Pinsent Masons comment: Firms must flush out money laundering threats

Responsible firms should verify who customers and suppliers are and where their funds come from, says Stocker. Picture: Contributed

Money laundering refers to the process by which the profits of illegal activities are disguised and made to appear legitimate. It enables other serious crimes such as modern slavery, drugs trafficking, cyber-crime, fraud, corruption and terrorism.

The National Crime Agency’s National Strategic Assessment of Serious and Organised Crime 2018 concludes that the scale of money laundering impacting the UK annually is in the hundreds of billions of pounds. It also recognised that part of the solution needs to be a focus on prevention and ensuring businesses play their part by not facilitating money laundering and by reporting concerns.

A core message of the Flag It Up campaign is that criminals regularly try to exploit the services offered by businesses. Responsible firms should conduct due diligence on customers and suppliers to verify who they are dealing with and where their funds come from.

In addition to anti-money laundering prevention, there is an international trend towards corporate criminal liability for failures to prevent financial crimes, such as bribery or facilitation of tax evasion, and modern slavery. These offences are generally subject to an affirmative compliance-based defence, and an integral part of this is that you have carried out risk-based due diligence.

Spotting potential red flags can be harder than the guidance from regulators and enforcement agencies indicates, but the key is to identify any pointing to potential dishonest conduct or poor business practices. This includes checking that the third party has in place standard compliance policies, their business structure is transparent, and there have been no allegations of unlawful conduct. It may be cause for concern if your business partner has no, or very little, online presence.

For higher risk third parties such as agents, business development intermediaries, and distributors, ideally businesses will be asking questions directly of the third party and conducting screening (sanctions, politically exposed persons, adverse media) using tools offered by due diligence providers. Many companies will have HR-related complaints made against them, but something like a trend of whistleblowing reports that are leading to tribunal claims should raise alarm bells.

A prospective business partner’s response to evidence of previous wrongdoing is crucial. If they constructively engage with your due diligence process, seek to explain any allegations of past infringements and can show that the management has changed and that new procedures are in place, such transparency tends to suggest a company that has moved on and which may now be less of a risk to work with.

In addition, smaller companies may not have anti-bribery and other compliance policies and procedures. Again, if those companies engage positively and are prepared to put policies in place, the risk posed by them may well be low.

Information gathered during the due diligence process should be monitored and kept up to date. We are commonly asked: how often should we repeat our due diligence checks? It depends on the risk profile of your business and supply chain. The key is to ensure that your policy is realistic and achievable. If you cannot meet your own policy requirements, it is highly unlikely that you will be able to prove to a regulator in a future investigation that you have done enough.

- Tom Stocker, partner and head of white collar crime, investigations and compliance at Pinsent Masons