In essence, money laundering transforms illegally obtained funds into what appear to be legitimate earnings. This process allows criminals to utilise their illicit profits while concealing their illegal origins, perpetuating harmful activities that impact communities worldwide.
However, it’s not only career criminals who engage in money laundering—fraudulent activity and false tax claims also fall under this category. These actions are often carried out by regular individuals who may not realise the full implications of their conduct.
As a professional operating in a regulated sector, understanding the mechanics and risks of money laundering is crucial. By recognising the methods employed by criminals and implementing anti-money laundering (AML) practices, you can safeguard your clients, your business and society as a whole.
Breaking down money laundering
Money laundering refers to any activity that involves concealing, transferring or legitimising the proceeds of crime. This could range from spending and converting illicit funds to helping someone else engage in such practices—whether knowingly or unintentionally.
UK law, under the Proceeds of Crime Act 2002, defines money laundering through the following activities:
- hiding, disguising, transferring, or converting criminal property
- assisting in the acquisition, retention, or control of criminal property
- personally acquiring, retaining, or using criminal property
The term ‘criminal property’ encompasses any money or assets acquired through illegal means. It even includes cases where financial obligations like taxes are evaded, with the unpaid amount classified as criminal proceeds. For instance, a client reducing their tax liability by falsifying income has effectively generated criminal property.
The primary aim of anti-money laundering legislation is to disrupt the cycle of crime by denying offenders the financial rewards of their illegal activities. This reduces the appeal of engaging in such acts in the first place.
Common money laundering tactics explained
Criminals use money laundering to obscure the origins of their unlawful gains, enabling them to integrate these funds into the legitimate economy. Research by the United Nations Office on Drugs and Crime estimates that over $2 trillion globally—about 2-5% of the world’s GDP—is laundered each year.
Here are some common methods criminals use to launder money:
Smurfing: Breaking large amounts of illicit money into smaller sums to avoid detection. These smaller amounts are then deposited into various accounts and consolidated later.
Round tripping: Moving funds through a web of accounts, businesses, or shell companies—often in jurisdictions with lax regulations—to disguise their origins before returning them as legitimate funds.
Shell companies: These paper-only entities facilitate fraudulent transactions, making illicit funds appear as payments for goods or services that do not exist.
Reselling assets: High-value items like real estate, luxury goods, or artwork are purchased with dirty money and resold, converting the proceeds into legitimate-looking transactions.
Cryptocurrencies: Digital currencies like Bitcoin and Ethereum provide anonymity and are harder to trace, making them an appealing tool for laundering large sums.
Trade-based money laundering: Manipulating invoices, trade values, or goods in international transactions to camouflage illicit funds within legitimate trade flows.
Understanding these techniques highlights the need for vigilance and robust AML procedures to counter evolving criminal strategies.
Are you a ‘professional enabler’?
Regulated professionals are at the forefront of the fight against money laundering, acting as gatekeepers of the financial system. Unfortunately, this also makes them attractive targets for exploitation by criminals seeking to legitimise their gains.
The term ‘professional enabler’, introduced in the Economic Crime Plan 2023/26, describes individuals or organisations whose actions—deliberate or negligent—allow criminal activity to thrive. These professionals, whether aware of their role or not, are critical to enabling money laundering schemes.
By failing to conduct due diligence or comply with AML regulations, professionals may unintentionally assist criminal enterprises. Safeguarding your services requires a proactive approach to understanding your clients and their intentions.
Seemingly routine professional tasks can be exploited for laundering purposes, such as:
- processing falsified invoices
- approving inaccurate financial statements
- facilitating questionable property transactions
- establishing new companies
- handling suspicious tax refunds or loan applications
AML as the solution
As a regulated professional, you’re obligated under the Proceeds of Crime Act 2002 and related regulations to identify and mitigate money laundering risks. Ignoring these responsibilities won’t make them go away.
These responsibilities extend beyond checking boxes. They’re an essential component ofthe larger effort to combat financial crime and uphold the integrity of the financial system.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 outline clear steps to ensure compliance. Embedding these measures into your operations strengthens your ability to identify and respond to potential threats.
Keeping accurate records of all your AML activities is not just advisable but legally mandated. This is so you can ultimately submit a Suspicious Activity Report (SAR) to the relevant authorities when you identify potential money laundering. After all, this is the only way that illegal financial conduct can be uncovered and the people involved dealt with.
Each step you take contributes to building a financial environment that is harder for criminals to infiltrate. Together, regulated professionals can make a meaningful impact in the fight against financial crime.
Richard Simms, MD of AMLCC, is a chartered accountant and a leading authority on anti-money laundering. He is a sought-after guest at accountancy and AML conferences worldwide due to his position at the pulse of changes in guidance and legislation that impact DNFBPs.
More information on money laundering risks to accountants can be found on the IFA’s website here.
