Anti-money laundering and risk: 6 insights from an HMRC tax investigator to help accountants

When it comes to anti-money laundering, John Groves certainly knows his stuff.

He spent 45 years at HMRC, including time as the Hidden Economies team liaison manager within HMRC's Risk and Intelligence Service.

Now, John works in practice and acts as an adviser to the team at AccountancyManager, recently helping to refresh the risk management section of the business.

John's passion for risk - and unearthing the truth - is palpable. His stories of tense meetings with fraudsters, tax dodgers and innocent victims of money laundering could be a Netflix drama.

As such, parts of our chat had an 'off-the-record, please' caveat.

In this article, John shares six insights that will help accountants and their teams. Read on to see how he can help you. Here's what is covered:

1. Make assessing risk an ongoing process at your firm

2. Keep an eye on 'no net liability' tax returns

3. Don't underestimate how much intel HMRC has on your client

4. Decide whether a lack of IT skills is a deal breaker

5. Prepare for a second wave of self-employment

6. Always question why you're being brought on

1. Make assessing risk an ongoing process at your firm

Any accountant worth their salt (and licence) will complete anti-money laundering ID checks, credit screens and a risk assessment for all new clients. But the risk of money laundering doesn't just go away after onboarding.

'Money laundering comes in all shapes and sizes,' explains John. 'It can be just somebody asking you to use your bank account to hold money for example.

'As such, assessing risk shouldn't be seen simply as a box-ticking activity, but as an ongoing process.'

Top tip

As well as formal, annual risk assessments, you should stay vigilant for red flags throughout the year, both in conversations with your clients and, of course, in their tax returns.

2. Keep an eye on 'no net liability' tax returns

A tax return that results in no tax to pay will be a red flag for HMRC - so it should be for you too.

'If you have a tax return where the client has no net liability, the question will arise: What are they living on?

'What you're telling the taxman is: 'Yes, this person is feeding and clothing themselves and their family, paying rent or a mortgage, additional bills like insurance, possibly holidays, probably running a vehicle - all on less than £12,000.'

'It's just not possible.

'A much harder issue to address, but a main issue around money laundering, is - have they got the means to support their lifestyle?'

Of course, there may be legitimate reasons - a partner's income for example - but it's crucial that you ask the question and record the response in your files.

John says: 'What you don't want is a compliance check into a client's tax return where the client says they've got no liability and all of a sudden, HMRC are coming up with data on third party information that says, well, this is what your client has got.

'And you're sitting there thinking, 'we didn't know that'.

'HMRC will say 'well, did you ask the question?'

'It's not very comfortable for an accountant to be sitting at a meeting with their client and a tax investigator and be given information which they thought never existed.'

Top tip

Rather than interrogate your client with blunt questions regarding their lifestyle and personal affairs, take a two-pronged approach - formal and informal.

Make sure the basic information you hold on your clients is correct and check periodically that things haven't changed with a simple 'please review your info' emails.

For extra information, longer than a tick in a box or a word or two, capture information that comes up in casual conversation and store it as part of your ongoing risk assessment process.

This can then be added as additional information on tax returns explaining no liability - HMRC will like that.

3. Don't underestimate how much intel HMRC has on your client

John says you should never underestimate the level of intelligence an HMRC investigator is likely to have on your client - before your client gets the dreaded knock.

(It often is a real knock. If someone is being investigated and brown envelopes haven't done the trick, someone like John will come to their door.)

'HMRC will build a profile of anyone they might potentially investigate and the systems are quite sophisticated now,' says John.

'They will actually see what connections [your client has] to third parties. So, it's important that you have that information too.

'I know I'm sounding a bit like a policeman. But you've got to think 'Is this a legitimate business this person is setting up?' especially if it's a limited company.'

Top tip

John emphasises the importance of being welcoming to new clients, while at the same time measuring the risks.

That's for the client, for their company and for you - and understanding as much about their business as possible.

He says: 'Knowing your client and having a good working relationship in terms of both the customer service side and the compliance side, is essential.

'And I'm sure a lot of accountants, the good ones, will have that.'

4. Decide whether a lack of IT skills is a deal breaker

John is a self-confessed 'late-adopter' when it comes to technology, favouring a phone call over Zoom for our chat. He readily admits that it's the likes of him you need to be wary of.

John says: 'Check what [the client's] IT skills are like and whether they'll engage with it.

I don't pretend to be IT literate, but I'm working with Alex [former HMRC senior district Tax Inspector at Accounts and Returns] and people at AccountancyManager and they're all really kind and patient.

'That in itself is a skill.'

Top tip

'Companies have to develop the personal skills to deal with clients who are reluctant to use technology. Not because they don't want to, but because they're a little bit scared,' says John.

'It's actually taking them through the process so that they build up confidence. It's having that support mechanism in the background.'

5. Prepare for a second wave of self-employment

John's career spans almost 40 years. In that time, he's seen a dramatic rise in self-employment - and he's expecting another soon.

'The figure at the moment of self-employed people in this country must be in the range of about four to five million people. That is a significant, major factor in financing this country.'

'When I first started in the service, the kind of people that went into self-employment tended to follow in the footsteps of their families.

'That started to change rapidly in the 1980s and 1990s.

'People working for the same company for 10, 15 years were made redundant and went self-employed for the first time.

'One of the things that will probably come out of this pandemic is not just a reduction in people being employed, but an increase of people going self-employed - because they need work.

'Some people plan to go self-employed because it's their ambition, but some are forced down that route. That's a different kind of client…'

Top tip

John didn't say it directly (he's good at that), so we will: these clients may carry a higher risk, so it pays to do your due diligence.

This ties in with the next point - questioning why a prospective client needs your services and support.

6. Always question why you're being brought on

There's another, more sinister reason for due diligence at the start of a relationship.

As John explains: 'From my perspective as an HMRC tax inspector, I'd start an investigation and quite often the person I was investigating had obviously just brought in an accountant or an agent to assist him with the [HMRC] enquiries.

'You quickly find out those agents who seem to keep their distance, know very little and just rely on whatever the client has said to them.

'Then in parrot fashion, repeat it back to HMRC.

'And I'd think, 'So do you actually understand anything about your client?' I'm just giving you that perspective.

'It's really important that the agent, the accountant, understand their client's base needs.'

Top tip

Make sure you build this line of questioning into your onboarding process and initial risk assessment.

Not just around why the prospect has come to you - try to build a full timeline that led to your conversation.

Don't just take the first response either.

Dig deeper into the story, continuing to ask, 'So why is that?' to fill in the gaps.

A final story

I'll leave you with a great memory of John's, which recalls a time back when he was first learning the tax investigation ropes.

After leaving the office of someone under investigation for fraud, John's senior implied certain guilt.

Why?

The suspect had presented John and his boss with an immaculate, handwritten logbook. He had allegedly used it every day to record transactions for years.

No scuffed edges, no amendments and written beautifully, with the same pen. 'You could almost smell the ink,' says John.

The moral of the story? John likens HMRC tax investigators to detectives, so maybe you should dust off the old deerstalker too.