New money laundering regulations may affect employment and staffing businesses

Maximum 5 year prison sentence for failing to report knowledge or suspicion of tax evasion

Strict new money laundering laws to take effect from March 1 could make businesses in the staffing industry criminally liable for failing to report knowledge or suspicion of tax evasion warns giant group plc, the staffing support specialists.

Comments Matthew Brown, managing director of giant group plc: Just as the Government effectively ëoutsourcedí activities such as tax collection to businesses via the VAT and PAYE regulations they now appear to be ëoutsourcingí the detection of money laundering and tax evasion. The legislation is very vague and has been widely drafted ñ perhaps deliberately. Since it appears unclear if staffing businesses are caught by the legislation they have two choices; play safe and comply or remain at risk until such time as a precedent is created within the court system.
The lack of clarity as to whether staffing businesses are caught by the legislation comes as a result of a number of legal opinions being provided all of which fail to provide a definitive answer.

These laws ñ the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003 ñ imply that any business making electronic payments (e.g. BACS), as well as those giving tax advice or providing accounting services, or setting up or managing companies (to the extent that those companies do those things or provide those services) will be obliged to report any knowledge or suspicion of tax evasion to the National Criminal Intelligence Service (NCIS). This is regardless of the amount of tax involved.
For those staffing businesses that choose to take the safe option and comply with the legislation this is going to be an unpopular and onerous burden, says Matthew Brown of giant.

According to giant, staffing businesses seeking to comply that also make payments to contractors via companies based or partly based offshore or who use offshore structures, will need to be particularly vigilant.

Any suspicion that the correct amount of tax is not being paid may require a report to NCIS, says Matthew Brown.
For those staffing businesses seeking to comply the effect of the changes are that a report must be made to NCIS even where a staffing business suspects another UK business or contractor of having evaded tax in a foreign country rather than in the UK. In addition, a staffing business facilitating tax evasion, unwittingly or otherwise, may find itself guilty of money laundering.

Reports received by NCIS may be passed on to the Inland Revenue.

If a future precedent means that staffing companies are caught by these new money laundering laws harsh penalties will be imposed on those businesses that fail to comply, including a maximum prison sentence of 5 years for failing to make a report in circumstances where one should have been made. Penalties for being involved in money laundering itself can be up to 14 years in prison.
Unfortunately, the courts donít recognise ambiguous legislation as a defence. Failing to form a suspicion of tax evasion where a court rules you should have formed a suspicion will leave you liable to the same penalties, warns Matthew Brown.

According to City law firm Tarlo Lyons, measures that staffing companies could take to minimise the risk of falling foul of the new laws include:

Verifying the credentials and identities of new clients before accepting instructions.
Establishing rigorous internal controls (e.g. only using client accounts where there is a genuine underlying transaction)
Training employees so they understand their obligations under the new laws.
Documenting and keeping records of all transactions
Appointing a Money Laundering Reporting Officer
Richard Stader, Partner at Tarlo Lyons says; These laws are draconian ñ they are designed to be. They are wide ranging and are designed to compel businesses to be the authoritiesí gatekeepers in the fight against crime. The penalties for failure are harsh.