There are fears that thousands of non-executive directors (NEDs) could unwittingly be committing a criminal offence as a result of new money laundering regulations that came into force last December

The problem affects all NEDs who receive fees for their services rather than payment as employees under schedule E, according to Felicity Banks, head of business law at the Institute of Chartered Accountants in England and Wales (ICAEW). Because fee-based NEDs are classed as "company service providers", they should, under the terms of the new regulations, have registered with Her Majesty's Revenue and Customs (HMRC) by 1 April.

Banks believes that NEDs have been unwittingly caught up in
the company service provider net, which was really intended for people such as accountants, solicitors and estate agents. Just like these other traditional business service providers, NEDS need to be able convince HMRC they are "fit and proper" people to be carrying out their duties.

There is little doubt that money laundering poses a serious problem. Some estimates put the cost to the UK economy as high as £20bn a year. But Banks believes the new regulations will nonetheless impose a significant burden on those who serve as NEDs. As she explains: "There is a difficult policy issue for the government, as money launderers can give themselves a spurious air of legitimacy by acting as directors or non-executive directors for sham companies. Also, all non-executive directors can assist significantly in maintaining a fair and law-abiding economy—for themselves as well as their competitors—if they know how to recognise and report suspected money laundering.

"However, inclusion within the scope of the money laundering regulations brings significant costs and could represent a deterrence for able non-executives making themselves available."

In order to comply with the regulations, NEDs should be making proper checks, not only on the companies on whose boards they serve, but also the "beneficial owners" of those companies, to ensure that no suspected money laundering is taking place. And they need to keep proper records to prove checks have been made.

Banks points out that few NEDs are aware of this added burden and that the ICAEW and other bodies have lobbied the government on their behalf.
When it introduced the new regulations, the government made much of the fact that it was reducing compliance work where the risk of money laundering was low. This included being able to make fewer checks in areas such as occupational pension funds and, in some circumstances, rely on enquiries made by others, such as solicitors and the Financial Services Authority.

But some NEDS in small and medium-sized companies, who often serve for only modest fees, may decide the new work is simply not worth the return.
Those who continue to serve will need to become more vigilant. "You need to know who your clients are, what they are doing and why they are doing business with you," says Mark Outhwaite, director of Out and Out Answers, an anti-money laundering consultancy.

Outhwaite points out that money launderers target legitimate businesses through scams. They order goods, then cancel the order and get their money back minus the deposit. "They have a cheque drawn on a legitimate company and never mind paying what they regard as a commission for the laundering," he says.

Outhwaite emphasises that money laundering often involves the profits of drug-trafficking and prostitution, and that some of the money is destined to finance the activities of terrorist organisations. The new regulations, therefore, put directors in the frontline of the fight.