This is today one of the major threats we are facing. Who knows, if our services are used for terrorist financing? Even, sometimes the legally earned money is also transferred for the financing of terrorism.
For terrorists, no matter how small the money amount is, it is a lifeblood for them.
Just like money laundering, terrorist financing is a predicate offence. Early detection and immediate counter steps are the only ways to combat it.
Concerns of Countries and Governments around the World
MLR-2017, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) regulations came into force in the UK on June 26, 2017. The new regulation of the UK is tightening the reins on money laundering in resourceful ways.
To combat money laundering, UK regulations include identity verification of customers before providing services to them. AML compliance is mandatory when it comes to screen the customers against Politically Exposed Persons (PEPs) list, sanction lists, the high-risk customers’ records, and updated criminal databases. In addition to this, employee training is also declared mandatory. Previously, regulations covered only casinos holders which now extend to all gambling providers.
Anti-money Laundering (AML) regulations in China primarily focus on KYC (Know Your Customer) verification of customers through identity verification protocols. China’s government has issued AML/CFT regulations on online financial institutions. FATF report for the People’s Republic of China states that China has a strong understanding of money laundering and terrorist financing risks.
In AML/CFT regulations of China, legitimate entities are required to verify their customers with identity proof (such as government-issued ID cards). In addition to this, regular identity checks are declared important in case of a change in records of beneficiaries or regulations. In the case of any suspicious transactions crossing the minimum transaction threshold, it should be reported immediately to the relevant authority. China is taking stringent measures in the AML compliance program to combat money laundering and terrorist financing criminal activities.
The United States of America
In the USA, Bank Secrecy Act (BSA) is residing. With several amendments, this act is quite detailed and covers broad perspectives of money laundering risks of financial institutions. BSA was designed to identify the source, volume, and movement of laundered money and monetary instruments. According to BSA, banks and other financial institutions are supposed to report transactions over $10,000 through currency transaction reports.
Not only this, CDD processes are mandatory for businesses operating in the USA. AML screening of customers against several criminal databases are updated records is necessary to comply with AML regulations. Additional federal laws are passed to strengthen the rules and regulations under BSA. Anti-money laundering programs in the USA come up with changes and scope will be extending with time.
FINTRAC, Financial Transactions and Reports Analysis Centre of Canada has recently released a final version of rules and regulations that depict amendments in the regulations to Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The changes in Canada’s regulations ensure the compliance procedures and policies to be significantly stringent.
According to these regulations, the financial services industry needs to be dynamic in nature for the reduction of money laundering and terrorist financing activities. Virtual currency services and digital payment methods have opened ways for fraudsters to transfer their embezzled funds across the world. Moreover, regulations extend to prepaid card issuers, virtual currency providers and foreign Money Services Businesses (MSBs).
Risks for Banks and Financial Institutions
Money laundering and terrorist financing affect the overall economy of the world. As regulated entities such as banks and financial institutions are primary sources that deal with the money in a country. These entities are opportunities for fraudsters through which they can transfer ill-gotten gains in different corners of the world. There are several risks associated with the maintenance and supervision of banking relationships to which FIs and employees should be aware of. The interconnection of banks should be secure and well-organized to track the unusual flow of transactions. Otherwise, regulatory scrutiny can subject hefty penalties which include monetary fines, imprisonments, business abandonment temporarily or permanently and assets freezing.
What are KYC and KYB?
Know Your Customer, KYC is a process of identity verification of the customers. It is part of Customer Due Diligence (CDD). To combat high-risk customers, identity verification plays an important role. KYC is the term most commonly used in banks and financial institutions for customer verification. Now, it is needed for almost all industries because of the extended scope of fraudulent tricks and region.
Also, to comply with the obligations of global and local regulatory authorities, businesses need to verify their onboarding customers. To verify the credibility of customers, the KYC verification process makes sure that the person is actually who he says he is. Not only customers, but the scope of KYC extends to agents, businesses, corporate entities, and third-party verification. This is what we call ‘Know Your Business’ or KYB.
KYB involves the verification of businesses your company is dealing with. This is important to verify that your business operations are running in association with honest and registered entities. To avoid regulatory fines, verification of Ultimate Beneficial Owners (UBOs) is declared mandatory. AML regulations of FATF have explicitly stated UBO screening importance for businesses to combat money laundering and terrorist financing.
What is EDD?
Enhanced Due Diligence (EDD) includes additional information of customers as compared to the one collected during the CDD process. To combat the risks of high-risk customers in an organization, thorough screening is performed. In-depth verification of customers is conducted by verifying their identity, not only by collecting personal but also financial information. Following is the EDD information that is collected at verification time:
- Business/ occupation
- Financial status
- Private/corresponding baking information
- Continuous transaction monitoring, etc.
Enhanced Due Diligence Factors
High-risk Customer Factors
- Verification of customers if they are foreigners or non-residents
- Personal vehicle information of legal identities
- Verification of customers if their relatives or family members are in the list of PEPs
- Businesses that are cash-intensive
- Risk assessment of company against AML policies and parameters
Geography Risk Factors
- Countries that lack AML/CFT practices and are prone to money laundering and terrorist financing.
- Countries that lie in sanctions lists or have high criminal records
- Countries that are blacklisted for facilitating criminal activities
- Countries that do not lie under the hood of FATF members, etc.
Importance of Watchlists and PEPs
Bad actors are spreading all around the world. Your business that is providing services across the globe should be well-aware of the policies and regulations under which businesses operate. Similarly, your businesses should know high-risk entities of friend countries. Updated records of criminals, money launderers, terrorist financiers, online fraudsters and hackers, and several other watchlists should be maintained issued by law enforcement agencies, to verify each onboarding customer and secure the organization.
In addition to this, identities should be verified against the list of PEPs and their relatives to make sure that no fraudulent identity is facilitated through your legitimate businesses. In case of any discrepancy, businesses can be subjected to inevitable heavy regulatory fines. Hence, it is a regulatory requirement as well as a security concern for the protection of business from malicious entities in the financial system.
Reporting Suspicious Transactions
In a financial system, any suspicious transactions should not be ignored. To prevent money laundering and terrorist financing activities, on an immediate basis, transactions should be reported. Under the requirements of regulatory authorities and anti-money laundering laws, reporting entities are supposed to submit Suspicious Transaction Reports (STRs). It should be reported regardless of the number of fraudulent transactions. A suspicious transaction is:
- That appears unusual
- Appears illegal
- Transaction performed above the specified threshold
- Frequent transactions from one identity
- With no clear economic purpose
- Shows indication of money laundering or terrorist financing
Discussed in the AMLA section, failure in reporting an STR is an offence which can be subjected to a regulatory fine.
Indications of Money Laundering
The features below are recorded in the money laundering case studies that came onto the surface after investigations:
Anti-money laundering and countering or terrorist financing is the responsibility of every business and employee of a country. Strict regulatory requirements came into force as a result of its adverse effects od money laundering and terrorism financing on the global economy. Fraudsters that are violating the legitimacy of financial institutions should be tackled by all means. This very first step is the scrutinization of organizations against AML policies and procedures. The government can impose heavy criminal and civil penalties as a result of violations of regulatory obligations.
Before the law, ignorance is not even an excuse.