When it comes to customer due diligence, there are several AML risk factors that individuals and businesses should consider beyond whether their customer is or is not an active PEP. These factors play a crucial role in mitigating risks and ensuring compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
In this article, we will explore some of these factors and their significance in the due diligence process.
Common AML risk factors in 2023
Identifying connections to high-risk countries is crucial in determining the risk profile of individuals or entities. FATF regularly reviews and publishes a list of high-risk countries that many governments follow. In the UK, amendments were made to money laundering regulations which meant HM treasury is responsible for publishing its list of countries considered to be high risk. Under UK MLR legislation, firms need only concern themselves with this list which you can find here https://www.legislation.gov.uk/uksi/2023/704/made
Residency not nationality
The residence of an individual plays a significant role in determining risk levels. Merely being from a high-risk country, such as Iran, does not automatically classify someone as a high-risk customer. The focus should be on the source of funds and the country where the person currently resides. If a person from a high-risk country resides in the UK, has proof of residence, and holds a UK bank account with legitimate funds, the risk may be lower. However, if funds originate from a high-risk country or the person is still residing in that country, enhanced due diligence should be applied.
Complex Ownership Structures
Another factor to consider is the complexity of ownership structures. If a corporate client is owned by another company, which is in turn owned by another company, it becomes more challenging to identify the ultimate beneficial owner—the actual human being at the end of the ownership chain. Such complex structures may indicate a higher risk profile because they suggest efforts to obscure the identity of the individuals involved. Conducting enhanced due diligence becomes necessary in these cases to ensure transparency and mitigate potential risks
Assets held in Trusts
While trusts are legal entities commonly used for legitimate purposes such as estate planning, asset protection, and wealth management, their inherent characteristics can make them susceptible to exploitation for money laundering. Trusts by their nature and design, offer a degree of confidentiality and anonymity that makes it challenging to establish true ownership. Furthermore, the inherent flexibility of trust structures allows for a dynamic adjustment of beneficiaries based on the outcomes of transactions or specific events such as the sale of a property and the value of such sale. This flexibility makes it difficult to determine to the UBO and requires additional due diligence to mitigate their misuse.
Source of Funds
Where the money for the transaction originates from is another significant factor when it comes to due diligence. Simple sources of funds such as evidenced salary or a connected house sale may not require further due diligence but if the funds are gifted, from multiple sources, through gambling or cryptocurrency profits then you should be confident all sources are legitimate and aren’t been used to conceal illegal activity.
Modern technology such as ours makes it easy to verify ID documents and confirm that they belong to the person that submitted them. Money launderers are known to use a mix of genuine and false identities to hide their activities. Recent SRA enforcement action highlighted that a firm missed obvious warning signs during the CDD process. Despite obtaining genuine ID documents that matched their claimed identity, the law firm overlooked that additional documents obtained after the initial ID check, contradicted the original documentation.
If you are dealing with a transaction that involves numerous parties and multiple properties or commercial assets then this can make it difficult to identify patterns of indicative illicit activity due to the intricacies of the mechanism involved. Moreover, the involvement of multiple jurisdictions, various financial products, and the use of advanced technologies further amplify the risk of money laundering, as it becomes increasingly difficult to stay ahead of evolving tactics employed by criminals.
Keeping up with evolving risks
These are just some of the high-risk factors to consider alongside running PEPs and Sanction checks. Different industries and transaction types will inherently have they own risks you should be aware of and as technology advances, new risks will present themselves.
To keep on top of the latest risks within your field we recommend you regularly check your supervisor’s website for their guidance and advice.