to their Money Laundering Reporting Officer (MLRO) any suspicion, which can then be reported to the authorities if required.

So, in conclusion:

  1. Know your customer

  2. Understand your customer

  3. Understand what the norm is

  4. Understand the risks associated with the customer

  5. Detail the risks in your firm risk assessment

  6. Mitigate the risks in your policies, controls and procedure document.

  7. Provide training to staff

  8. Report suspicion


 

This article gives an overview of proliferation financing and the requirements placed upon the accountancy sector, for further reading please see the links below to the HM Treasury Report and the FATF Guidance. Also, as always, seek advice from your professional body supervisor.



 

Calathea Solutions Ltd provides a full range of AML support for the accountancy sector including audits, training and consultancy. It has been whilst we have been engaging with clients that it has become increasingly evident that clients have been unaware of the requirements in relation to proliferation financing.


Calathea Solutions was established in 2023 by Mike Jardine and Lucy Brown to help businesses in the accountancy sector with cost effective training, help line and audits. Mike is ex law enforcement, has worked in the banking sector, been an AML inspector and Director of Compliance for a professional body supervisor. Lucy has also worked in the banking sector, is a bookkeeper with a vast amount of experience running a busy practice which she sold to then become the Director of Professional Standards for a professional body supervisor. Between them they have a wealth of experience which they are keen to share. They can be contacted on info@calatheasolutions.co.uk or www.calatheasolutions.co.uk If you quote code CPAA the first 25 clients will receive 10% off any services they provide to you.

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