Dirty money

  • 12th July 2024

Mike Ward offers advice about the risks of money laundering to independent schools

 

As crime rates surge worldwide, efforts to combat money laundering have intensified, with the cost to the UK alone estimated to be a staggering £100 billion annually. As such, independent schools within the UK have come under scrutiny due to potential vulnerabilities arising from large money transfers, such as anonymous donations and tuition fee payments.

Under the Proceeds of Crime Act 2002, schools are obligated to flag suspicious activities, including suspicions around money laundering, and disclose any relevant information regarding offences or investigations.

As pressure mounts on school foundations to ensure transparency regarding their funding sources, it is crucial that they understand the financial checks in place and how to use them effectively.

AML loopholes in the independent schools sector

The independent school sector represents a significant gap in the UK’s anti-money laundering (AML) framework, as many schools appear to lack robust checks on the source of the funds before accepting payments. The potential installment (at the time of writing) of a Labour government and the proposed introduction of VAT on school fees have sparked interest in prepaying fees for multiple terms. These larger prepayments, combined with an increasing number of international students, have placed independent schools under closer examination, as source-of-funds checks are now more critical than ever to mitigate any risks.

The National Crime Agency has highlighted indicators of potential money laundering within independent schools, including third party payments for school invoices, funds originating from non-UK accounts, students from high-risk jurisdictions, and obscured sources of money through cash deposits. Additional red flags encompass payments made by parties other than parents, transactions suggesting advance fee payments, and school fees paid by politically exposed persons.

Source-of-funds and source-of-wealth checks

To combat these risks, schools frequently need to conduct source-of-funds and source-of-wealth checks. A source-of-funds check determines the origin of money used for transactions, such as school fee payments, helping to prevent the use of illicit funds. In some cases, additional information is required through a source-of-wealth check, which evaluates how a pupils’s family has amassed their total wealth, examining income sources, business activities, investments, inheritance, and other financial avenues.

By conducting these checks, schools can ensure that the money being used is legitimate and not linked to criminal activities, providing an additional layer of security against money laundering activity.

Performing a source-of-funds check

To carry out a source-of-funds check, individuals must provide financial data and documentation to enable the tracing of the funds’ origins for specific transactions, such as school fee payments, ensuring they are not derived from criminal activities. Beyond simply identifying the financial institution from which the funds originated, the check should delve deeper.

It should not only rely on matching the payer’s name to the bank account but should include documenting key details such as the amount, currency and specifics of the remitting account (bank, account number, sort code, and name on the account). However, it’s equally important to verify where the funds originated by providing clear evidence of the source or reason for acquiring the funds, whether through salary, gifts or other legitimate means.

Harnessing technology for efficiency and transparency

Conducting these checks manually can be time-consuming and resource-intensive for both administrations and fee-payers. Fortunately, technology offers faster, simpler and more effective alternatives. Open banking, for instance, extracts crucial information from the fee payer’s account, revealing the funds’ origins. Combining this technology with artificial intelligence and machine learning enhances the efficiency and transparency of AML checks, aiding schools in identifying any potential risks.

Furthermore, client checks can be conducted across multiple bank accounts, providing the required information in a single report, along with supporting evidence of the funds’ origins. This streamlined approach not only saves time and resources but also ensures a comprehensive and transparent view of the payer’s financial history.

In conclusion, as independent schools face increasing scrutiny over their funding sources, implementing thorough source-of-funds and source-of-wealth checks is essential. By leveraging technology to streamline these processes, schools can enhance transparency, mitigate risks, and ensure compliance with AML regulations. This will help protect the education sector from being exploited for illicit financial activities.

Mike Ward is executive chairman of data intelligence firm Armalytix.

Mike Ward

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