Understanding AML risk

Regulation 46 requires a supervisory authority such as the IPA to ‘adopt a risk-based approach to the exercise of its supervisory functions, informed by the risk assessments carried out by the authority under regulation 17’. Regulation 17 requires the IPA to identify and assess the risks of money laundering and terrorist financing to which IPA members are subject, taking into account (among other things) the UK’s National Risk Assessment (prepared by the Treasury and the Home Office under regulation 16(6)).

Regulation 17 also requires the IPA to keep a record of the risk profile of each Insolvency Practitioner that it supervises, taking account of the risks that an Insolvency Practitioner will not ‘take appropriate action to identify, understand and mitigate money laundering and terrorist financing risks’. So AML risk is fundamentally important to both Insolvency Practitioners and supervisory authorities such as the IPA.

What is AML risk?

Regulation 16 of the Money Laundering Regulations states that the Treasury and the Home Office must make arrangements for a risk assessment to ‘identify, assess, understand and mitigate the risks of money laundering and terrorist financing affecting the United Kingdom’, and they must report on that risk assessment. That report has become known as the National Risk Assessment (NRA). According to regulation 17, the IPA must identify and assess the risks (of money laundering and terrorist financing) to which its members are subject, and regulation 18 requires each Insolvency Practitioner to identify and assess the risks to which their business is subject.

An Insolvency Practitioner is subject to the risk that they will fail to comply with the Money Laundering Regulations, but the wider public bear the risk that money laundering or terrorist financing will take place and might even go undetected. The Insolvency Practitioner’s risk of noncompliance includes the risk that they may be subject to exploitation for money laundering purposes. In fact, the Money Laundering Regulations refer to a relevant person’s responsibility to mitigate the risks, which can only be done through avoiding involvement in the money laundering process.

Therefore, when we talk about an Insolvency Practitioner’s AML risk, we are referring to both the Insolvency Practitioner’s risk of exploitation for money laundering and the risk that the Insolvency Practitioner may fail to identify (or reasonably suspect) money laundering where it has taken place.

UK National Risk Assessment

As stated above, regulation 16 of the Money Laundering Regulations requires the Treasury and the Home Office to undertake an assessment of (and report on) the risks of money laundering and terrorist financing affecting the United Kingdom. This National Risk Assessment (NRA) must, among other things, identify the sectors or areas of lower and greater risk of money laundering and terrorist financing. The Treasury and the Home Office must prepare a joint report setting out the findings of the NRA, and they must ensure that the NRA is kept up-to-date.

The latest NRA report was published in 2020, and is the third assessment of money laundering and terrorist financing risk in the UK (previous assessments having been published in 2015 and 2017). The full report is available here. Chapter 9 is dedicated to accountancy services, which generally are deemed to be high risk for money laundering (and low risk for terrorist financing). But this covers a wide range of services and service providers, including unregulated accountants and bookkeepers.

Insolvency practice is only mentioned once in Chapter 9, which states:

There continues to be a risk that criminals will exploit company liquidation and associated services … to mask the audit trail of money laundered through a company. Regulatory guidance, increased supervision and strict legislative requirements on [accountancy service providers] go some way to mitigate the risks of providing these services.’

Previously, the NRA focused more on the regulation of insolvency practice (in paragraph 6.8 of the 2017 NRA), noting:

The scope for abuse of insolvency services is mitigated to some extent by the licensing of practitioners, the strict set of obligations through the Insolvency Act and recent changes through the Small Business, Enterprise and Employment Act 2015. However, there remains evidence of insolvency and wider company liquidation services being abused.’

IPA’s AML sectoral risk assessment

According to regulation 18 of the Money Laundering Regulations, an IPA member who is a relevant person must take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which their business is subject, taking into account:

  • information made available to them by the IPA (including the sectoral risk assessment required by regulation 17(1)), and
  • risk factors relating to its clients, services, transactions and delivery channels, and the countries or geographic areas in which they operate.

The IPA’s sectoral risk assessment is available here, and it incorporates the Risk Outlook of the AASG referred to below.

Anti-Money Laundering high-risk indicators

The IPA has compiled details of areas that may indicate a higher risk of money laundering in insolvency. These indicators should assist our supervisees with their consideration of AML risks for their own business and which feed into their firm’s AML risk assessment.

The indicators may also assist with any specific cases where an appointment has been made, or where supervisees have been approached to assist an individual or a company, and their consideration and monitoring of an individual case risk assessment.

Click here to access the document.

AASG Accountancy sectoral risk guidance

HM Government, law enforcement and the professional body supervisors work together to ensure that criminals find it difficult to exploit accountancy services. Members of the Accountancy AML Supervisors Group (AASG) have been able to set out the key risks, and red-flag indicators, that they consider are relevant to the accountancy sector. The AASG (of which the IPA is a member) will update this ‘Risk Outlook’ on a regular basis, reflecting the UK’s latest NRA and other emerging threats and trends.

The AASG’s Risk Outlook is available here. It is intended to assist accountants and Insolvency Practitioners in assessing AML risk with reference to the services they provide and the types of client they have. A firm’s written risk assessment will identify the areas of the business that are most at risk and this will enable the accountant (or Insolvency Practitioner) and their firm to focus resources on the areas of greatest risk.

AML alerts

Access AML alerts from financial intelligence units here (member login required). Please note that the documents in this section are for IPA members only and should not be reproduced in any way.