Dealing with high-risk customers | EBA amends ML/TF Risk Factor Guidelines for Crypto Assets | UNODC report | Penalties imposed in January 2024

Welcome to the our AML News and Updates Newsletter February 2024 edition. ??

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So, let's see an outline of the topics to be covered in this edition:

1.???? Discussion of the month: Dealing with High-risk Customers – The importance of EDD in mitigating risks

2.???? Regulatory Developments:

? EBA amendment of the “ML/TF Risk Factor Guidelines” to include Crypto Asset Service Providers (CASPs)

? UNODC Report on Casinos, Money Laundering, Underground Banking, and Transnational Organized Crime in East and Southeast Asia

? EU removed Cayman Islands and Jordan from high-risk third country list

? FATF Mutual Evaluation and Follow-Up Reports published in January 2024

3.???? Other News:

? Millions of Money Laundering/Financial Crime Penalties in January 2024

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Let’s start...

Dealing with High-risk Customers – The importance of EDD in mitigating risks

In the world of financial crime, money launderers are like skilled architects, designing complex schemes to conceal the origins of ill-gotten gains. They understand that the more complicated their operations are, the more difficult it is for AML professionals to follow the trail of their transactions or identify the real person behind them.

Let’s explore high-risk customers and how Enhanced Due Diligence (EDD) can help companies mitigate the associated risks.

Identifying High-Risk Customers

Certain businesses are more susceptible to money laundering or terrorist financing purposes than others. Deemed "high-risk," customers operating in these sectors require stricter scrutiny and robust AML measures by financial institutions to eliminate the risk of money laundering and terrorist financing.

International bodies such as the FATF, Wolfsberg Group, and national authorities have provided extensive guidance on identifying and managing high-risk customers which often include:

• PEPs (Politically Exposed Persons): Individuals holding prominent public positions who may be more susceptible to corruption or bribery. A growing number of regulated entities are becoming increasingly aware of the risks associated with PEPs. According to the State of Financial Crime Report, 61% of the surveyed compliance leaders plan to become more risk-averse when managing PEPs over the next 12 months.

• Customers Operating in high-risk industries: Various industries are more vulnerable to money laundering, such as cash-based businesses, the construction industry, gambling, real estate, art and antiques, etc.
• Customers with links to high-risk countries: Individuals or businesses operating in countries with weak AML/CTF regulations or high levels of corruption. These countries are often bound by secrecy laws, which makes them attractive to people who want to hide their identities.
• Customers with complex ownership structures: Companies that are part of a complex web of companies making it difficult, often impossible to identify the real beneficial owners.
• Customers that have nominee arrangements or shares in bearer form: Companies that are using nominees without adequate explanation require further scrutiny. Bearer shares are associated with a lack of transparency regarding the ownership of a company.
• Customers engaging in unusual or suspicious transactions: Transactions that lack a clear economic purpose, are excessively large or complex, or involve third parties with questionable backgrounds are considered high risk and require further investigation.
• Non-face-to-face business relationships: Especially when there inadequate safeguards to verify the customer effectively, these customers expose a company to identity fraud.

Given the potential for money laundering, terrorist financing, and other illicit activities associated with high-risk customers, effective EDD is of utmost importance. By understanding the enhanced measures and procedures involved in EDD, financial institutions can effectively address these risks and protect their operations.

What is Enhanced Due Diligence (EDD)?

EDD refers to a more thorough and comprehensive level of due diligence applied to higher-risk customers. It goes beyond basic Know Your Customer (KYC) and Customer Due Diligence (CDD) measures to mitigatethe risks associated with high-risk customers.

To effectively manage high-risk customer relationships, AML professionals should implement, AT A MINIMUM the following measures:

• Obtain Extensive Customer Information: Collect detailed information about the customer's background, occupation, business activities, and financial status.
• Beneficial Ownership Identification: Identify the ultimate beneficial owner of the customer - the individual or individuals who ultimately benefit from the business or assets. The use of a screening and adverse media tool is highly recommended and, in some cases, an absolute requirement by the regulator.
• Conduct Extensive Background Checks: Use reliable AML solutions to check whether the customer is involved in high-risk activities or has a history of money laundering or terrorist financing.
• Establish the Source of Funds and Source of Wealth: Establish the origin of funds used for transactions and the source of wealth, ensuring they are legitimate and not proceeds of crime.
• Enhanced Transaction Monitoring: Implement stricter monitoring of customer transactions, paying attention to unusual patterns, large amounts, third-party involvement, products or services that do not match the company’s activities, etc. The use of an automated transaction monitoring tool is highly recommended and in some cases required by the regulator.
• Senior Management Approval: Seek approval from senior management before establishing or continuing business relationships with high-risk customers.
• Additional Due Diligence Measures: Consider visiting client premises, conducting open-source searches, and reviewing third-party reports if available in your country.
• Comprehensive Documentation: Maintain detailed records of all EDD measures taken, the rationale for enhanced due diligence, and communications with the customer.
• Periodic Review and Update: Regularly review and update EDD measures to adapt to changing customer risk profiles and market conditions.Looking ahead

As the financial landscape continues to evolve, so do the methods employed by criminals to launder money and/or finance terrorism. Organizations must stay ahead of these evolving trends by adopting a proactive approach to managing high-risk customer relationships. These measures are necessary steps to ensure that organizations not only protect themselves from financial losses but also contribute to the broader effort to combat financial crime and promote a more secure and transparent financial system.

EBA amendment of the “ML/TF Risk Factor Guidelines” to include Crypto-Asset Service Providers (CASPs)

On 16th January 2024, the European Banking Authority has issued guidelines amending the previously issued “ML/TF Risk Factor Guidelines”. The new amendment provides a common understanding of Money Laundering and Terrorist Financing (ML/TF) risks associated with Crypto-Asset Service Providers (CASPs) and the steps CASPs and other credit and financial institutions should take to manage these risks.

Read the report here.

UNODC Report on Casinos, Money Laundering, Underground Banking, and Transnational Organized Crime in East and Southeast Asia

UNODC has issued the above report to highlight the growing nexus between illegal online casinos, e-junkets, cryptocurrencies, and transnational organized crime in the region. The report aims to raise awareness of the issue and provide a basis for developing effective solutions to address the problem.

You can read more here.

EU removed Cayman Islands and Jordan from high-risk third country list

The removal was based on the progress made by these countries in addressing their strategic deficiencies in accordance with Article 9 of Directive (EU) 2015/849. The FATF also removed the Cayman Islands and Jordan from its list of 'Jurisdictions under Increased Monitoring' in October 2023, following the implementation of their respective action plans agreed with the FATF.

You can read the relevant amendment of the regulation here.

FATF Mutual Evaluation and Follow-Up Reports published in January 2024

In January 2024, the FATF along with FATF-Style Regional Bodies (FSRBs) issued the following follow-up reports:

Mutual Evaluations:

• Nepal
• Guinea

Follow-up reports:

• Nigeria
• Mali
• Kyrgyz
• Jamaica

Millions of Money Laundering/Financial Crime Penalties in January 2024

January 2024 saw a significant number of enforcement actions against financial institutions and individuals for failing to prevent, or participated, in financial crime. These penalties serve as a wake-up call for the industry and a proof that regulators are taking a tough stance on financial crime.

Here are some of the penalties imposed:

• SEC Charges Global Software Company SAP for Foreign Corrupt Practices Act (FCPA) Violations
• SAP SE (SAP) to Pay Over $220M to Resolve Foreign Bribery Investigations
• FCA fines Guaranty Trust Bank (UK) Limited ￡7.6 million for failures in its AML systems and controls
• Former Law Firm Partner Sentenced To 10 Years In Prison For Laundering $400 Million Of OneCoin Fraud Proceeds
• The Office of the Comptroller of the Currency (OCC) Assesses $65 Million Penalty Against City National Bank
• Three Individuals Charged for Roles in $1.89B Cryptocurrency Fraud Scheme
• Investment fraud gang that used aliases from films and TV shows to defraud victims of over ￡1m jailed for five years
• Italy uncovers $1.9 billion fraud linked to Chinese shadow bank network

That's all for this month!

Hope you have a productive month and year!

Stay tuned for next month's AML News and Updates! ??

Best

Anna

Founder

AML Cube Consulting and Education