As most of you may know, the draft sector risk assessment for accountants was released for comment on 6 November 2023. This was informed by the Financial Action Task Force’s (FATF) recommendation and methodology, in developing best practice on assessed risks in the accountancy profession on the inherent national and international Money Laundering (ML) and Terrorist Financing (TF) risks of accountants in South Africa.
This sector risk assessment report addresses principally the inherent ML and TF risk factors facing accountants in South Africa related to products, services, clients, transactions, delivery channels and geographical areas, and the potential mitigation of these risks by complying with the Financial Intelligence Centre Act, 2001 (Act 38 of 2001), as amended (FIC Act).
Beyond outlining the ML and TF risk indicators associated with the accounting sector, the assessment seeks to heighten awareness to service specific vulnerabilities that have been identified and you will see, accountants in general have not been loosely rendered accountable. Accountants who fulfil Trust and Company Service Providers (TCSP) activities became accountable institutions in line with the December 2022 FIC amendments which was confirmed in the finalised Public Compliance Communication (PCC) for TCSP’s on 18 August 2023.
As such it is pertinent to identify the associated sector related risk indicators to better mitigate against ML and TF activities in the accounting sector. The profession of an accountant in itself does not mean that these individuals or businesses automatically become accountable institutions, however the focus is more on the business activity and particularly the relevant TCSP activities that will constitute accountability. Where the accountant or accounting firm is involved in activities relating to the organisation of contributions and in terms of the creation, operation or management of companies and trusts, they will fall under the purview of the FIC Act. Additionally, the provisions of the FIC Act must be fulfilled only in relation to clients that receive TCSP related services.
Services within the accounting sector are deemed to have different levels of inherent ML and TF risks. Financial and tax advice are both low risk services, however criminals could also use accountants as intermediaries between themselves and financial institutions, which is useful in obscuring the individuals behind the transaction, particularly in light of Ultimate Beneficial Ownership (UBO) concerns. Criminals also use accountants to pass instructions through financial institutions. These services typically bear a lower ML and TF risk because advisory services may not always involve any material monetary or value transfer transaction. Additionally, intermediary services are generally regulated and involve various controls as informed by the diverse regulatory functions found within different industries which make it difficult to carry out illegal transactions or activities.
Accounting activities that are inherently medium to high ML and TF risks include the formation of company and trust vehicles and other similar complex structures. The complexity of the structures as well as transactions facilitated becomes of relevance. The more complex the structure, the more prone to abuse they become. The reason for this is that complex structures may be used to disguise who is ultimately working behind the scenes and are easily used in untoward schemes. Property related transactions, whether buying or selling, may be used by criminals as a means of placement, layering or integration of funds. Beyond layering, property purchases can be used as final investments and allow for large amounts to be stored for long periods through acquired properties.
Financial transactions performed by accountants on behalf of their clients also pose a heightened risk, they may include cash deposits and withdrawals, retail foreign exchange operations, purchases, sale of stock, international fund transfers as well as issuing and cashing of cheques. The maintenance of incomplete or missing records as revealed during the accounting or bookkeeping services provided by accountants is also an area of high risk. The incompleteness of the records may result in an inaccuracy of the accounting and bookkeeping outcomes as the integrity of the financial information contained within the records cannot be guaranteed.
Sector specific risk indicators:
- Cash payments are considered a higher risk on account of a lack of an audit trail
- Unusually large and complex structures that may be used to obscure the ultimate beneficial owner, additionally trusts and shell companies
- Unusually large and seemingly complex transactions with no real purpose
- Payment technologies such as Cryptocurrency
- Accountants may lack ML and TF awareness training, ie. FICA Awareness /Related Training
- International payments from high-risk jurisdictions
- Individuals or entities who appear on a sanctions list
- Domestic Politically Exposed Persons (DPEPs), Foreign Politically Exposed Persons (FPEPs), Prominent Influential Persons (PIPs)
- High-net-worth individuals who are internationally regarded as high-risk clients
- Payments from unrelated and unknown third parties
- Clients who offer to pay extraordinary fees for services that would not warrant such fees
- Successive short-term transactions, that may hinder the know-your-client (KYC) process and potentially aids in concealing the ultimate beneficial owner
- Funds are received from or sent to a foreign country when there is no apparent connection between the country and the client
- The use of multiple or foreign bank accounts
- Change in customer behaviour and actions from the usual anticipated or expected manner and approach
From an International perspective, the below are some of the ML and TF risks that have been outlined as being associated with Accountants:
- Accountants are particularly targeted as an avenue to legitimise illicit funds
- Organised crime groups attempt to infiltrate accountancy practices or corrupt their employees with the intention to abuse their structures and facilities for money laundering purposes
- Client accounts in the accounting space may be used to legitimise the movement of funds
- Criminals take advantage of poor or weak policies, procedures, controls and risk assessments
Overall, the inherent ML and TF risks for the accountancy sector involved in TCSP activities in South Africa, based on national and international experience, is classified as medium to high. It is for this reason that the various risk indicators must be considered from the onboarding stage and throughout the lifecycle of the business relationship.
Products and services are being used and manipulated more and more in ML and TF schemes, which is why it is important to identify these weaknesses and how they may be used. Many of the risks identified are not unique to TCSP’s, or accountants but these spread across accountable institutions in general. Additional guidance when assessing risk may be found in Guidance Note 7.
If you are an accountant or accounting practice that engages in TCSP activities as outlined in the FIC’s PCC 6A, you may want to get on top of your FICA obligations as soon as possible. For most FICA is a “bad word”, it may seem daunting especially if you do not know where to begin, however, fear not as DocFox has assisted several accounting firms to become and remain FICA compliant. Please feel free to reach out to us on any of the channels provided at the bottom of this article and one of our seasoned compliance experts will help take care of your FICA requirements so you can focus on running your business.
