How money laundering is messing up the world of cryptocurrency

Money laundering is messing up the world of Cryptocurrency

How money laundering is messing up the world of cryptocurrency

How money laundering is messing up the world of cryptocurrency

Virtual assets. Cryptocurrency. Bitcoin. Litecoin. Ethereum. These concepts or words are in trend nowadays across the world. People are using these digital assets as investment vehicles or for the exchange of value. There is a sudden rise in its adoption. Parallelly, there is a rise in innovations in financial infrastructure for securing cryptocurrencies.
But, money launderers and financial criminals are not far behind. They have found ways to exploit this supposedly safer currency for money laundering activities. Though the volume of crypto laundering is low, it is the newest and trendiest venue for hiding illicit funds.
Crypto supporters believe that money laundering will not affect the cryptocurrency market much. This is because there is more transparency and accountability in the transactions. Also, laundering money in cryptocurrency is a more complex and riskier process than in other currencies.
But, we are witnessing the reality of cryptocurrency money laundering in the world. And, global regulators, countries, and the financial world need to do something about it. They need to understand the reasons, identify the red flags, and develop mechanisms to counter them. In this article let’s look at the cryptocurrency money laundering risks and ways and means to mitigate them.

Reasons for money laundering in cryptocurrency

People love cryptocurrencies because they make transactions faster, easier, and safer. But, certain demerits of it make them vulnerable to attacks by money launderers. The major reasons why cryptocurrencies are an easy target for financial crime are:

Total online nature of cryptocurrency

Technology developments are happening at a faster rate across the world. But, at a higher rate, criminals are exploiting the shortcomings of technology for the wrong use. The full online nature of cryptocurrencies makes them an easier target for laundering money.
These virtual assets are stored, transacted, and conducted online. Full online nature with the anonymity of the owner creates the possibility of laundering activities. Whether placing illicit funds or layering money with structured transactions or putting it back in the legal system, crypto is at high risk.
Money laundering is messing up the world of Cryptocurrency

Lack of regulation or government control

Generally, the financial infrastructure and systems of any country are highly regulated. Such a regulated environment ensures safe and secure transactions across the globe. But, that is not the case with the world of virtual assets.
There are little to no regulations in place for the cryptocurrency market. Some of the governments do not even encourage the use of cryptocurrency, let alone framing any legal protection rules. The absence of regulations is the key attraction for financial criminals to use it for layering of illicit funds.

Basic characteristics of cryptocurrencies

The best feature of cryptocurrencies is they are global and accepted everywhere. You can use these virtual assets for cross-border transactions. Also, these are more autonomous because no intermediaries are involved.
These features of cryptocurrencies make them more attractive to financial criminals. It is easier, faster, and convenient to process these virtual assets across borders. Also, the crypto transfer transaction from one owner to another is not centralized, leading to higher risks.

Ways in which crypto laundering happens

Placement of illegal money

Money launderers buy one cryptocurrency through one of the online cryptocurrency exchange houses. This exchange is the one with lesser or no compliance with AML regulations. The cash or cryptocurrency used for buying is the illegal money that enters the ecosystem. This is the first stage of money laundering – placement.

The layering of illegal money

The second stage of money laundering is layering. Financial criminals use a structured transaction to layer the illegal money. They enter into buying and selling transactions of cryptocurrency on crypto exchanges. They also transfer their virtual assets to other countries to move them away from the actual source.

Entry of illegal money as clean in the financial system

The third stage is integration where illegal funds enter the financial system as legal money. Herein, money launderers sell cryptocurrencies to other buyers through over-the-counter brokers.

Online gambling transactions

Generally, gambling sites accept cryptocurrencies as the mode of payment. They buy chips for gambling using illegal cryptocurrency. Then, they encash it using clean money.

Decentralized fund transfer networks

The cryptocurrency transfer network is decentralized. Generally, people transfer cryptos to other people in countries that have no or weak AML regulations. Next, they buy other goods or services with those illegal virtual assets to convert them into clean money.

Cryptocurrency tumbler

There exists cryptocurrency mixing services or tumbler that pools cryptocurrencies from many users. Then, the tumbler is split and distributed to each owner as per the proportion received. This is how crypto launderers put illegal money into the system, which may go to any participant of the tumbler.

Abuse of crypto ATMs

Many private companies have installed cryptocurrency ATMs in many countries. On these ATMs, you can buy cryptocurrency using cash, or debit/credit cards. But, these ATMs have no regulatory structure or legislation controlling them.
Because of all these red flags, AML watchdogs must keep a focused eye on the world of cryptocurrency. They must identify the various money laundering risks and how they affect these virtual assets. And, most importantly, they need to find ways to eliminate or lessen these risks.

Global regulations for the cryptocurrency world

The time has come for financial watchdogs to frame regulations to stop the misuse. Financial criminals are exploiting the high technology used in cryptocurrency to launder money. Similarly, the regulators must use technology to detect these activities as well. They must find out technological innovations that can prevent the occurrence of money laundering.
Many countries have implemented regulations for KYC and reporting suspicious activities. They have also come up with laws for conducting cryptocurrency transactions through key channels. Some countries are even considering digital versions of their national currency. All these ways will help economies to reduce the risks of money laundering.
FATF, the global AML agency, released updated guidance for virtual asset service providers (VASPs) in October 2021. The guidance was originally released in 2019. The updated version subjects VASPs to similar AML regulations as applicable to financial institutions. It covers areas such as peer-to-peer transactions, decentralized finance, stablecoins, and non-fungible tokens.

AML regulations for cryptocurrency in the UAE

The UAE market is quite active in regulating the money laundering activities in cryptocurrency. The country does not ban crypto assets. But, it has implemented measures to protect them from financial criminals
It has introduced the following regulations:

DIFC in October 2021

The Dubai International Financial Centre (DIFC) introduced a new regulatory framework for virtual assets in October 2021. These regulations, implemented by Dubai Financial Services Authority (DFSA), apply to investment tokens. Investment tokens may take the role of a security or derivative depending on the rights and duties of their holders.
These regulations allow individuals to carry out activities related to investment tokens in or from DIFC. But, such individuals must take approval from DFSA before carrying out these activities. DFSA also plans to introduce more laws for cryptocurrencies and utility tokens.

UAE in September 2021

In September 2021, UAE adopted a regulatory framework for the protection of cryptocurrencies from ML risks. The law was adopted in the meeting of the National Committee for Combating Money Laundering and Financing of Terrorism and Illegal Organizations (NAMLCFTC).
The framework is in regards to Recommendation No. 15 of FATF on AML/CFT. This recommendation talks about having strict regulations for virtual assets and VASPs. It requires a country to have rules for licensing, registration, monitoring, and compliance of VASPs.
The regulation developed initiatives to protect the infrastructure of virtual assets against ML risks. It also intends to adopt guidelines for the implementation of financial sanctions against criminals. The implementation responsibility lies on the Securities and Commodities Authority (SCA) and the Central Bank of UAE.

Onshore UAE in November 2020

In November 2020, the SCA released Decision No. 23 of 2020 concerning Crypto Assets Activities Regulation. This law governs the listing, offering, trading, and issuing of digital assets in or from onshore UAE. The law defines the types of virtual assets included and excluded in this definition.
The regulation applies to marketplaces, ICOs, custodian services, exchanges, and crowdfunding platforms. It also includes the financial services related to these crypto assets. It differentiates between commodity tokens and security tokens. It also makes provisions for approval requirements for both.
SCA must license these crypto assets providers. For obtaining a license, they must follow the country’s AML/CFT, data protection, and cyber security compliance requirements and laws. Relevant regulators must incorporate these providers only in onshore UAE, DIFC, or ADGM.
Besides, there are provisions on cloud computing, data residency, and employees for these crypto-assets providers. Crypto assets can be offered to qualified investors who must file documents with SCA for approval. In the case of non-qualified investors, they must take approval from SCA before being offered crypto assets.
SCA also stresses the point that it considers all potential investors highly risky. This means conducting enhanced due diligence for all customers becomes essential. This includes checking ultimate beneficial ownership, geographical risks, sanctions, and political exposures.

ADGM in 2018

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) provided regulations for crypto assets. It amended the Financial Services and Markets Regulations (FSMRs) to factor in the regulation on operations of crypto-asset businesses. Under this legislation, FSRA regards crypto assets as commodities.
Accordingly, operators in the market of virtual assets (intermediaries or custodians) must take approval from FSRA. Once they get the approval, they will operate as a financial service permission holder. So, anyone operating in these virtual assets must comply with the same regulations as applicable to securities, derivatives, and funds in ADGM.

Conclusion

Thus, we see that the UAE government has made many provisions for protecting crypto assets from money laundering. But, money launderers are at a higher pace of exploiting technology for illegal activities. This surpasses even the pace at which technological innovations are happening in the crypto space.
Nonetheless, the global and national regulators are making good progress with relevant protection laws. The key lies in identifying the red flags at the right time. It is also crucial to hire AML consultants who can help you with achieving AML compliance in the UAE.

About the Author

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Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

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AML and CFT requirements for trusts and company service providers in the UAE

AML and CFT requirements for trusts and company service providers in the UAE

AML and CFT requirements for trusts and company service providers in the UAE

AML and CFT requirements for trusts and company service providers in the UAE

Corporate service providers and trusts engage in certain activities that are vulnerable to money laundering and terrorism financing. Generally, they carry out these activities on behalf of their customers. Performance of these activities requires access to financial services sector companies, and this is how the risk of ML and FT arises.
The activities include:
  • Acting as an agent in the creation or establishment of legal persons
  • Acting as a director or secretary of a company, or as a partner in a legal person or arranging for another person to act as the above
  • Providing a registered office, work address, residence, correspondence address, or administrative address for a legal person or legal arrangement
  • Performing work (or equipping another person to act) as a trustee for a direct trust or performing a similar function in favor of another form of legal arrangement
  • Acting or arranging for another person to act as a nominee shareholder in favor of another person

During the performance of these activities, trusts and corporate service providers (TCSPs) use corporate vehicles. This is when money launderers and financers of terrorism activities facilitate the misuse of money. If TCSPs do not conduct proper due diligence of their clients, their ML/FT risk increases.

The risks may also increase when TCSPs in UAE collaborate with TCSPs in other countries where AML/CFT regulations are absent or less stringent. So, TCSPs must be careful of such suspicious transactions and associations. We will cover such suspicious transactions and relevant AML requirements for TCSPs in this article.

Suspicious transactions that raise a concern of ML/FT in TCSPs

ML/FT risks occur for TCSPs at both enterprise and customer levels. These risks may occur in the business relationships they have with their clients. Risks may also arise in the form of nature and type of customer or type of arrangement involved.
Some of the possible red flag indicators are as follows:
  • Business relationships with complex and opaque legal entities and arrangements
  • Clients hide their beneficial ownership details from TCSPs using nominee agreements
  • Clients who want to setup a business in UAE hide their business identities from TCSPs by giving wrong addresses or fake identity documents
  • Clients may bribe TCSPs to conduct unauthorized or illegal transactions through their accounts
  • Clients use the services of TCSPs to form complex company structures that are used for layering money laundering of illicit funds or hiding their criminal transactions
  • Clients with a base in tax havens or countries with a high number of terrorist organizations, high levels of corruption, subject to Sanctions, or weak AML/CFT regime
  • Clients that do not make or take direct payments to you but via a third party whose identity is unknown or the payment method is unusual of the client
  • Clients that have either a high number of cash transactions, a significant debt amount, are PEPs or have association with PEPs, unusually high level of assets, have funds that are disproportionate to their status or have frequently changed their organizational structure
  • Accounting of transactions that are not true to their actual nature, such as over or under-invoicing, multiple invoicing, false entries of goods and services, multiple trading, etc.
These are the possible transaction, client, and country risks that make TCSPs in UAE vulnerable to ML and FT. You, as a trust or company service provider, must be aware of these risks. Also, you must abide by the regulations of AML/CFT that we list down below.

AML regulation for trusts and company service providers in UAE

Decree-Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organizations is the primary law for AML in UAE. The Cabinet Decision No. 10 of 2019 concerning the Implementing Regulation of this Decree-Law applies this AML law UAE to trusts and company service providers as well. This means that the TCSPs in UAE must comply with every provision of this law and its related guidelines.
They must fulfill the obligations stated in these regulations to ensure an effective AML/CFT program internally. These measures will ensure their protection from exploitation by money launderers or financial criminals. These guidelines help TCSPs identify business relationships, transactions, and clients that make them vulnerable to ML and FT risks.
These regulations provide the guidelines for identifying suspicious transactions and reporting them. They provide the measures for customer due diligence and internal policies and procedures to keep TCSPs safe from ML/FT risks. We also get to know the governance framework that TCSPs must implement for AML compliance.
AML and CFT requirements for trusts and company service providers in the UAE

AML/CFT compliance requirements for trusts and company service providers in UAE

Trusts and company service providers must comply with the following requirements under the AML regulations of UAE:

Understand possible ML/FT risk exposure

It is highly crucial to understand your business’ exposure to ML/FT risks. For this, you must:
  • Adopt a risk-based approach to identify the risks and take relevant AML/CFT measures to manage them. Identification of these risks is also dependent on the role TCSPs play in the business relationship. They may act either as a representative, advisory and consulting role, or service providers to entities.
  • You must be careful of the client risks that include their nature of business, level of complexity, country of origin, or the country of operations in case of a foreign client.
  • You must identify any possibility of channel risk of the client. Specifically, this risk refers to the channel by which the customer is introduced and the preferred mode of communication in the relationship.
  • You must be vigilant of any unusual nature of financial arrangements or payments with the client, specifically if they are different from the standard practice in the market. Also, investigate the type, complexity, size, geographical sources, and transparency of financial transactions.
  • Identification of these different types of risks associated with a client must be documented. You can use it to allocate a risk rating to the client and develop AML/CFT measures accordingly.

Implement customer due diligence measures

Once you identify the risks, the next step is to implement relevant customer due diligence measures. CDD is essential for TCSPs since their clients are the most significant ML and FT risks source. You need to be doubly sure of your clients’ identities and activities to save yourself from money laundering.
You must have the following CDD measures implemented in your firm:
  • You must implement a regular process of screening existing and prospective customers against Sanction lists. You must check their background information to identify any association with PEPs or financial crimes. You must dig information about your client’s customers and third-party intermediaries facilitating the relationship between you two.
  • You must pay full attention to deriving any information about the beneficial owner of the client. It is also essential to verify this information through established independent sources. Money launderers conceal beneficial ownership by using third-party intermediaries, proxies, or some kind of legal arrangement.
  • You must ask pertinent questions to all your clients to determine their beneficial ownership. Then, you should confirm this information for consistency and reasonableness through reliable, independent sources. If questions persist, you can scrutinize them further to know their identity.
  • You must check the compatibility of the client’s profile with the kind of activities or transactions they engage in.
  • You must be alert to clients’ usage of opaque or complex legal arrangements to hide their identity or business activities.
  • You must assess any kind of influence of the client on how you carry out your duties and transactions.
  • It is also essential to check the authenticity of documents submitted by the client. These documents may relate to acquisition, transfer, financing, or any other transaction involving financial instruments.

Put in place internal policies, controls, and procedures

The trusts and company service providers must implement necessary measures to manage and mitigate the ML/FT risks. One of the key measures is the implementation of strong and effective internal policies, controls, and procedures. You must assess these policies for effectiveness and update them accordingly as and when the need arises.
These policies must relate to customer due diligence and suspicious transaction reporting. It must also include requirements for governance and record-keeping. Overall, such procedures must ensure management and mitigation of risks.

Report suspicious transactions to Financial Intelligence Unit (FIU)

You must report any kind of suspicious transactions to the Financial Intelligence Unit as and when you suspect it. You must add all the relevant information for the alleged transaction and keep it updated. You must be extra vigilant to identify any suspicion in any transaction or customer.
Some of the indicators for suspicious transactions include:
  • Unnecessary complex transactions whose purpose or beneficial owner is not known
  • Transactions that are inconsistent with the customer’s risk profiling
  • Large transactions (relatively large to a customer’s income or turnover)
  • Unexplained changes in the ownership of entities or unnecessary involvement of a third party
  • Transactions involving high-risk countries or third parties with no relationship with customers
  • Unclear or dubious sourcing of funds for a transaction
  • Refusal of customers to provide relevant information or proofs required for due diligence measures

Ongoing monitoring

Continuous monitoring of business relationships and client’s activities is a crucial part of AML and CFT measures. TCSPs must make efforts not to become victims of money laundering and any other financial crimes by their clients. Specifically when their clients are from high-risk countries or have a history of financial crimes or PEPs.
  • For this, you must periodically check information about your clients in public or commercial registries. This will help you detect any changes, transfers, or additional information that may add to their identity. You will also be able to notice any inconsistencies or unusual patterns in their information or activities.
  • You must monitor the transactions with clients until their closure or for the entire account life cycle. You need to be alert to any change in frequency, size, or amount of transaction that is unusual to the client.
  • Another critical point of consideration is checking the source of your payments from the clients. You must ensure that these payments are not from third-party accounts, foreign accounts, or unknown sources. Also, the method of payment must be consistent with the client’s history of payments and profile.

Conclusion

Thus, the TCSPs must understand the importance of these AML/CFT measures to fight against money laundering and terrorism financing. When forming new business relationships, you must be extra careful to implement due diligence measures to identify and manage risks. All these measures will ensure compliance with UAE’s AML/CFT measures and similar global regulations.
These measures will enable you to save yourself and your business from any fraudulent transaction or business relationship. This, in turn, helps you to minimize your exposure to money laundering and terrorism financing risks. These measures also help you to be in congruence with international AML/CFT regulations and best practices.

About the Author

Linkedin

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

AML requirements for lawyers, notaries, and legal professionals in the UAE

AML requirements for lawyers, notaries, and legal professionals in the UAE

AML requirements for lawyers, notaries, and legal professionals in the UAE

AML/CFT Requirements for lawyers, notaries, and legal professionals in the UAE

Earlier, lawyers, notaries, and other legal professionals were not required to comply with AML requirements. FATF recognized the legal profession as one of the gatekeepers for money laundering. However, later, there were concerns about using gatekeepers as financial intermediaries by money launderers to launder illicit money.
Lawyers, notaries, and other legal practitioners have high exposure to money laundering risks because of the nature of their jobs. Some of the reasons why the ML/FT risks are higher for legal professionals are:
  • Association with lawyers adds a touch of legitimacy to the transaction
  • Lawyers handle large amounts of money that are attractive to the money launderers
  • Financial criminals and money launderers abuse the client accounts of law firms
  • Law firms have a relaxed attitude towards identifying risks to their firm
  • Their activity of establishing trusts and companies has high chances of money laundering
Here, in this blog, we shall cover the various red flags of ML/FT that legal practitioners must be aware of. We shall also include the AML/CFT regulations and requirements that they must comply with.

Suspicious transactions in the legal profession that raise a concern for money laundering

Following are some of the suspicious transactions that raise a concern for money laundering or terrorism financing in the case of legal professionals:
  • The client conceals information about identity, beneficial owner, and source of funds in any transaction
  • The client communicates only through online means or uses an unknown or unrelated intermediary to communicate
  • The client provides false documents or no documents for the execution of transactions
  • The client has past criminal records in terrorism financing or money laundering, or any other financial crime
  • The client is a PEP or belongs to a high-risk country or with an office in a country under the Sanctions list of various countries or international organizations
  • The funding of the transaction is unusual and not aligned with the client’s profile or general nature of transactions
  • The transactions are carried out with no logical reason in terms of legal, commercial, taxation, or financial sense
  • The source of funds is either from an unrelated third party, or any of the high-risk countries, or a country with no logical connection with the client
  • The payments to and from are happening to multiple bank accounts or foreign bank accounts which are being used without any office or branch in that country
  • The transaction with the client is unusual in terms of inconsistency with the size, business type, value, activity of the client, frequency of dealing, or manner of execution
  • The client is unaware of the transaction’s size, nature, and purpose of engaging in it
  • There are frequent changes in the organizational structure of the client’s business to make it more complicated without any legitimate reason or regular changes in the management team
  • The client does not have the required proofs for previous transactions, operations of the company, or presence in different geographies
  • The client’s company has a presence in many countries, with which there is no logical association or no activities are being carried out from that location
To save the legal professionals from these suspicious transactions, the UAE government introduced AML/CFT regulations. Lawyers, notaries, and all types of legal practitioners must abide by these regulations to reduce money laundering risks.

AML regulation for the legal profession in UAE

Decree-Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organizations is the primary law for AML in UAE. The Cabinet Decision No. 10 of 2019 concerning the Implementing Regulation of this Decree-Law applies this law to all types of legal professionals and practitioners. So, you must comply with its requirements and provisions to fight money laundering and terrorism financing.
The Cabinet Decision provides a list of Designated Non-Financial Businesses and Professions (DNFBPs) that includes lawyers, notaries, and other legal practitioners. These define the procedures that lawyers must implement to identify and assess ML/FT risks. These require lawyers to implement CDD measures and sufficient internal controls and procedures.
The AML/CFT requirements also require legal professionals to execute indicators to identify and report suspicious transactions. All these measures will ensure the mitigation of risks of any involvement in illicit money transactions. These indicators will allow legal practitioners to carry out their normal activities safely and securely.
AML requirements for lawyers, notaries, and legal professionals in the UAE

AML Requirements for lawyers, notaries, and legal professionals in the UAE

Lawyers, notaries, and legal professionals must comply with the following requirements under the AML regulations of UAE:

Understand possible ML/FT risk exposure

Legal professionals must adopt a risk-based approach to understand their ML/FT risks and implement relevant measures. These risks will be different and unique for each firm or individual. The chances depend on the type of services, geographies of operation, and client base of the legal practitioner.
Legal practitioners engage in some activities in their business that are more vulnerable to ML/FT risks. It would be best if you were wary of ML/FT risks while carrying out these activities. These activities include:
  • Purchase and sale of real estate
  • Managing bank, savings, or securities accounts
  • Forming and managing legal arrangements
  • Managing client money, securities, or other assets
Lawyers must be specifically aware of the ways illicit money can enter their ordinary course of business. The entry or placement of illegal funds may be from the client’s side, transaction type, or geography. This understanding will enable the legal practitioner to be careful before taking up any work.
Before commencing any business relationship, you must conduct a risk assessment of the client. For this, you may consider national reports or sectoral reports undertaken by supervisory authorities. You must also keep a regular check on the client and their transactions to keep yourself alert of any possible ML/FT risks.
Legal professionals must check the location of the client, transaction, and source of funds. Check if the country is high-risk in terms of terrorism funding, criminal activities, subject to Sanctions, or a weak AML/CFT regime. In such cases, lawyers must do a thorough investigation before carrying out any transaction.
After identifying risks, conduct a risk assessment to prepare a client’s risk profile or transaction. Based on this assessment, you can develop and implement risk mitigation measures at both enterprise and client levels. Now, document these risk assessments.

Implement internal policies, procedures, and controls for risk management and mitigation

Now, focus on developing and implementing policies and procedures for the company’s operations. These policies, procedures, and internal controls must manage the risks that the business faces. The internal controls must be able to fight the money laundering risks that your operations face. These controls, policies, and procedures must be:
  • Applicable to all branches, subsidiaries, departments, and functions of the company
  • Reviewed and approved by the management
  • Reasonable, effective for the identified risks, and consistent with the results of their risk assessments

Customer due to diligence measures

Lawyers and notaries must implement simplified or enhanced due diligence measures based on customers’ low or high risks, respectively. Also, they must do continuous monitoring of their clients because the risk profile may change. The client’s risk may also vary based on the type of transaction, which may require an update on the due diligence measures.
You must carry out customer due diligence before starting any business relationship with a client. In this, you need to verify the client’s identity and get the necessary proofs of the same. You must understand the nature of their business activities and the purpose of having that business relationship.
You must conduct a background screening of your clients to know their beneficial owner/s. This background screening will enable you to have information on any particular sanctions or criminal history. Understanding the purpose and nature of the transaction or relationship, or arrangement will give you more confidence in the client.
Another essential consideration is monitoring the transactions and relationships with clients. This monitoring ensures consistency and alignment between the information you have about the client and the type of transactions. Any unusual nature of inconsistency will alert you at the right time to take relevant actions.
If the client is from a high-risk country or has an association with PEPs, you must carry out enhanced due diligence. This EDD includes verifying client information from many legitimate sources. You must investigate for understanding their source of wealth and control structure, including voting rights.
With all this information about the client, prepare a risk profile and allocate a risk rating. At timely intervals, review and update this information in proportion to their risk rating. Legal professionals must document and save this information for future reference and updating.

Report suspicious transactions to Financial Intelligence Unit (FIU)

Lawyers, notaries, and all legal professionals and practitioners must report any suspicious transaction to FIU. They must provide all relevant supporting information to the authority for further investigation. Adequate internal policies related to this best practice will help legal professionals to comply with it. Some of the indicators for suspicious transactions include:
  • Unnecessary complex transactions whose purpose or beneficial owner is not known
  • Transactions that are inconsistent with the customer’s risk profiling
  • Large transactions (relatively large to a customer’s income or turnover)
  • Unexplained changes in the ownership of entities or unnecessary involvement of a third party
  • Transactions involving high-risk countries or third parties with no relationship with customers
  • Unclear or dubious sourcing of funds for a transaction
  • Refusal of customers to provide relevant information or proofs required for due diligence measures

Devise and implement a sound governance structure

You must formulate a governance structure to ensure your business complies with AML/CFT requirements. For this, you must appoint a fit and capable compliance officer. He/she must be capable of handling ML/FT reporting, AML/CFT program management, and training and development of the team.
You must keep your employee up-to-date on AML/CFT laws, policies, and norms. You must design a training manual and impart it to relevant team members. You must also assess the effectiveness of these training programs to ensure the correct knowledge development.
A well-functioning governance structure is tested by an independent audit frequently. This auditing procedure will check the risk profile of products and services, customers, and target markets. If it is not possible for you to keep an internal audit team, then you can hire a third-party auditing team.

Conclusion

Legal professionals carry out certain activities that have higher vulnerability to ML/FT risks. They are at increased risk, whether they give tax advice, facilitate property transactions, represent clients in disputes and mediations, or act as intermediaries. Financial criminals take advantage of this vast range of services to engage in money laundering and terrorism financing.
So, they need to be careful about their entity’s risk exposure and employ the above requirements. UAE has categorized them in the DNFBPs list and expects regular compliance with the AML/CFT law provisions. Such compliance with the national AML/CFT requirements will enable them to keep themselves safe from money laundering risks.
To plan and implement any of these measures, you can also take the support of AML consultants in the UAE. A professional AML consultant will be better equipped to help legal professionals and practitioners with suitable, relevant measures against money laundering. The consultant will ensure that industry-specific steps are taken in the fight against money laundering and terrorism financing.

About the Author

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Jyoti Maheshwari

CAMS, ACA

Jyoti has over 9+ years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.

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A detailed guide of AML compliance requirements for auditors and accountants in the UAE

A detailed guide of AML compliance requirements for auditors and accountants in the UAE

A detailed guide of AML compliance requirements for auditors and accountants in the UAE

A detailed guide of AML compliance requirements for auditors and accountants in the UAE

The profession of auditors and accountants is not an easy thing. They have access to the financial records and activities of their clients. This accessibility to financial records increases their vulnerability to money laundering. The involvement of their clients in money laundering activities also increases their exposure.
So, they must be extra vigilant to the risks of money laundering and terrorism financing. In this article, we list down the red flags of money laundering that auditors and accountants must be aware of. We also mention the important AML requirements that they must fulfil to remain in compliance with UAE’s AML regulations.

Key aspects that make auditors and accountants vulnerable to money laundering and financial crime

Some of aspects of the profession of auditors and accountants make them vulnerable to financial crimes. They must be aware of these factors to save themselves from becoming a victim of money laundering and terrorism financing. These factors include:
  • Payments from clients are the proceeds from a money laundering or financial crime incident.
  • The financials of a client are unusual in terms of source, complexity level, type of business activity, geographical origins, etc.
  • The client hides the identity details of the ultimate beneficial owner (UBO), senior managers, signatories, legal representatives, etc. to launder the proceeds of criminal activities.
  • The client may use shell companies or complex legal structures to layer the laundered money from illicit sources and bring the money back into the legal financial system of the country.
  • The client conceals the sourcing of funds of the company and the auditor and/or accountant, being responsible for the financial management of this company, becomes a part of money laundering crime.
A detailed guide of AML compliance requirements for auditors and accountants in the UAE
  • An accountant or auditor may unknowingly be involved in laundering the proceeds of a fraud activity of a client through shell companies.
  • The client hides any kind of association with Politically Exposed Persons (PEPs) concerning some kind of controlling stake
  • The client tries to influence the accuracy or transparency of the auditor’s or accountant’s work through bribery or any other ways

AML regulation for auditors and accountants in UAE

Decree-Law No. 20 of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organizations is the primary law for AML in UAE. The Cabinet Decision No. 10 of 2019 concerning the Implementing Regulation of this Decree-Law makes accountants and auditors subject to the AML law. This means that the AML law applies to all auditors and accountants in UAE.
The Cabinet Decision provides a list of Designated Non-Financial Businesses and Professions (DNFBPs). AML regulations apply to these DNFBPs that include auditors and accountants. Given the nature of their profession and the content of their duties, accountants and auditors must comply with AML requirements as stated in the regulations for DNFBPs.
Their exposure to money laundering and financial crime activities is high because of the nature of their profession. They are responsible for financial management, examination of financial records and accounts, and assessment of governance structure and control procedures. These activities are the reason why illicit organizations or individuals exploit or bribe auditors and accountants to launder money.
The Ministry of Economy of UAE provides a Supplemental Guidance for auditors and accountants. It mentions in detail the AML/CFT obligations for both of these professions. These obligations include risk identification, customer due diligence, identification and reporting of suspicious transactions, and internal control and governance frameworks.

AML/CFT compliance requirements for auditors and accountants in UAE

Auditors and accountants must comply with the following requirements under the AML regulations of UAE:

Understand possible ML/FT risk exposure

You must have a detailed understanding of how your accounting and auditing business can be exposed to ML and FT risks. This requires an assessment at both the enterprise level and customer level. For this:
  • You must adopt a risk-based approach to identify risks in your business transactions. These risks may be of different types based on business nature, type of service, the operational environment, and other factors. Accordingly, you must adopt risk mitigation measures.
  • You must be aware of the source of ML/FT risks and the phase in which the money laundering risk is high. You must know the client who is exposing you to such money laundering risks.
  • You must know the transactions of clients that are making you vulnerable to financial crimes – valuation of certain types of assets or liabilities, approval of changes in a company’s capital structure, approval of company restructuring option, use of reserve account, approval of write-off of uncollected debt, payments from clients that are proceeds of financial crimes, or any other.
  • You must consider different types of risks to your business due to money laundering. These risks include customer risk, geographic risk, transaction risk, channel risk, or any other. You must be able to identify each type and strategize for their elimination.
  • You must conduct a risk assessment to understand the impact of these risks on your business. You must also analyze it in depth, document it, and update it as and when the changes occur.
You must conduct a similar assessment of ML/FT risks on your client’s business. You must identify potential risks, adopt a risk-based approach, and document the methodologies adopted. Also, based on the client’s type and nature of business, you must appoint Compliance Officer and relevant team members to facilitate compliance with AML regulations.

Put in place internal policies, controls, and procedures

Auditors and accountants must implement necessary measures to manage and mitigate the ML/FT risks. One of the key measures is the implementation of strong and effective internal policies, controls, and procedures. You must assess these policies for effectiveness and update them accordingly as and when the need arises.
These policies must relate to customer due diligence and suspicious transaction reporting. It must also include requirements for governance and record-keeping. Overall, such procedures must ensure management and mitigation of risks.
Auditors and accountants must apply the same for their client’s businesses as well. They must check whether the client has implemented relevant internal policies and control measures related to AML/CFT. They must ensure that these policies and procedures are in alignment with the risk appetite of the client.

Implement customer due diligence measures

Auditors and accountants must apply the necessary customer due diligence (CDD) measures based on the category and profiling of the ML/FT risk. If there is any change in the risk category, they must be ready to update the due diligence measures as well. You must apply these measures during or before the transaction happens or the business relationship starts.
You need to apply similar CDD measures for your clients as well. These due diligence measures include the following:
  • You must screen all your existing and prospective clients against Sanctions Lists. You must check information about beneficial owners, management control, or any associations with financial criminals or PEPs.
  • You must conduct a risk-based identification and verification of the true beneficial owner of your clients. For this, you must test your clients’ CDD measures to check the authenticity of their business relationships and counterparties.
  • After obtaining all this information from the clients, you must check its consistency and authenticity through reliable independent sources. You can use sources such as bank references, public registries, tax identification numbers, and any other relevant registries for information on assets.
  • You must check for use of any fraudulent or forged documents in transactions with clients. While working as an auditor or accountant, you must check the legitimacy of the client’s corporate documents.

Report suspicious transactions to Financial Intelligence Unit (FIU)

Auditors and accountants must report any kind of suspicious transactions to the Financial Intelligence Unit as and when they suspect it. You must add all the relevant information for the suspected transaction and keep it updated. You must be extra vigilant to identify any suspicion in any transaction or customer.
Some of the indicators for suspicious transactions in their own business or client’s business include:
  • Unnecessary complex transactions whose purpose or beneficial owner is not known
  • Transactions that are inconsistent with the customer’s risk profiling
  • Large transactions (relatively large to a customer’s income or turnover) that are unusual for that client
  • Large deposits or withdrawals inconsistent with customer’s business nature
  • Unexplained changes in the ownership of entities or unnecessary involvement of a third party
  • Transactions involving high-risk countries or third parties with no relationship with customers
  • Unclear or dubious sourcing of funds for a transaction
  • Refusal of customers to provide relevant information or proofs required for due diligence measures

Ongoing monitoring of their and clients’ activities

Auditors and accountants must be vigilant of their clients’ activities and transactions. They must protect their business transactions and their clients’ from possible misuse by terrorists or criminals. So, you must check the client’s business and transactions often to be sure of no involvement of financial crime.
You must do continuous monitoring of the following activities of your client’s business:
  • You must check for any unexpected changes, amendments, or transfers that are unusual to your client’s routine transactions.
  • You must keep a check on any changes in ownership, capital contributions, dividend payments, powers of attorney, or any other transaction that changes the control of the client’s business.
  • You must monitor any unusual transaction, which does not align with the client’s expected business activity. This may include funds transfers or financial transactions, or any other transaction that does not give the correct source of financing.
  • An important consideration for auditors and accountants must be to check the source of the payments received from clients. You must ensure that the payments come from known sources and not from any unknown foreign accounts or third parties. The mode of payment must be such that it does not hide the origin of funds and must be the usual mode used by the client.

Conclusion

Auditors must understand the vulnerability of their professional activities to money laundering risks. With that understanding, they must implement the above measures to comply with UAE’s AML/CFT regulations. These measures ensure that they themselves and their clients are not exposed to money laundering or terrorism financing activities.
To plan and implement any of these measures, you can also take the support of AML consultants in the UAE. A professional, AML consultant will be better equipped to help accountants and auditors with the right, relevant measures against money laundering. The consultant will ensure that industry-specific steps are taken in the fight against money laundering and terrorism financing.

About the Author

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Jyoti Maheshwari

CAMS, ACA

Jyoti has over 9+ years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.

Reach Out to Jyoti

Terrorism Financing and CFT measures in Singapore

Terrorism Financing and CFT measures in Singapore

Terrorism Financing and CFT measures in Singapore

What is terrorism financing or terrorist financing?

Terrorism Financing refers to illicit money being laundered and used to finance terrorist activities. Terrorism is a global issue, and money laundering facilitates the funding of terrorist organizations. Terrorist uses this laundered money to purchase arms and ammunition, provide training and propagate terrorism.
To cease the funding of terrorist activities, various governments have adopted strict measures primarily aimed at preventing money laundering that would further prevent the financing of terrorist activities. Thus, regulations for anti-money laundering and combating terrorism financing go hand-in-hand. With AML rules and regulations, governments make efforts to stop the financial aid offered to terrorists by identifying money laundering activities.
Interestingly, money used for financing terrorist activities may not always come from illegitimate sources. Criminals also get financial assistance from legitimate/legally earned money such as salaries, profits, and business revenues. Money launderers use shell companies and charitable organizations to route legitimate money into terrorist groups. Such money from legal and financial institutions is run through various channels and later used for funding terrorist activities.

Why is it necessary to counter or combat Terrorism Financing?

Terrorism is a massive danger to society, countries, and the world. The aftermath of terrorist attacks impacts generations to come. Not only does it cause loss of life and limb, but it also destroys the economic fabric of the country where the attacks take place.
It creates unrest in the public and political trouble that poses a danger to the safety and security of the nation. So, the government should prevent terrorist activities and seize funds that go into the finance of such crimes.
Terrorism originates and expands its base with a regular supply of funds. It is used in large amounts to plan and execute terrorist attacks worldwide. If the terrorists cannot source funds, it will be difficult to materialize their anti-social ideas and, thus, curb this heinous crime.
Terrorist activities require massive funding, but if the government and the relevant agencies can identify and prevent money laundering activities, the same will directly impact the prevention of terrorism.
The Singapore government has taken several measures to combat money laundering and prevent the financing of terrorism.
Terrorism Financing and CFT measures in Singapore

Measures adopted by Singapore to counter financing of terrorism

Singapore is committed to combating money laundering and terrorism financing.
In 2020, Singapore conducted the Terrorism Financing National Risk Assessment (TF NRA) 2020. Basis the findings and observations of this assessment, the Singapore authorities have formulated the National Strategy for Countering the Financing of Terrorism (CFT). The National CFT Strategy shall drive Singapore’s national methodology to fight the TF risks and help deploy the measures necessary to detect, investigate, and prevent terrorism financing.
With this National CFT Strategy, Singapore authorities strive to improve the collaboration among different enforcement agencies working towards fighting terrorist financing.
The Singapore authorities have enacted the following regulations targeted at combating financial crimes in the country
  • CDSA (“Corruption, Drug Trafficking, and other Serious Crimes (Confiscation of Benefits) Act”)
  • Terrorism (Suppression of Financing) Act,
  • Precious Stones and Precious Metals (Prevention of Money Laundering and Terrorism Financing) Act.
Further, the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department are working closely toward identifying, investigating, and preventing money laundering and terrorism funding cases.
Singapore’s AML/CFT measures aim to prevent criminals from gaining access to the proceeds of crimes generated in Singapore or introduced in Singapore through any other country.
The AML/CFT regulations obligate the designated entities to deploy strict AML/CFT policies and controls in their organization proportionate to their business risk assessment. Such AML/CFT framework shall be implemented to detect, deter and prevent money laundering and terrorism financing. This policy shall include effective measures to identify the customers and clients and report suspicious activities at the earliest.

About the Author

Linkedin

Jyoti Maheshwari

CAMS, ACA

Jyoti has over 9+ years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.

Reach Out to Jyoti

AML Compliance Requirements for Jewellers in UAE​

AML Compliance Requirements for Jewellers in UAE​

AML Compliance Requirements for Jewellers in UAE​

AML Compliance Requirements for Jewellers in UAE​

The industry of gems and jewellery, and precious metals and stones is a key contributor to the UAE’s economy. But, it is also an attractive point for illicit activities and financial crime. So, jewellers must protect themselves from money laundering and terrorism financing activities.
In this article, we focus on the factors that make the jewellery industry vulnerable to money laundering activities. We will list the regulations that govern AML compliance in UAE. We will also enlist the AML requirements that jewellers have to fulfill to comply with AML regulations.

Factors contributing to the higher vulnerability of jewellery industry to financial crime

Some characteristics of the jewellery industry make it vulnerable to exploitation by criminals. Unless jewellers are aware of these factors, their efforts against money laundering will not be successful. Following are these factors:
There are three major business structures at Dubai Internet City. They are-
  • The jewellery industry’s products have high intrinsic value, which may increase over time.
  • It is easy to physically transport the jewellery pieces, gems, and precious metals from one place to another.
  • Money launderers can use jewellery in two ways in money laundering activities. Firstly, they can use it as the source to generate illegitimate money. They can also use it as the vehicle to launder the proceeds of criminal activities.
  • Money launderers can use jewellery directly as a form of currency. They can also use it indirectly by exchanging its value with other financial products.
  • It is difficult to track the movement of jewellery items and precious metals since it requires the capability and capacity of laboratory techniques
  • Cash-based markets exist for certain types of gems or precious metals. These are often decentralized and well-established. It is easy to trade or exchange precious stones through these cash-based markets by remaining anonymous.
  • There is a low level of involvement of the formal financial system in jewellery transactions.
AML Compliance Requirements for Jewellers in UAE​
  • The market for jewellery and precious metals and stones is global in nature. So, many cross-border and multi-jurisdictional situations arise in jewellery transactions. Criminals find it easier to take advantage of such situations to engage in financial crime.
  • There are several small and medium-sized companies in this industry. Generally, their awareness of ML/FT risks and due diligence requirements is low. This increases their exposure to money laundering and terrorism financing activities.
  • There is a common cultural practice of buying and selling precious metals and stones in some regions. This leads to difficulty in identifying which transaction is legitimate and which one is illicit.
  • Different regulatory regimes in different countries affect global transactions. Some countries have a strict regime while some have few to no restrictions. Also, some jurisdictions do not pay heed to supervision and monitoring of every transaction.
All the above factors make the jewellery industry an attractive means of money laundering activities. So, the UAE government introduced relevant regulations to combat such activities. These regulations run parallel to the global AML/CFT regulations.

AML regulation for jewellers in UAE

Decree-Law No. 20 of 2018on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organizations is the primary law for AML in UAE. The Cabinet Decision No. 10 of 2019 concerning the Implementing Regulation of this Decree-Law makes dealers in precious metals and stones (DPMS) subject to the AML law. This means that the AML law applies to jewellers and dealers in precious metals, gems, and stones.
The Cabinet Decision provides a list of Designated Non-Financial Businesses and Professions (DNFBPs). AML regulations apply to these DNFBPs that include dealers in precious stones and metals and jewellers. If they engage in transactions valuing not less than AED55,000.0, AML regulations apply to them. Herein, a transaction can include any single transaction or several interrelated transactions.
The Guidelines for Designated Non-Financial Businesses and Professions mentions the Customer Due Diligence (CDD) obligations for jewellers. But, they must also be aware of the ways to identify suspicious transactions followed by reporting. In the next section, we describe the compliance requirements for jewellers in UAE.

AML compliance requirements for jewellers in UAE

Jewellers must comply with the following requirements under the AML regulations of UAE:

AML Policy Documentation

Jewellers need to document their AML Policy and prepare an AML Policy Manual describing the procedures and controls embedded to counter the risk of money laundering.
The jewellers must implement necessary measures to manage and mitigate the ML/FT risks. One of the key measures is the implementation of strong and effective internal policies, controls, and procedures. You must assess these policies for effectiveness and update them accordingly as and when the need arises.
The AML Policy Manual should cover the following areas:
  • The identification and assessment of ML/FT risks
  • Customer due diligence (CDD, EDD, SDD), including its review and updating, and reliance on third parties in regard to it
  • Customer and transaction monitoring and the reporting of suspicious transactions
  • AML/CFT governance, including compliance staffing and training, senior management responsibilities, and the independent auditing of risk mitigation measures
  • Record-keeping requirements

Understand possible ML/FT Risk Exposure

You must have a detailed understanding of how your jewellery business can be exposed to ML and FT risks. For this:
  • You must adopt a risk-based approach to identify risks in your business transactions. These risks may be of different types based on business nature, type of service, the operational environment, and other factors. Accordingly, you must adopt risk mitigation measures.
  • You must be aware of the source of ML/FT risks and the phase in which the money laundering risk is high.
  • You must know the latest ML/FT trends and how money is getting laundered in the jewellery industry.
  • You must consider different types of risks to your business due to money laundering. These risks include customer risk, geographic risk, transaction risk, channel risk, or any other. You must be able to identify each type and strategize for their elimination.
  • You must conduct a risk assessment to understand the impact of these risks on your business. You must also analyze it in depth, document it, and update it as and when the changes occur.

Implement customer due diligence measures

Jewellers must apply the necessary customer due diligence (CDD) measures based on the category and profiling of the ML/FT risk. If there is any change in the risk category, jewellers must be ready to update the due diligence measures as well. You must apply these measures during or before the transaction happens or the business relationship starts.
These due diligence measures include the following:
  • You need to identify the customers, beneficial owners, beneficiaries, or controlling persons. You must collect the necessary documents and relevant information that prove your identity.
  • You must understand the nature of your business’s relationship with that customer or business associate. Also, you must identify the key purpose of having this relationship.
  • You must employ policies to monitor and supervise the business relationship. If you see any sudden change in the transaction or behavior of the customer, it is a red flag.
  • You must keep updating the customer risk profiles to avoid any errors or missing data.
  • In the case of customers from high-risk countries or politically exposed persons, you must execute enhanced due diligence measures.

Report suspicious transactions to Financial Intelligence Unit (FIU)

Jewellers must report any kind of suspicious transactions to the Financial Intelligence Unit as and when they suspect it. You must add all the relevant information for the suspected transaction and keep it updated. You must be extra vigilant to identify any suspicion in any transaction or customer.
Some of the indicators for suspicious transactions include:
  • Unnecessary complex transactions whose purpose or beneficial owner is not known
  • Transactions that are inconsistent with the customer’s risk profiling
  • Large transactions (relatively large to a customer’s income or turnover)
  • Large deposits or withdrawals inconsistent with customer’s business nature
  • Unexplained changes in the ownership of entities or unnecessary involvement of a third party
  • Transactions involving high-risk countries or third parties with no relationship with customers
  • Unclear or dubious sourcing of funds for a transaction
  • Refusal of customers to provide relevant information or proofs required for due diligence measures

Devise and implement a sound governance structure

You must formulate a governance structure to ensure your business complies with AML/CFT requirements. For this, you must appoint a fit and capable compliance officer. He/she must be capable of handling Ml/FT reporting, AML/CFT program management, and training and development of the team.
You must keep your employee up-to-date on AML/CFT laws, policies, and norms. You must design a training manual and impart it to relevant team members. You must also assess the effectiveness of these training programs to ensure the right knowledge development.
A well-functioning governance structure is tested by an independent audit frequently. This auditing procedure will check the risk profile of products and services, customers, and target markets. If it is not possible for you to keep an internal audit team, then you can hire a third-party auditing team.

Keep and maintain records

Jewellers are required to keep records of all their financial transactions. You must also keep all documents, data, and records of your ML/FT risk assessment and implemented measures. You must submit these records to the relevant authorities as and when requested.
You must maintain the records for the following:
  • Records of all domestic and international financial transactions for at least five years, including customer correspondence, customer payment proofs, agreements, and analytical data of customers’ financial transactions
  • Records of customer accounts, customer correspondence, personal identification proofs, KYC and CDD forms, customer risk assessment, and classification records
  • Corporate documents and information on beneficial owners, legal shareholders, and senior managers
  • Records of ongoing monitoring of business relationships such as transaction reviews, customer correspondence, CDD profiles and documents, and transaction handling decisions
  • Records of suspicious transaction reports, related correspondence, competent authority’s investigation files, and notes by FIU on the feedback for suspicious transaction reports

Conclusion

These are the various measures that jewellers must implement to comply with AML regulations. These measures will enable them to save themselves from any fraudulent transaction or business relationship. This, in turn, helps them to minimize their exposure to money laundering and terrorism financing risks.
To plan and implement any of these measures, they can also take the support of AML consultants in the UAE. A professional, AML consultant will be better equipped to help jewellers with the right, relevant measures against money laundering. The consultant will ensure that industry-specific steps are taken in the fight against money laundering and terrorism financing.

About the Author

Linkedin

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

Enhanced Money Laundering Risks In The Real Estate Sector

Enhanced Money Laundering Risks In The Real Estate Sector

Enhanced Money Laundering Risks In The Real Estate Sector

The Role of Real Estate Agents in Money Laundering (ML)

Money laundering is a crime that has been in the business environment for a very long time now. However, the scope and intensity of the crime have grown dramatically in the last few years. Needless to say, it is expected to grow more disastrously in the coming years. In this article, let’s look at Money-Laundering Risks in the Real Estate Sector.

Dealing with Money Laundering Risks in real-estate business

Generally, the ML risk of a real estate agent is substantially mitigated with the help of the majority of real estate transactions, which involve both banks and non-bank mortgage companies.
However, whenever an unusual transaction happens or a situation where the client belongs to a high-risk profile, the chances of encountering a possible money laundering scheme elevate exponentially. Therefore, you must be prepared to take mitigative actions.
Being a real estate professional, you must possess the knowledge of how to undertake real estate transactions and the ability to identify, evaluate, and mitigate the risks involved with money laundering.
In addition, it requires agents and brokers to be aware of how real estate transactions might be used in illegal financing schemes, along with what steps should be taken in order to detect and deter such activities.

Types of risk in real-estate business

As a real estate agent or broker, If you are familiar with the signs of money laundering activities in the market of real estate, then it can help you in.
  • Identifying the potential money laundering activities
  • Take required preventive steps in order to mitigate the risks involved with money laundering
  • If required, communicate with the dedicated authorities to help deter and mitigate the potential use of real estate in money laundering schemes.
Financial experts and law enforcement have identified a few warning signs about money laundering related to real estate. Therefore, in order to minimize and mitigate that risk, several jurisdictions have issued a few guidelines.
Every broker or a real estate agent should be aware of the primary characteristics of a real estate transaction that may indicate illegal financial activities. Being a real estate broker or an agent, you are well versed in the fundamental processes of your industry.
Hence, it becomes effortless for you to identify any unusual or suspicious activities. Regulators, The International Community, and Law Enforcement have identified a few money laundering activities or risk factors. These risk factors or red flags can be categorized into three groups: transaction risk, geographic location, and the nature or profile of the customer.
Enhanced Money Laundering Risks In The Real Estate Sector

1. Geographic Risk

The geographic risk might come into the picture because the customers or the source of customer’s funds are geographically located in a jurisdiction that has a weak AML compliance regime, supports or gathers funds for the terrorist groups, or does belong to high-risk individuals under the influence of political powers, leaders, or parties.

2. Customer Risk

Sometimes the risks are associated with the customer’s point of view as well. These might include the following.
  • The difference between the property and the buyer’s buying capacity
  • Unusual involvement of third parties
  • Titling a residential plot in the name of the third party like a friend, business associate, lawyer, or a relative
  • High-ranking political foreign officials or the members of their family are parties to a real estate transaction

3. Transactional Risks

Here are a few transactional risks in the real estate sector.
  • Over or undervalued properties
  • Use of hefty and unexplained amount of money
  • Buying property with inconsistent or unexplained income or occupation
  • Immediate resale of the purchased property
  • Excessive speed of transactions without a valid explanation
  • Unusual sources of funding
  • Buying a property without having any interest in the core characteristics of a property
  • Any other activity that might account for suspicion

Actions Need To Be Taken In Order To Mitigate The Risk in Real-Estate Sector

There could be only a single risk factor or even multiple risk factors that can be present in the ecosystem. The role of a real estate agent is to be aware of such risk factors and practice sound judgment on the basis of their knowledge of the real estate industry. One should also be prepared to take necessary mitigative actions when the red flags are thoroughly identified. Here are a few actions that you should take in order to mitigate the AML risks in the real estate sector.

1. Know Your Customer (KYC) And Customer Due Diligence

Knowing your customer is one of the most critical elements of the various roles of a real estate agent or a broker. It can help you in identifying and combating any sort of money laundering activities.
Assessing the risks associated with Money Laundering is one of the most traditional ways for real estate agents or brokers in order to lay a foundation of trust in their respective clients.
In situations where the red flags are identified, the real estate agent should seek help from Customer Due Diligence (CDD) protocols. The process of CDD includes the following aspects.
  • Ask for additional information and documents supporting that information, like an Emirates ID, driver’s license, or a passport. It is essential for you to ask for the papers that clearly and legally establish the customer’s true identity.
  • If there is the involvement of a legal entity, ask for additional information that clearly states the ownership and its rights. It is commonly referred to as beneficial ownership information.
  • Ask for additional information that can help you understand the circumstances and the nature of the client’s business.
In addition to that, depending upon the company’s size, it would be ideal for the agent to notify and discuss the scenario of the high-risk clients with the senior-level management. This is important in order to identify the red flags and monitor the relationship between them if found any.

2. Report The Suspicious Activities

The real estate agent should report in case if he or she encounters any type of suspicious activity. For example, these suspicious activities in the real estate industry might include the following.
  • When the price is either over or under-quoted for a particular property as per the market valuations.
  • If the payments are made with the bank accounts from the high-risk associate geographies or politically exposed personnel (PEPs).
  • Unusual transactions or the history of accounts/ account holders.

About the Author

Linkedin

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

Reach Out to Pathik

The Role of Technology In Anti-Money Laundering Compliance

Role of Technology In Anti-Money Laundering Compliance

The Role of Technology In Anti-Money Laundering Compliance

The Role of Technology In Anti-Money Laundering Compliance

This article revolves around the role of technology in anti-money laundering compliance and KYC processes. So let us dive deep into it so that you can also start leveraging the power of technology to reduce the risk of any sort of fraudulent activities.
In today’s modern world, the state of technology is constantly changing and undoubtedly for good. You name any industry that can survive without modern technological suits, and we bet you would not be able to name anyone.
It is simply because all the industries are now focusing on minimizing the manual efforts and incorporating automation, artificial intelligence into their systems.
Financial industry or institutions are more prone to risks, and hence, giving space to manual steps calls for some unwanted circumstances that might result in irreversible qualitative as well as quantitative damages.
Role of Technology In Anti-Money Laundering Compliance

How Does Technology Ease AML And KYC Processes?

Anti-money laundering or AML includes regulations and laws that are aimed to prevent any sort of financial crimes or manipulation. Every country has a differentiated and clearly established set of AML regulations or rules.
While knowing your customer or KYC is just a part or action of the steps undertaken in order to prevent any sort of money laundering activities.
KYC includes various practices that recognize the customer or a business enterprise at the time of the first transaction or practically, even before that.
In addition, it requires agents and brokers to be aware of how real estate transactions might be used in illegal financing schemes, along with what steps should be taken in order to detect and deter such activities.
It is a procedure in which financial institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs) gather information related to their probable customers. This information includes name, name of the business, address, age, legal identity card, nationality, and stuff like that.
All business enterprises that are prone to money laundering activities should have anti-money laundering compliance strategies. If they do not have AML compliance strategies well defined, they might invite some penalties from the regulators.
However, complying with all such methods might not be easy at first because it incorporates a lot of tedious paperwork and asks for your undivided attention to understand the gist and make all your staff aware of the same in the most effective and efficient manner.

In addition to that, these strategies are updated at regular intervals, and this is the point where the need and importance of technological aid come into the picture. Technological evolution supported by artificial intelligence, machine learning, and big data can exponentially reduce the risk of money-laundering.

How Artificial Intelligence, Big Data, and Machine Learning Can Help You counter Money-Laundering Risks?

Artificial Intelligence, Big Data, and Machine Learning have made tackling financial crime both cheaper and faster. It also has allowed companies to adopt a much more efficient and more innovative approach.
Financial institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs) are now replacing the good old black, and white rules approach with something more focused on the technology front, holistic, and flexible program. These programs will be able to detect any sort of abnormalities in a highly efficient way.
Manual-oriented processes are typically slow. But with the help of automation and (AI) artificial intelligence, these processes have become much quicker and more efficient. Also, the scope of manual error or manipulation is reduced.
In addition to that, financial institutions usually have to deal with loads of data. Now, suppose you consider humans to filter, analyze, and conclude a solution from that voluminous data. In that case, it will take an eternity and still won’t guarantee a hundred percent accuracy and reliability.
If the same process is being carried out by fast, efficient, and accurate software, you will be able to save money and valuable time.
Artificial intelligence can identify patterns of transactions, anomalies & behavior rapidly, allowing the AML compliance professionals to invest their time better analyzing the results, collaborating the findings with other financial institutions, and investigating root causes. and valuable time.
The use of technology is not restricted merely to transaction monitoring. Big data has helped business enterprises move away from simply tracking financial crime at the transaction level but enabling connections to detect the pattern in the voluminous data.
This allows the business enterprise to trace the sources of illegal transactions and activities more effortlessly and effectively.

Solutions That Ensure Anti-money Laundering And Know Your Customer Compliance

AML Solutions that are supported by artificial intelligence enable you to easily comply with all the laws and regulations along with the scope of minimizing your financial risk.
Here are a few solutions that will allow you to comply with all AML and KYC processes and strategies.

1-Transaction Monitoring

Every transaction that your business encounters on a daily basis involves some sort or level of risk. Hence, transaction monitoring software is the essential requirement for financial institutions under anti-money laundering obligations.
Business enterprises can create their own set of rules without having any prior coding knowledge in order to detect suspicious and high-risk economic activities automatically.

2- Anti-Money Laundering Name Screening

AML name screening software can help you effectively meet all of the basic requirements of sanctions, PEP scanning services, risk-based approach, and can also meet local and global AML compliance policies and keep your business safe from any negatives or risks that may arise as the transactional course continues to grow.
This way, you can also avoid regulatory penalties. With the help of AML name screening, you can even perform Customer Due Diligence or CDD and Know Your Customer or KYC transactions in accordance with the stated obligations.

3- Anti-Money Laundering Transaction Screening

With the help of AML transactional screening software, banks or DNFBPs can check the details of the sender as well as receiver without delay. Enterprises can exponentially reduce the risk of financial crime by tracking the sender and receiver of the transactions with the help of this software.
In addition to that, companies can even create their individual search options along with advanced search parameters. The data collected by this software structures in a way that provides comprehensive results and without having to compromise on the accuracy.

4- Adverse Media Screening

An adverse media software helps the companies to track and monitor any negative news about any of the already existing clients or a potential client. Adverse media screening is one of the essential steps of anti-money laundering and knowing your customer processes.
It basically helps the companies to identify the potential risks and protect them from the same. Adverse media data include news related to terrorist financing, arms trafficking, corruption, money laundering, bribery, smuggling of drugs, violation of human rights, and tax evasion.

Financial institutions can comply with AML processes by performing advanced media screening in addition to PEP scans during the process of customer onboarding.

Final Words

By now, you must be pretty familiar with what is the role of technology in anti-money laundering compliance and how it can make a difference in terms of enhanced efficiency, accuracy, and productivity.
As a result, financial institutions (FIs) and Designated Non-Financial Businesses and Professions are able to protect themselves from reputational losses and regulatory penalties.

FAQs - Role of Technology In Anti-Money Laundering Compliance

AML technology is a program to help you detect suspicious transactions, store and analyse customer data, and assess customer risks. It facilitates transaction screening, checks suspicious customers against PEPs or Sanction lists, and monitors transactions based on artificial intelligence.  
Anti-money laundering technology can help assess customer data, determine relationships between them, identify patterns of transactions, and risk score customers.
Many systems with anti-money laundering capabilities are available in the market to monitor transactions and individuals, investigate and report to the entity.

About the Author

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Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

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A Brief Guide to PEP and PEP Screening

A Brief Guide to PEP and PEP Screening

A Brief Guide to PEP and PEP Screening

A Brief Guide to PEP and PEP Screening

PEP screening is the verification process for politically exposed persons (PEPs). It is a critical part of the anti-money laundering compliance process. Identifying PEP also forms an essential part of the AML/ CFT process. Institutions need to have a robust AML compliance framework, follow customer due diligence, identify criminal activities, and combat money laundering and terrorist financing.
PEP screening is a complex process that involves dealing with people involved in political corruption and financial crimes. A vigilant eye needs to be kept on banks, financial institutions, and other money services businesses as they are often misused for money laundering purposes. But there are hefty fines imposed for non-compliance with AML rules and regulations.
But with an increase in fines, little assistance is provided to financial institutions. They need to adopt a high level of due diligence to screen high-risk customers

Who is a PEP?

PEP is an acronym for “politically exposed person.” PEPs are defined as persons that hold a prominent public position or function. So, due to their role or power, they might be exposed to corruption or other money laundering offences. So, they are considered high risk to financial institutions and other regulated entities.

Types of PEPs:

Domestic PEPS refers to individuals who hold a prominent public position or function in the home country. They include people such as Head of State or government and senior officers, financial regulators, and foreign PEPs refer to individuals holding such prominent public positions or functions within a foreign country. International PEPs are people having an important public role or function in an international organisation, such as board members and people holding key senior management positions.
It is noteworthy that family members of PEPs are also a risk, so they need to be monitored regularly. This group of people has been defined as Relatives and Close Associates (RCAs).
  • Family members: individuals related to a PEP can also be classified as a PEP.
  • Close associates: an individual who has close relations with a PEP personally and professionally.
A Brief Guide to PEP and PEP Screening

Financial Action Task Force (FATF) Recommendations

The FATF is an inter-governmental organisation focusing on combating money laundering and terrorist financing. The current FATF Recommendations (2012) ensure that financial institutions follow the proper procedure for identifying if their customers are PEPs or related to PEPs or can be classified as UBOs. Such screening processes give a clear understanding of the customer risk.
The organisations and Designated Non-Financial Businesses and Professions (DNFBPs) can take the appropriate action and prevent any misuse of the financial system and their organisation.

PEP Challenges 

The identification of PEP is considered complex as they have to face hurdles while conducting the AML compliance processes such as customer due diligence (CDD) and the Enhanced Due Diligence process.
It is crucial to identify the PEP to know the potential risk of associating with the person. People holding prominent positions are identified quickly, but people who do not have prominent political positions are likely to go unidentified. So are their family members and close associates. Despite the rules of identifying PEPs, the process is challenging and needs expert advice to correctly identify, screen, and keep a tab on the PEP activities.
Financial Institutions have to work with a risk-based approach to identify PEPs and monitor them. They can depend on various resources and expertise of AML consultants who will provide valuable services that will help follow the AML rules and regulations diligently. Institutions can become more efficient in AML compliance with cost-efficient services offered by professional AML consultants.
It is important to note that identifying PEPs does not mean that every PEP is a criminal and involved in money laundering or financing terrorism. All is required is a risk-based approach to ensure regulatory compliance. It is a process that needs to be followed to complete the AML process and deter criminals from misusing the financial system and laundering money.

Conclusion

Financial institutions and other regulated entities must screen customers for PEP. PEP screening will help identify the actual customer risk and help to follow the AML rules and regulations. There are various services on which financial institutions, Designated Non-Financial Businesses and Professions (DNFBPs) and other regulated entities can depend on such as AML/ CFT Policy, Controls, Procedures Documentation, Annual AML/ CFT Risk Assessment Report, AML/ CFT health check, AML Training, and AML software selection. With professional assistance, get AML compliance right and avoid penalties imposed in cases of non-compliance.

About the Author

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Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 26 years of experience in governance, risk, and compliance. He helps companies with end-to-end AML compliance services, from conducting Enterprise- Wide Risk Assessments to implementing the robust AML Compliance framework. He has played a pivotal role as a functional expert in developing and implementing RegTech solutions for streamlined compliance.

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The best AML Framework under Singapore AML Regulations

The best AML Framework under Singapore AML Regulations

The best AML Framework under Singapore AML Regulations

The best AML Framework under Singapore AML Regulations

Money Laundering is a global concern. Companies worldwide are adopting stringent customer verification methods to prevent the misuse of their company for financial crimes. To deter criminals from exploiting the businesses, financial institutions and other regulated entities must create a robust AML compliance framework, or the “AML Model,” following internationally recognized AML/CFT practices.
Let us discuss how a business can develop a robust and comprehensive AML Model to ensure due compliance, safeguard the business and avoid fines or reputational damage.

What is the best AML model or an AML Compliance Framework?

An AML model is a set of controls and procedures that operates to identify any suspicious transactions involving money laundering, terrorism funding, or any other financial crime.
The best AML model combines human expertise and technology (such as artificial intelligence or machine learning) to timely identify any suspicious person or unusual activity/transaction. With instant alerts and human supervision, businesses can prevent their businesses from being conduits to money laundering or terrorism financing (ML/FT) activities.
Earlier, to detect ML/FT potential risks, businesses relied heavily on manual efforts, but today criminals are using new technologies to evade the scrutiny of the authorities. It demands that businesses also rely on technology to fight sophisticated financial crimes. Therefore, it has become necessary that an ideal AML model should depend on human intervention and advanced technology (AML Software) to prevent ML/FT.
The best AML Framework under Singapore AML Regulations

How to develop a highly effective AML model?

Developing a highly effective and result-oriented AML model requires a customized approach as each business is unique, and so is its ML/FT exposure. The transaction type, customer base, geographies, products/services offered, etc., must be considered to design a comprehensive and effective AML model.
We have listed a few steps to help you develop the best AML model and create a compliance shield against ML/FT risks:

Develop an AML framework aligned with AML/CFT business risks:

The ideal framework should be customized per the company’s vulnerabilities to the financial crime risk. The higher the ML/FT risk exposure, the more stringent controls to be built in the AML Model. Further, the risk assessment will help businesses understand the balance required between human expertise and technology.

Technology:

Selection of the right technology and its implementation will help derive accurate results. The right AML software selection with the help of experts will make the AML model more effective. The software will help identify any fraudulent transactions immediately and notify the business to take appropriate actions before suffering any monetary or reputational loss.

Integrated with business:

Businesses must ensure that the AML framework is integrated with the routine business operations where interaction with third parties is involved. It is essential to ensure that the AML model works optimally and produces the best results on a real-time basis.

Continuous Monitoring:

The AML model can be construed as effective if the results are measurable and reliable, assuring the company that its AML compliance framework is on the right track. Continuous monitoring is essential because it will help get the desired results consistently. It is vital to prevent it from faltering during the customer relationship journey.

AML Model Validation Process

Best Practices for developing a robust AML Compliance Framework

Easy to understand, yet comprehensive:

Companies should create a simple-to-understand AML framework to be more relevant, effective, and practical to be followed by all employees and implemented across the entire organization. Easy-to-understand models work for both – the employees and the customers.
Easy-to-understand does not mean just capturing the high-level idea about AML Compliance. The AML Model should be comprehensive enough to include end-to-end AML compliance requirements and procedures to be followed.
It would include the methodology of conducting business risk assessment, customer onboarding process, identification/reporting of suspicious activities, AML governance structure, AML record-keeping requirements, sanctions implementation, etc.

Based on regulations and best international practices:

AML policies and procedures should be aligned with the AML/CFT regulations implemented in Singapore and the international best compliance practices recommended by FATF and other similar bodies. Ensuring that AML Model, including the AML Software, is synced with the regulations would ensure 100% compliance.

Up-to-date:

The AML framework should be updated with the changing regulatory obligations, evolving ML/FT typologies, etc. so that necessary mitigative actions are designed and implemented on time.

Final words

Regulated entities must continuously keep their AML model or compliance framework updated per the revised laws, changing customer data, and evolving practices worldwide.

About the Author

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Jyoti Maheshwari

CAMS, ACA

Jyoti has over 9+ years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.

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