Factors that lead professional services firms to assist kleptocratic behaviour have fallen under the microscope of a new book from Oxford University Press.

Indulging Kleptocracy is co-authored by University of Exeter Professor of International Relations John Heathershaw, who is co-leading a landmark worldwide study of how professional services, including accountancy, enable corruption.

Fellow co-author is University of Exeter Research Fellow Tom Mayne, who researched a chapter that focuses on accountancy. Insights caught up with them to find out what accountants can learn from their book.

Risky territories

The great majority of accountants are unlikely ever to encounter issues around kleptocracies, Mayne says. However, across the profession, enhanced due diligence is both critically important and a logistical challenge to get right.

“I have some sympathy for anyone who works in a sector that’s regulated for anti-money laundering (AML) purposes,” Mayne says. “Yes, the Financial Action Task Force has its risk list, but while some kleptocracies are featured among its high-risk, or ‘grey-listed,’ countries, many aren’t. That essentially forces the accountant to become an expert in whether or not certain countries are kleptocratic, which often falls outside their expertise.”

Standard Google searches will typically reveal whether a country has a high incidence of corruption scandals. Meanwhile, Transparency International’s Corruption Perceptions Index will provide a feel for how risky a country is. 

But accountants will automatically need to carry out deep and extensive vetting on any individual hailing from a noted kleptocracy – particularly if they are identified as a politically exposed person (PEP). According to ICAEW guidance on enhanced due diligence, a PEP is any individual entrusted with prominent, public functions – but the term may also cover their family members and close associates.

At the same time, accountants must pay keen attention to complex transactions or murky sources of wealth linked to risky territories, plus companies or subsidiaries that are held offshore in such places for unclear reasons.

“Globally – and to a large extent, nationally – the current system is not set up to counter kleptocracy,” Heathershaw says. “Boilerplate measures you may go through to achieve regulatory compliance aren’t necessarily going to pick up kleptocratic risk. For example, to amplify Tom’s point, the current definition of a PEP is quite narrow in kleptocratic terms.”

Heathershaw explains that in countries such as Kazakhstan or Azerbaijan, kleptocracy tends to manifest as concentric circles of families linked by business arrangements and/or marriage, with additional ties to government branches or personnel.

“Even if an individual in one of those circles appears to fall out of favour with the governing regime, to the point where they no longer technically count as a PEP, they will still be part of a network that’s doing business through political connections. So, from an ethical standpoint, the money’s tainted. And from a risk management standpoint, if that person is your client, there’s a high chance that, eventually, a data leak will trigger a major corruption case. Then suddenly your accountancy firm will be named by The Guardian or BBC News.”

For that reason, there are strong, ethical, self-interested reasons for accountants to go that extra mile in their enhanced due diligence and always ask those nagging, further questions, Heathershaw says.

Constant vigilance

Accountants must also look out for signs that they are on a slippery slope towards kleptocratic association, Mayne says. “One of our reports featured a case study of an accountancy firm that had worked with a PEP. After an innocuous start, the relationship got to a point where the firm was being asked to contact registration service providers in the Isle of Man so the PEP could set up an offshore company for the purpose of buying a private jet. That’s quite an escalation.”

Mayne describes three types of professional enabler: the unwitting, who truly don’t know what they are getting into; the wilfully blind, who suspect wrongdoing but choose not to ask questions; and the witting, who know exactly what they are doing and accept the risk. Staying out of those categories requires constant vigilance.

“Even if a client seems okay at the beginning, continuously reassess the relationship. If the client introduces an unfamiliar new element or company into your brief, start asking questions about it,” Mayne says. 

Mayne says a classic mistake is to interpret a prospective client’s state links and/or wealth as reasons to bring them on board, rather than dig deeper. “They’ll say: ‘Well, this person’s a billionaire and they’ve got contracts with the government – what’s wrong with that?’ But those agreements may be valid for only as long as that specific government is in power – and governments in high-risk countries tend to be very changeable. What may be legal one week could become criminal the next.”

If in doubt, firms should seek external input from the likes of Chatham House, or ask in-house foreign language speakers to scrutinise documents – particularly those in Arabic, Russian or Chinese. 

Firms should carefully take the measure of so-called ‘mini-garchs’ – less known and less wealthy oligarchs. “If you anticipate doing accounts for them or their companies on a regular basis, it will be worth the investment to seek out regional specialists who could advise you on risks,” Heathershaw says.

ICAEW Head of AML and Operations, Professional Standards, Michelle Giddings says the Institute seeks to ensure that its supervised firms comply with money laundering regulations, such that they never professionally enable through negligence. In 2023, ICAEW refocused its monitoring away from technical compliance to the effectiveness of firms’ policies and procedures. Its most significant finding for 2023/24 was that, of the three key stages of customer due diligence, firms performed verification least effectively.

“In some cases, firms simply carried out more ID verification on a beneficial owner, when AML risk relates to factors such as transactions in high-risk third countries,” Giddings says. “That’s important when considering risks from kleptocracies. Firms must tailor verification to ensure they gather enough evidence to satisfy themselves that the risks of being used to launder are sufficiently reduced.”