Archives For Regulation


By John Davies, head of technical, ACCA

There is no doubt that professional advisers have on occasions been implicated in money laundering schemes.

Numerous cases have been reported of solicitors being successfully prosecuted for being involved, innocently or otherwise, in such activities; there have been other cases where solicitors have been found to have been actively complicit.

Given the expertise that is called for in order to devise and execute the more sophisticated laundering schemes, it is perhaps only to be expected that criminals will seek out the advice of technical experts who understand how business works and how laws and practices can be manipulated to facilitate substantial transfers of criminal property.

The UK Government is conscious of this and is seeking to step up its efforts to tackle serious organised crime. In a new Bill, presented to Parliament last week, the Government has included a clause to make it a criminal offence to ‘participate’ in an organised crime group. While there is no express reference in the Bill to accountants and lawyers, the Home Office’s press briefings in advance of its publication made it clear that accountants and lawyers were very much the targets of the new measure.

The Bill would make it a criminal offence to take part in any activities that the person concerned knows or suspects are the activities of an ‘organised crime group’ or which would provide help to such a group.

Few would argue with the proposition that involvement in serious criminal activities should be actively discouraged by the law.

The question is whether we need another criminal offence in this area with the additional pressure and uncertainty it would impose on professional advisers.

Under the Proceeds of Crime Act as it currently stands, any person, whether a professional adviser or not, commits an offence if s/he becomes directly involved in holding or transferring criminal property or becomes involved in an arrangement which s/he knows or suspects facilitates such activity.

Accountants and lawyers have additional specific responsibilities to inform the authorities, again on the basis of either knowledge or suspicion, if they come across information suggesting that any of the aforementioned offences have been committed. While there is an exemption from disclosure to cover circumstances of legitimate professional privilege, that exemption is not available where the adviser is aware that the client’s motives in seeking advice are criminal.

In addition to the above, accountants and lawyers are obliged to take all reasonable steps to verify the identity of new clients, ascertain their motives and to monitor on an on-going basis the financial transactions of their clients.

Failure to comply with any of these requirements is already a serious matter and punishable by large fines and long prison sentences. The following comment by a solicitor jailed in 2006 for failing to satisfy a court’s retrospective judgment about what he should have known about his clients sums up the force of the current law:

‘I made a simple mistake, amounting even in its worst interpretation, to no more than an error of professional judgement, from which I made no benefit … all sole practitioners and money laundering reporting officers (MLROs) in professional practices should take heed.’

So what will the new measure achieve that is not achievable under the present rules? As the above example shows, those who conduct professional work for groups of individuals who turn out to be criminals, already run a serious risk of prosecution and imprisonment, even if they make an honest mistake about the client’s motives. An accountant or lawyer who has even a suspicion that he has come across an organised crime gang in the course of his work will already be covered by an obligation to pass on his information to the authorities.

Rather than introducing stringent new offences which don’t appear to add much to what we have, we should surely be focusing on ensuring that we optimise the effectiveness of the existing framework. The regulated sector in the UK, one of the most comprehensive of its kind in the world, provides over 300,000 suspicious activity reports to the National Crime Agency every year, yet there remains a widespread perception that the extensive efforts that go into providing this information do not translate into effective enforcement action against serious crime.

A study by CCAB, to be published on 23 June, brings together the views of stakeholders on both sides of the fence about the operation of the UK’s anti-money laundering regime. It reports that some practising accountants are not convinced that the regime is as efficient as it might be. In particular some feel that there is too much regulatory focus on prosecuting cases of non-compliance with rules and too little emphasis on using the information advisers supply to clamp down on serious criminal activity. They call for a greater effort by regulators to share information with individual firms about how the system is working, with the intention of encouraging more of a shared commitment to the ultimate aims of the exercise.

The Government should heed the feedback from practitioners before it enacts its new Bill. Tackling money laundering is a cause that is vital to both the economy and wider society, and one that accountants and other regulated parties are generally happy to contribute to for that reason. But buy-in from those at the sharp end is crucial, and for that to happen the authorities need to resort to the carrot as much as the stick.


By Ramona Dzinkowski, economist and business journalist.


On 2 April, the European Commission (EC) issued a consultation paper requesting comment on potential new disclosure rules regarding the use of conflict minerals in the manufacture of goods listed on European exchanges. This initiative follows the US Securities and Exchange Commission’s final 2012 rule on conflict minerals that requires companies listed in the US to disclose their use of conflict minerals manufactured in the Democratic Republic of Congo (DRC) and adjoining countries.

The US rule fulfills the requirements laid out in the Dodd-Frank Act 2008, which required companies using minerals from Africa’s Great Lakes region to publicise their due diligence practices to ensure the minerals they use in their products have not financed illegal armed groups engaged in the Congo’s war. These minerals include tin, tantalum, tungsten and gold, which are often used in the manufacture of a wide range of products. It is anticipated that the rule will affect approximately 6000 issuers in the US who will have to file their first minerals report in May 2014.

The gist of the US rules upon which the EC has framed its proposed disclosure requirements is that companies must determine whether or not they manufacture or contract to manufacture products that contain conflict minerals, whether these minerals originated from the specified conflict region or were obtained in scrap or recycled sources, and whether or not the conflict minerals benefited armed groups in the region.

While many have lauded the initiative, others see it as a prohibitively tall order and are concerned about the costs of the disclosure and the implications for using the reporting system in this way. Similar issues are unlikely to unnoticed by affected parties in Europe.

In response to the proposed ruling, the US-based National Association of Manufacturers pointed out that, among other things, the SEC has ignored the complexity of manufacturing supply chains. More specifically they say there are three major challenges for downstream users attempting to establish a chain of custody from the mine to the product:

1. identifying which mines are conflict mines – that is mines whose output is controlled by or taxed by warring factions;

2. tracing ores from the mine to the smelter; and

3. tracing conflict minerals from smelter through complicated supply chains to the finished product.

Implementation of the legislative language, must therefore, take into account these on the ground realities.

Some CFOs are questioning why the financial reporting system is being used to resolve political conflicts in the first place. For instance, how would CFOs be able to answer the question of which are conflict mines, and tracking down the sort of information required is not a traditional finance function. There’s also the level-playing-field argument that suggests that North American and European companies will now be at a competitive disadvantage against companies originating from countries that have no such disclosure requirement like China, Brazil, Indonesia and Canada.

In Europe, the EC is requesting all interested parties to comment on whether they should craft similar rules. Comments are due by 26 June 2013.

This article first appeared in Accounting and Business magazine, May edition, 2013.

By James Bonner, independent sustainability consultant

Engaging with, and accounting for, wider stakeholders – a process of understanding, taking into account, and reacting to the needs and preferences of groups in in society who might affect, or be affected by, organisations – is an activity that many companies have integrated into their business strategy.

Implementing methods and systems to understand the needs of both internal and external stakeholder groups to an organisation, and those with financial and non-financial interests, can have significant benefits. Managing and developing positive relationships with shareholders, employees, customers and suppliers can contribute to and improve the productivity, value and sales of an organisation. Additionally, understanding and co-operating with the needs and wishes of wider stakeholders such as the government, local communities and non-governmental organisations (NGOs) can enhance the reputation of an organisation’s brand, reduce the risk of being targeted by external pressure groups, prepare for changes in regulations and legislation, and, fundamentally, improve the long term sustainability of a company.

Corporate governance frameworks and practices are developed by organisations in an attempt to ensure that their management and boards incorporate and balance the different needs and perspectives of shareholder groups, and their interests, into decision making and business strategy. It is apparent that there will be different, and sometimes contradictory, perspectives and priorities on certain issues between various groups (e.g. shareholders and management may have different perspectives whether to expand a business, or focus on short-term profits), or, in fact, within certain stakeholder groups (e.g. an animal welfare NGO may have different, or conflicting, priorities/perspectives to a human welfare NGO with regards to a topic like animal testing of pharmaceuticals). Managing these differences and conflicts is a significant part of the corporate governance process.

The following table is an introduction to various stakeholder groups that are relevant to many organisations, their typical overarching areas of interest, and some areas where they might not entirely agree, or indeed, conflict. The list of stakeholders, their interests, and example priority differences/conflicts provided here are not exhaustive or complete- but serve to introduce/stimulate issues around this topic.

* While not a ‘group of people’, the natural environment can, nonetheless, be considered as an important stakeholder, who can significantly affect/be affected by, an organisation.

This blog post intends to primarily support ACCA’s Accounting for the future session ‘Thinking Alike: getting boards in tune with their stakeholders’ on Monday 8 October by introducing some of the perspectives of different stakeholders on the issues that organisations and companies might impact and depend upon- an issue which will be discussed in greater detail in the session. Additionally, a number of other presentations during the conference relate to the themes covered in this blog post:

8 October
09:30-10:30 Thinking alike: getting boards in tune with their stakeholders
9 October
12:30-13:30 Inclusive and integrated – the future role of the CFO
10 October
15:00-16:00 Practical workshop: active ownership

Further information:
While with a global level focus, and stakeholder engagement in intergovernmental processes, Stakeholder Forum are, nonetheless, a good group to follow to understand the perspectives of wider stakeholder groups.
Follow the Stakeholder Forum on Twitter

By Manos Schizas, senior SME policy adviser, ACCA

As of today, we are one step closer to the answer. The Bank for International Settlements (BIS) has finally published their interim impact assessment (in two parts) of increased capital and liquidity requirements. It is a massive undertaking of qualitative and quantitative research and reading only a couple of pages can make one's head hurt, but I strongly suggest you give it a go. It really is that important.

The first of the two reports, which deals with the immediate macroeconomic effects of higher capital and liquidity requirements, can be read here.

BIS' median scenario estimates that for every 1 percentage point rise in the target capital ratio (tangible common equity / risk adjusted assets) the following are likely to take place:

'Changes in lending spreads alone are estimated to reduce GDP relative to the baseline trend by roughly 0.16% in the four-year implementation case.

'Taking account of [credit supply] effects, by incorporating indicators of bank lending standards into models, yields a median reduction in GDP of 0.32% after four and a half years (again, per percentage point increase in the capital ratio). Models that incorporate the impact of both higher lending spreads and supply constraints tend to yield some of the largest impact estimates, perhaps because they were calibrated based on past data that include episodes when deep recessions coincided with persistent banking sector strains. This underlines the importance of implementing new regulatory requirements in a way that is compatible with the ongoing economic recovery.

'These GDP effects reflect median increases in domestic lending spreads of about 15 basis points, and declines in lending volumes of 1.4%.

'An easing of monetary policy [interest rates, QE?] reduces the estimated output losses. When it is assumed that the central bank responds to the incipient aggregate demand fall and reduced inflationary pressures precipitated by the regulatory changes, the central estimate of the maximum output loss shrinks significantly. Such offsets are especially pronounced in models that incorporate credit supply constraints, for which the GDP loss in the 18th quarter falls from 0.32% to 0.17%.' (pp. 3-4)

To this must be added an additional reduction in GDP of:

'0.03%, which is the potential impact of international spillovers (reflecting exchange rates, commodity prices and shifts in global demand) as estimated by the IMF' (pg. 3)

If the BIS estimates are accurate, then it appears that bankers have slightly overplayed their hand. BIS note that this is about one eighth of the impact calculated by the Institute of International Finance, which can be found here:

BIS have also tested the effect of higher liquidity requirements:

'The MAG also examined the impact of tighter liquidity requirements, which were modelled as a 25% increase in the holding of liquid assets, combined with an extension of the maturity of banks’ wholesale liabilities. The estimations, which were run separately from those for higher capital standards, yield a median increase in lending spreads of 14 basis points and a fall in lending volumes of 3.2% after four and a half years. This is estimated to be associated with a median decline in GDP in the order of 0.08% relative to the baseline trend. It is important to emphasise that the estimates of the impact of enhanced liquidity requirements do not take account of their interaction with the capital rules. Because meeting one helps banks meet the other, the combined effect of both measures is almost certainly less than the sum of the individual impacts.' (pg. 4)

Small business bodies and ACCA have called for a detailed SME impact assessment before any decisions are made on capital requirements and as such will be keen to examine the BIS paper. The BIS impact assessment is of course a macro study and as such was never going to look too deeply into differential effects by firm size, but some basic points emerge from its analysis.

  • The report notes that the effect of higher capital requirements on small and medium-sized enterprises is a risk to the estimate and will likely be disproportionately large due to the lack of alternatives to bank lending (pp. 11 & 31).
  • It also explains that it is very difficult to model the precise effect due to difficulties in anticipating the responses of lenders (pp 29-30, 34). One disturbing scenario that is highlighted in the report is Japan's experience in the late 90s, during which higher capital requirements appear to have been followed by a quadrupling of defaults as compared to the early 90s due to a deep SME credit crunch. (pg. 51)
  • SMEs are singled out as one sector which, if disproportionately affected by capital requirements, could make a substantial difference to their effect on economic growth in general (pg. 34).
  • Finally the report suggests that a longer implementation period might benefit SMEs (pg. 5).

In one sense, this tells SME stakeholders very little that we didn't know already. What little information the report does provide suggests that what policymakers need in order to optimise capital requirements is a credible signal from lenders of how they will respond to increased capital requirements with regard to SME lending. Credibility is very important to this exercise, because it is in lenders' interest to signal that they will be forced to cut SME lending savagely under higher capital requirements – thus forcing policymakers to opt for more lenient requirements.

This may well be the case if small businesses (not even SMEs!) account for about 46% of the risk adjusted assets of major retail banks, as suggested by this year's World Retail Banking Report.

If any reader who is a keen game theorist would like to model this signalling process, they can email me at

While we wait for the game theorists to arrive, we can go out on a limb and use a recent report by EIM and CSES for the European Commission to look at how the median BIS-estimated fall in GDP might correspond to changes in SME lending. The report can be found here.

Scaling the effect down from the EIM-CSES estimates would suggest that each percentage point added to capital adequacy ratios would come at the price of a 0.34% decrease in bank lending to small businesses, a 0.5% decrease in bank lending to medium-sized businesses, a 1.2% decrease in factoring, a 0.77% decrease in leasing and a 2.2% decrease in venture capital funding. Bank lending to small businesses would fall by just under 1% under some of the worst scenarios.

I suspect that is a price some small business advocates will be willing to pay if it means avoiding a repeat of 2008-9, but will it?

To be continued.

Update: The FT’s Alphaville has had a look at this too.

by Ian Welch, head of policy, ACCA

So the Dodd-Frank Bill, dubbed the biggest overhaul of US financial regulation since the 1930s, has been signed into law

President Obama's political opponents are already warning that the vast 2,300 page bill will damage US competitiveness and lead to business uncertainty, given that it instructs government agencies to create hundreds of new rules and regulations and guidance notes.

It will only be possible to say whether such a huge regulatory and structural change is a success with the benefit of several years' hindsight, but there are parts that look good. The establishment of a regulator for consumer protection has to be a good thing, given the sub-prime mortgage disaster that sparked the financial crisis. While the principles of caveat emptor must always apply, groups of consumers who are new to financial products markets are entitled to expect a degree of official support.        

Similarly, the efforts to address one of the key aspects of the financial crisis – the 'too big to fail' banks – must be applauded. A re-introduction of Glass-Steagall was never going to be on the cards, given the strength of US banks lobbying, but procedures that will allow the safe dismantling and winding down of a huge bank in peril, without causing mayhem in the wider market as the fall of Lehmans did in 2008, must be a big step forward. The concept of moral hazard has to be maintained and this appears to achieve it.

Other measures such as driving more derivatives trades through public exchanges should increase transparency while the requirement for credit ratings agencies to establish internal mechanisms for determining their ratings, to use additional external sources of information and to disclose their methodologies, seems eminently sensible. The promised SEC probe into agencies which for years have suffered from an essential conflict of interest – ie rating the same institutions that pay them – will keep them on their toes.  

Of course, any huge regulatory shake-up – especially one that involves setting up new agencies and reshaping responsibilities of existing ones – suffers from the potential danger that teething bureaucratic problems will overshadow and mar what is trying to be achieved.   

It is interesting that some are comparing the current US regulatory overhaul with the Sarbanes-Oxley legislation of 2002. That Act, which followed the Enron scandal, was for years demonised by many in the West as the epitome of knee-jerk, excessive over-reaction, which cost business billions to no great purpose. Last month, it even had to survive a concerted legal effort to derail the Act by its opponents.

Yet it is now largely recognised that Sarbox, by requiring senior corporate officers to take personal responsibility for the accuracy of their firms' accounts, has led to increased accountability and transparency. And while it did not prevent the governance and ethical failures among financial institutions that was central to the financial crisis, how much worse might the situation have been without it? Sarbox, together with strict US Federal sentencing guidelines, has had an impact on executive behaviour.

A 2007 survey carried out for ACCA by CFO magazine found that among finance executives in Asia Pacific more than half found that Sarbox was useful to them in helping to establish financial disciplines, processes and internal controls. The fact that everything had to be documented and audited, far from being a burden, was seen as giving the businesses more confidence to focus on growth.

Might it be that opponents of regulatory change simply have to accept that a huge crisis will inevitably mean a major response? Certainly, bureaucratic overload must be contested – and Sarbox's requirements have probably had adverse effects on smaller-listed businesses. But crying wolf and exaggerating the threat to national competitiveness is not helpful.