A Guide to Anti-Money Laundering (AML)

May 6, 2024

Anti-Money Laundering (AML)

AML regulations refer to procedures and processes put in place by companies to discourage and prevent criminals from performing money laundering on or via their premises or through their processes.

Due Diligence

All business transactions necessitate thorough due diligence. These checks confirm the identity of your customers, assess the risk associated with a customer or supplier and identify red flags, such as political exposure, residency in high-risk areas, or connections to criminal activities. Ensure business relationship transparency. Perform due diligence checks during onboarding and periodically. Some cases require enhanced due diligence, whilst standard checks safeguard your and client’s interests and prevent financial crimes like money laundering, fraud, and terrorist financing.

By adhering to due diligence best practice, trust privacy is respected and negative publicity, reputational damage, and legal repercussions are minimised. Corporations and individuals can face severe fines and imprisonment, if complicit in criminal activity due to lack of due diligence.

Accounting Red Flags

Accountants and finance administrators are a barrier against criminals attempting to launder money through their businesses. It is crucial that all financial professionals equip themselves with knowledge and identify signs of money laundering and suspicious activities that warrant investigation. 1. Unusual behavior from known and loyal customers, such as repeatedly needing reminders for documentation when they are typically prompt. 2. Reluctance or inability to provide the required paperwork. 3. Inconsistencies between documents and previously provided information. 4. Anomalies in invoices, misspelt critical details, unexplained gaps, or discrepancies between the invoice address and the head office address. 5. Negative media coverage related to the individual or organisation. 6. Associations with politically exposed persons (PEPs). 7. Using offshore accounts, with no in country customer/supplier presence. 8. Unusual transactions, emptying an account, multiple small cash deposits.

Politically Exposed Persons

A politically exposed person (PEP) is an individual who currently holds or has held a prominent public office. The immediate family members or close associates of PEPs are also classified as ‘politically exposed’ and are subjected to thorough due diligence checks to combat money laundering. PEPs are at a higher risk due to their influential positions, which increases likelihood of involvement in money laundering, bribery, fraud, and terrorist financing. These individuals can have access to state assets and implement measures to evade detection of money laundering or terrorist financing. They may control financial institutions, businesses, or enterprises that can be exploited for money laundering or the generation of illegal profits. The majority of PEPs do not misuse their positions. However, they are often targeted by individuals seeking to exploit them or their influential status. PEPs are regarded as high-risk clients and are frequently subjected to comprehensive background checks and enhanced due diligence procedures.

Know Your Customer

KYC standards protect financial institutions against fraud, corruption, money laundering, and terrorist financing. KYC is considered the initial and most critical step in the AML compliance program. It involves verifying a client’s identity, establishing their risk profile, and monitoring their account activity. Organisations must meticulously authenticate a customer’s identity, evaluate their risk level, and comprehend their financial behaviour to effectively detect any suspicious activities or warning signs. This proactive approach enables companies to promptly investigate indications of money laundering or illicit activity before escalation.

Key Components of KYC:

1. Customer identification: Confirm identity by validating personal information, ie.name, date of birth, and address. This can include verifying the presence on electoral registers and requesting documents i.e. valid passport, driver’s licence, birth certificate, utility bills or other official statements. 2. Customer due diligence: Identify risks conducting business with specific customers. Utilise gathered information to ensure customers are not on sanction registers, e.g. Interpol, verify individuals are not PEP’s. 3. Continuous monitoring: Conduct identity verification and due diligence checks more than once. Financial institutions must consistently monitor customer account activity to understand typical usage patterns, detect anomalies, and mitigate risks in a timely manner.

Financial Sanctions

Financial sanctions programs operate worldwide. Many countries and jurisdictions have their own financial sanctions and enforcement agencies  to combat money laundering, terrorist financing, and financial crime. Financial sanctions are crucial for national security, foreign policy, and international peace. Common financial sanctions include import tariffs, trade embargoes, asset freezes (to restrict access to funds), and limitations on financial markets and banking and investment services. Most financial sanctions programs maintain lists of individuals and entities who are subject to sanctions. These are “targets”, “Specially Designated Nationals”, or “blocked persons” under different sanctions regimes. Enforcement bodies for financial sanctions have global legal jurisdiction. Examples include the United Nations Security Council and European Commission. Others, such as the Office of Foreign Assets Control (OFAC) within the US Department of the Treasury, and Office of Financial Sanctions Implementation (OFSI) within the UK HM Treasury, enforce sanctions based on their respective laws, national security, and foreign policy.

Red Flag Due Diligence

Enhanced Due Diligence

Fraud, Investigations, Litigation & Disputes