How to reduce risks of dirty money in private schools
Published 26/03/2024
Governments worldwide are escalating efforts against money laundering, with the UK alone estimated to be losing £100 billion annually to this crime.
Independent schools in the UK are now under scrutiny due to potential loopholes arising from substantial money transfers, including anonymous donations and payment of tuition fees.
Schools are obligated under the Proceeds of Crime Act 2002 to flag suspicious situations and disclose any information relevant to money laundering offences or investigations.
With growing pressure on school foundations to be clear on where their money is coming from, they must be aware of the financial checks in place and what to do about them.
AML risks for private schools
With the current geopolitical tensions, there is an increased focus on organisations that attract non-UK customers.
Additionally, with the prospect of a labour government and the proposed levying of VAT on school fees, there is more interest in multi-term prepaying of fees. Prepayments of larger sums and a growing population of international students mean independent schools are under the microscope.
The independent school sector presents a glaring loophole in the UK’s anti-money laundering system because it appears that insufficient checks on the Source of Funds are completed by schools before they accept fees.
Failing to put sufficient processes in place risks reputational damage and fines or sanctions.
The National Crime Agency has identified concerning signs of potential money laundering within independent schools, including third-party payments for school invoices, students from higher-risk money laundering jurisdictions, funds not originating from UK accounts or the child’s nationality jurisdiction, and obscured money sources through cash deposits.
There are additional indicators such as payments not directly from parents, transactions suggesting upfront fees and politically exposed persons paying fees.
What is a Source of Funds check?
A Source of Funds check verifies where the money to pay for things is coming from – in this case the payment of school fees. These checks limit opportunities for criminals to use criminal property and are already in place across many sectors in the UK, at any point at which large sums of money are being transferred.
There are sometimes further checks required, which are called Source of Wealth.
Source of Wealth describes how a client, or their family, has acquired their total wealth and involves looking at the activities that have generated or contributed to the accumulation of their financial and other assets.
How to conduct a Source of Funds check
To conduct a Source of Funds check, individuals must provide financial data and documentation to enable the tracing of the funds’ origins in 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, except in cases where the institution is providing financing like a mortgage, the check should delve deeper.
It should not solely rely on matching the client’s name to the bank account.
It should encompass documenting key details such as the amount, currency, and specifics of the remitting account (bank, account number, sort code, and name on account), but it’s equally important to note where the funds originated from.
The information on the origins of the funds should be substantive, providing clear evidence of the source or reason for acquiring the funds, whether through salary, gifts or other legitimate means.
How technology makes checks easier
All of this can be achieved through manual processes, though it will be time-consuming, resource-heavy and a significant admin overhead for the school and the fee payer alike.
There is technology in place across other sectors that can be used that make the checks faster, simpler and more effective.
Open Banking gathers key information from the fee payer’s account to determine where the funds have come from.
This technology, together with AI and machine learning, is key to unlocking effective AML checks as it provides transparency for all parties involved, and can help schools identify riskier customers.
A client check can also be conducted across multiple bank accounts, providing the required information from those accounts in a single report, along with answers and documentary evidence to support the origins of those funds.
The scrutiny of independent schools regarding potential money laundering underscores the importance of robust financial checks and compliance with anti-money laundering regulations.
By conducting thorough Source of Funds and Source of Wealth checks, and leveraging technology for efficiency and transparency, schools can mitigate the risks associated with dirty money.
About the author: Mike Ward is executive chairman of Armalytix, one of the UK’s leading fintech companies specialising in anti-money laundering through affordability and source of funds checks.
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