Virtual offices are among the many types of company being used to launder cash, says Chris Middleton.
The British government has issued new advice to companies in the Trust and Company Service Providers (TCSP) space on how to minimise the risk of customers using them to launder money or finance terrorist activities.
The advice comes as many small businesses and gig-economy workers use virtual offices and other services to operate their businesses in a more flexible, agile, and mobile way, without the long-term financial commitment of permanent premises.
While most customers are legitimate, providers should take steps to ensure that they are not using them as cover for illicit activities for which they may be held liable.
Anti-money laundering and anti-terrorist financing enforcement actions are on the rise worldwide, with increasing numbers of companies fined for not carrying out due diligence checks.
A 2017 National Risk Assessment rated TCSPs as relatively high risk when providing additional financial, legal or accountancy services, but medium risk for money laundering and low for terrorist financing outside of these sectors.
Either way, it is important that all service providers put in place policies, controls, and procedures to assess and tackle the risks presented by their customers, says the government.
“HMRC expects a risk assessment to be more than a ‘tick box’ approach; it should reflect the nature of the services that the business provides and counter any risk that its services could be exploited for money laundering, and/or terrorist financing purposes.”
It is important that all TCSPs identify who the customer and beneficial owner is/are, and what levels of due diligence are appropriate.
“Policies, controls and procedures should document the business’ approach when dealing with intermediaries and when placing reliance on third parties or accepting due diligence undertaken by others,” adds the government.
HMRC’s latest guidance includes a detailed commentary on specific areas of risk. These include company formation agents being asked to establish large numbers of companies at the same time or in quick succession.
“The companies may be being used to open a large number of bank accounts across different jurisdictions to facilitate the movement of funds,” warns the government.
In addition, requests for ‘aged’ companies, as opposed to newly formed ones, may indicate that a customer wants to create the impression of an established business for fraudulent purposes.
If asked to supply director services for a prolonged period of time, providers must also be satisfied they know who the beneficial owner of the business is.
While there may be legitimate reasons for the beneficial owner wanting to remain anonymous, it can help disguise the misuse of funds. There is also a risk that a disqualified director may use another person to act in their place.
Providing director services for multiple companies with common owners may indicate that beneficial owners do not wish their business relationships to be open to scrutiny.
Company secretarial services are also open to abuse, warns the government. If asked to provide them to a non-UK-based entity, a provider must consider if it is competent to do so.
“It would also need to consider what risks arise from not having a locally-based Company Secretary and issues arising because of the jurisdiction where the entity is based,” says HMRC.
Shareholder services are another potential avenue for illegal activities, says the government. If asked to act as a nominee for a prolonged period of time, a provider must again be satisfied that they know who the beneficial owner is.
However, virtual offices are perhaps an overlooked area in terms of money laundering and terrorist financing, warns the government.
“The provision of office services to a business that does not maintain a physical presence at your premises can present a number of risks to your business.
“It is important that you establish an appropriate risk assessment to monitor and differentiate between the provision of services that are out of scope of the regulations –for example, the letting of physical office space where the user is in regular attendance and can be easily contacted – and where the user is not in regular attendance and therefore cannot necessarily be easily contacted.”
If providing a virtual office to a local resident who operates a peripatetic business, is known to the provider, and regularly collects post in person, then this constitutes a lower risk, explains HMRC. However, the inverse may indicate illegal activities.
If receiving large volumes of mail for the customer, providers should ask whether they have sufficient expertise to judge if this is normal for the type of company concerned.
“Virtual office addresses can be used in investment frauds, particularly those that are promoted with long-term returns,” explains the government.
The use of multiple addresses can also create the impression that a business is more substantial than it is, or that a large company has opened a dedicated local presence.
Either way, the risk for providers is that customers have entered a Serviced Office agreement purely to avoid due diligence checks.
According to the government, there is little evidence of UK trusts being used for money laundering or terrorist financing purposes, but there is some evidence of offshore trusts laundering illicit funds. As a result, professional trustees must assess whether bank accounts are being used for non-trust purposes.
If acting as the professional trustee of a charity, appropriate measures should be put in place to confirm the nature and purpose of the organisation.
If it is a newly established one, there should be evidence that the charity can meet its objectives, of the source and control of its funds, and of appropriate decision-making processes being put in place.