Effective and efficent risk-based approach in anti-money laundering (AML) and combating the financing of terrorism (CFT) implies the adoption of a risk management process for dealing with money laundering and terrorist financing. This process encompasses recognising the existence of the risk(s), undertaking an assessment of the risk(s) and developing strategies to manage and mitigate the identified risks.
Risk Based Approach: Top Down Approach
- Geography and Country Risk
- Business and Entity Risk
- Product and Transaction Risk
1. Geography and Country Risk
Firms that have a significant proportion of their customer base located in countries without adequate AML strategies where;
- Cash is the normal medium of exchange;
- There is a politically unstable regime with high levels of public or private sector corruption; that are known to be drug producing or drug transit countries; or have been classified as countries with inadequacies in their AML strategies will need to consider what additional "know your customer" (KYC) and monitoring procedures might be necessary to manage the enhanced risks of moneylaundering.
- In particular, additional monitoring of inward payments from countries without equivalent AML strategies should be considered.
The characteristics that make businesses high risk vary. Casinos, gaming, brokers-dealers for example, are popular money laundering targets because a mature AML culture is yet to develop in these businesses. Such businesses with a high volume of cash activity need to be watched carefully.
Offshore banks provide financial services that are conducted behind the shield of strict banking and corporate secrecy laws.
Professionals facilitate the creation of laundering vehicles and schemes including real estate linked.
Car, boat and airplane dealers, as well as jewel, gem and precious metal dealers, provide launderers access to 'big ticket items', which often can be purchased with little or no customer identification and later sold to provide a 'legitimate' source of cash proceeds.
Import and export companies provide cover for international money laundering operations through false trade pricing schemes.
Cash intensive businesses allow launderers to disguise cash derived from illegal activities in deposits containing cash derived from regular, legitimate business activity.
The above list is by no means comprehensive. Other sources of negative information include media searches and/or KYC databases such as IntegraScreen Online, World-Check etc.
3. Product and Transaction Risk
Products or services with the highest risk are those where unlimited third party funds can be
freely received, or where funds can regularly be paid to third parties, without evidence of identity of the third parties being taken.
The product or services could support high-speed movement of funds or along with a high volume of transactions, or both, and could conceal the source of those funds. It may facilitate a higher degree of anonymity, or involve the handling of high volumes of currency or currency equivalents. It could allow a customer to readily convert cash to a monetary instrument.
Some of the highest-risk products are those offering money transfer facilities though chequebooks, monetary instruments, drafts, telegraphic transfers, SWIFT, CHAPS, automated clearing house (ACH), deposits from third parties or other means, electronic cash (e.g., stored value and payroll cards), payable upon proper identification (PUPID) transactions, third-party payment processors, automated teller machines (ATMs), and electronic banking.
Corporate and private current accounts fall within this category because unlimited third party funds are continually received for credit to the account and it would be impractical to identity all providers of such funds. Private banking – both domestic and international - can be particularly vulnerable just as trust and asset management services, is.
Similarly, other products and services that constitute high-risk include:
- Foreign correspondent accounts – pouch activity, payable through accounts, and money drafts.
- International trade finance (letters of credit).
- Special use or concentration accounts.
- Lending activities, particularly loans to small and medium enterprises secured by
cash collateral, marketable securities; and credit card lending. - Nondeposit account services (e.g., nondeposit investment products, insurance and safe deposit boxes).
- Risks increase if the money launderer can hide behind corporate structures such as private limited companies, offshore trusts, special purpose vehicles and nominee arrangements that increase anonymity. Company formation agents offer nominee director, shareholder and authorized signatory services.
- Offshore shell company ownership by another offshore bearer share company is a favourite.
- Another favourite is where assets are conveyed to an offshore company 100% of whose shares are held by an offshore Asset Protection Trust which has as its sole beneficiary a second trust – this is called a Layered Trust structure. Hence, understanding the ownership and control structure for companies and trusts is critical.
- When devising their internal procedures, firms should consider how their customer base and operational systems impact upon their staff's capacity to identify suspicious transactions.
The FATF 2002 consultation report on the 40 principles, the Wolfsberg group of banks pointed out that certain transactions or activities have a minimal risk of money laundering or terrorist financing. They give some examples as follow:
- Transactions where a financial is acting as a principal rather than on behalf of third parties
(such as foreign exchange, derivatives, capital market transactions and some extensions of credit); - Accounts established for a specific purpose with funds received or disbursed under
limited defined circumstances to identified third-parties, such as escrow, corporate trusts, paying agency and custody accounts; - Accounts for the investment of funds that are subject to a regulatory scheme, such as investment of funds of regulated pension or retirement plans; and
- Accounts held by other financial institutions that are themselves subject to a robust AML
regime. - Customer categories where the risk of money laundering or terrorist financing is lower.
- Generally large public listed companies subject to regulatory disclosure requirements are regarded as lower risk than unlisted companies.
- Government administrations or enterprises are also potentially lower risk.
- Pooled accounts held by designated non-financial businesses or professions regulated to FATF standards may also be lower risk.
Bank staff should question themselves whether the nature of the client's account or business justifies the products or services the client is asking for. It is important to consider all dimensions of money laundering risk when assessing an account opening or a transaction.
Case Study:
Mr B is the Managing Director of an offshore company incorporated in country A in June 2000. He seeks to open an account for moving his business from another bank that he claims is providing bad service. Mr B wants to set up a trade financing line to import microprocessors from the US for his computer business. He provides details of the Letter of Credit to be set-up that he says would be fully secured with cash assets.
1. Geography and Country:
- Country A is in the Caribbean, which is a hot-bed for laundering drug money coming out of the US both directly and indirectly.
- You are aware that the country A was removed from the FATF black list in June 2001 but your AML officer advises that regimes that are removed from the FATF black list may also be vulnerable for historical reasons.
- Furthermore, Country A was involved in recent high-profile corporate scams, increasing the discomfort.
- You are aware that import-export businesses are a key high-risk business for money laundering.
- You further do a search on your PEP commercial database that shows a match. Mr B is a distant relative of a key politician in a country known for corruption. Mr B concealed this fact.
- Mr B is unable to provide an introduction to facilitate account opening and can only provide identification documentation. Given the risks, you feel uncomfortable with this fact.
- You know that over-valued imports are a mechanism for laundering money. From your Internet Research you note that the price is higher by 30 percent from various online quotes for the same quantity and brand.
- His offer of full security also raises discomfort for in your experience, customers do not do so easily.
- Also, why is he not using a local supplier for microprocessors? All the other computer assemblers who have accounts with your bank, source such parts locally as all the major manufacturers have local suppliers in the country.
