Key Compliance Challenges from ICAEW’s 2023/24 AML Report

The latest ICAEW 2023/24 AML Supervision Report has been released highlighting the primary areas of non-compliance in the accountancy sector concerning anti-money laundering (AML) regulations. A total of 1,088 proactive monitoring reviews were conducted on firms under its supervision, which included both onsite and desk-based reviews, with a particular focus on firms classified as high or high-medium risk making up 35% of the reviews.

The report identified recurring themes behind these non-compliance issues:

• Lack of understanding of risk: Many firms overlooked obvious risk factors, such as high-risk jurisdictions or client business activities.
• Under-resourcing for AML compliance: In larger firms, AML compliance officers often lack sufficient time or resources to manage AML effectively.
• Overemphasis on identity documentation: Some firms focused excessively on document collection rather than risk assessment and mitigation.

Here’s a summary of the main findings of non-compliance and the issues faced by firms under ICAEW’s supervision:

1. Inadequate Ongoing Customer Due Diligence (CDD)

A significant issue identified was the lack of ongoing CDD. Approximately 36.7% of non-compliant firms were found not to regularly update CDD on clients throughout the business relationship. A critical process, as the AML regulations require that firms consistently monitor client's to detect new or elevated risks, which may include factors like significant business changes or the addition of politically exposed persons (PEPs).

2. Deficiencies in Firm-Wide Risk Assessments

The risk-based approach, the best practice for managing risk, ensures that firms focus resources on high-risk areas. However, 27.9% of non-compliant firms had either insufficient or no firm-wide risk assessments. Proper risk assessments are foundational for all firms, as they help identify potential vulnerabilities within a firm’s client base, services, and geographic reach. These assessments must be comprehensive, tailored to the firm, and consider both client-specific risks and broader operational risks.

3. Ineffective Client Identification and Verification

The report found that 27.4% of non-compliant firms did not effectively conduct client identification procedures. This shortcoming often involved inadequate identification of beneficial owners or a lack of understanding of clients’ business structures and the jurisdictions in which they operate. In addition, 34.4% of firms performed verification procedures that failed to effectively mitigate identified risks. Verification should be adapted to each client’s specific risks, especially those operating in high-risk countries or industries.

4. Lapses in Regular Compliance Reviews

Approximately 26.5% of non-compliant firms lacked routine reviews of their AML policies and controls. Regular compliance reviews are essential for evaluating the effectiveness of AML procedures and ensuring adherence to updated regulatory requirements. These reviews are done to detect and address any gaps or weaknesses that may develop as regulatory expectations and risk profiles change.

5. Insufficient AML Training

Ensuring that staff are well-trained in your firm's AML practices is essential for effective compliance, yet 25.1% of firms were found lacking in AML training for their employees. Adequate training allows staff to understand and recognise money laundering risks and apply your firm's policies consistently. Training is particularly vital in helping employees understand complex structures like beneficial ownership and high-risk jurisdictions.

6. Failure to Report Discrepancies on Persons with Significant Control (PSC)

The regulations require that firms report any discrepancies between client information and the public Persons with Significant Control (PSC) register. Yet 19% of firms did not report these discrepancies, missing a key step in verifying ownership transparency. Reporting discrepancies is essential to prevent suspicious individuals from hiding behind complex corporate structures and is a requirement.

Summary

These findings aim to highlight shortcomings of regulated firms in the accountancy sector to act as a reminder for firms to ensure they have correct procedures in place when it comes to being audited. Whilst the issues themselves may seem basic, this report reveals that a significant portion of firms are still struggling with foundational AML requirements, such as ongoing due diligence, risk assessments, and client verification. ICAEW aims to enhance compliance across the sector by addressing these challenges and taking action against those who do not meet the expected standards.