Are recruiters now caught by serious criminal penalties under the new money laundering regime?

This involves serious risk and potential criminal penalties, including personal criminal liabilities in some cases.

Many recruiters, in the view of HMRC and HM Treasury, now fall within the regulated sector for the purposes of Anti-Money Laundering legislation, which is European in origin and came into force on 15 December 2007. This follows the implementation of the Money Laundering Regulations 2007 (the Regulations), and is notwithstanding efforts by the industry including REC to get recruiters exempted. These efforts appear to have hit a brick wall for the time being with HM Treasury confirming yesterday on 19th December (after the regime came into force) that certain types of recruiter are caught (and are intended to be caught i.e. it's not a mistake).

Frankly it seems very disproportionate to impose on a large number of recruiters a regime which will be very burdensome for them, but which seems unlikely to materially increase public safety. What suspicions of money laundering do recruiters stumble across? Do they regularly place people who might be assisting terrorism or involved in serious crime? Would they have any cause for suspicion anyway? But given the position the regulators are taking (i.e. HMRC, backed by HM Treasury), and the serious criminal penalties involved if the regulators are correct in the position they are taking (on which they will have taken legal advice), it would be a brave recruiter that put its head above the parapet and argued the point.

Are you affected by this?
Broadly speaking the Regulations are being interpreted by HMRC and HM Treasury as requiring organisations which do

- payroll only /payroll agency deals to any material extent for

- temps or

- contractors

or

- executive search or interim supply for the following types of role:

- directors (i.e. head hunters will be caught in the view of the regulators)

- company secretaries

- partners (i.e. recruiters who focus on the professions will be caught in the view of the regulators)

to adopt detailed anti-money laundering procedures similar to those hitherto applied by banks, solicitors and accountants. It appears that the regulators are likely to accept that recruitment is not the highest area of risk but it is nevertheless the case that failure by an affected recruiter to comply with this law is, from last weekend, a serious criminal offence punishable by a fine, imprisonment or both.

It seems that company formation companies and providers of services to contractors may also generally be caught to the extent they provide tax advice, help set up companies or just act as a payment intermediary.

If you are affected what do you need to do?
The Regulations are the UK implementation of the Third EU Money Laundering Directive. If the Regulations apply to a particular recruiter, they require, amongst other things, it to

- appoint a Money Laundering Reporting Officer (MLRO) (which will not necessarily be an easy task because the MLRO will become personally liable for compliance),

- train relevant staff,

- carry out specific Customer Due Diligence on candidates and clients (which are more detailed checks than currently carried out by many recruiters and must be done at the outset: this will be burdensome),

- keep relevant records, and

- report suspicions of money laundering to the authorities.

It is also a requirement to register with HMRC by 1st April 2008.

On registration, the applicant, directors, beneficial owners and any nominated officer of the business will also be subject to the fit and proper test. If any of these individuals fails the test the business will not be able to register and will therefore not be permitted to carry on CSP activities. Matters that will cause an applicant to fail include: convictions under fraud, terrorism or taxation legislation; disqualification from acting as a director; being an undischarged bankrupt; and consistent failures under previous money laundering regulations.

Failure to register, along with other breaches of the Regulations, can give rise to both civil and criminal penalties. HMRC and the courts both have the power to impose unlimited fines, and if the breach is treated as an indictable criminal offence the courts may impose a prison term of up to 2 years. A defence is available to an individual to demonstrate that they took all reasonable steps and exercised all due diligence to avoid breaching the requirements of the regulations. Our compliance packages will be designed to make available this defence.

In addition to complying with the regulatory regime it is also necessary to ensure that offences under other money laundering legislation are not committed. For example, anyone who becomes involved in an arrangement involving criminal property may face criminal penalties, while those subject to the Regulations have additional duties to disclose suspicions relating to money laundering. It is essential that staff are trained in this area because a failure to make a disclosure of a suspicion is in itself a serious criminal offence.

Failure to comply with the regime can be a criminal offence even if the recruiter has not financially benefited from any money laundering (e.g. the mere failure to carry out the correct checks etc. may now be a serious criminal offence, even if the candidate is not a terrorist or drug trafficker).

What is the solution?
If you do not do permanent or interim recruitment relating to directors, company secretaries or partners (or the equivalent of these positions), and, so far as contractors and temps are concerned, you only do vacancy filling and do not do payroll only deals, you appear to be outside the new regime.

Otherwise we think that there may be scope for potentially affected recruiters to argue that they are not caught by the Regulations. However, this may involve a test case and it is not possible to guarantee that the Courts will disagree with the view HMRC and HM Treasury are taking. The stakes would be high as criminal penalties would apply. There is a real risk of losing because, in light of the words used (see below), the Directive and Regulations could well be deemed by a judge to include relevant recruiters (and clearly HM Treasury have looked into this carefully and have, possibly reluctantly, formed their view that many recruiters are caught).

What else can be done? Whether there is room for lobbying is unclear - the regime is now enshrined in UK law and is derived from a Directive, and so this beyond the consultation stage and is not just a UK Government matter.

Therefore we consider that many recruiters will elect to comply (to the extent they are not already compliant). To the extent any recruiters decide to comply (which we would advise) it might be wise for them to state in all relevant communications, including their application for registration, that they have elected to adopt procedures as if regulated without necessarily accepting that they are regulated. Whatever the case we now have a team working through the Christmas period to develop recruitment-sector focussed training and compliance packages designed to enable a recruiter to comply with the new Regulations with minimum bureaucracy and cost. These packages will be available after Christmas and it may be that we will work with trade associations such as REC and ATSCo to offer them to members on as cost effective a basis as possible.

The compliance package will consist of the following:

- if a recruiter thinks it is not caught (or does not want to be and can achieve that with some changes to its contract model) we will offer a package of services designed to minimise the risk of falling within the regime. For many recruiters this may not be a viable option and so...

- if a recruiter appears to be caught by the current interpretation of the Regulations we would offer :

- an initial 60-90 min seminar for key personnel at each affected company - cost is likely to be 99 VAT. This will help people form a view as to whether they are caught and what may be involved;

- a substantive compliance package which will involve (1) MLRO training (2) Anti-Money Laundering manual and systems & procedures (Customer Due Diligence, reporting etc.)and (3) general training for relevant staff; and

- registration assistance.