The Nexus Between Money Laundering and Terrorist Financing

The Nexus Between Money Laundering and Terrorist Financing

Understanding illicit practices like Money Laundering and Terrorist Financing is important to safeguard the financial systems, promote economic stability, and ensure national security. This blog intends to give a clear picture of both Money Laundering (ML) and Terrorist Financing (TF) and how these are connected to each other, helping Relevant Persons in the UK to ensure robust AML/CFT compliance.

Definition of Money Laundering

Money laundering is a process through which a person or an entity conceals the illegal source of funds in the legal economy. Basically, it’s a process where dirty (illicit) money is laundered and given the appearance of legitimate funds.

Process of Money Laundering

As laundry is done to wash away all the traces of wrongdoing until it is spotless, the same is the situation with money laundering; the process includes three steps by which dirty money is laundered. The steps are as follows: –

1. Placement: This is the initial stage, where the illicit money is introduced into the financial system. At this stage, the money is often in the form of cash. The goal of this step is to create distance between money and its criminal source. Here it includes:

  • Structuring, where a small amount of money is deposited into banks
  • Transferring funds through a cash-intensive business
  • Buying foreign exchange in cash with illicit cash.

2. Layering: This is the second stage, where the money is layered in a way that makes it difficult to trace the origin of funds. Here it includes:

  • Investing funds in real estate and high-value precious metals such as gold and silver
  • Moving funds with shell companies and offshore companies
  • Converting funds into different currencies and financial instruments.

3. Integration: This is the last and final stage, where the cleaned money is reintroduced into the mainstream economy as legally earned money or legitimate money. Here it includes:

  • Use the funds in buying goods and services without attracting the attention and scrutiny of authorities
  • Investing funds in high-value assets
  • Building business relationships and investing in such businesses.
This three-step process helps criminals to disguise the illegal origin of the funds and make it appear as legitimate money. This process makes it difficult for authorities to trace the illicit money and its source.

Background of Anti-Money Laundering Legislation in the United Kingdom

The background of legislation to combat ML risk in the UK is elaborated as follows:
  • Before 1990, the United Kingdom didn’t have any law specific to money laundering, but it became a member of the Financial Action Task Force (FATF) in 1990. After that, the Money Laundering Regulations 1993 (1993 No. 1933) were enacted. The ML Regulations, aligned with FATF standards, marked a significant milestone in the UK’s AML efforts, expanding the scope of oversight to encompass a wide range of financial and non-financial sectors.
  • The Joint Money Laundering Intelligence Taskforce (JMLIT) was established in 2015 by the Financial Sector Forum, which meets thrice a year to make the UK’s Financial Sector unfavourable for criminal activity.
  • In 2015, the UK published its first National Risk Assessment (NRA), recognising that the factors which make the UK attractive for legitimate financial activity also make it vulnerable to misuse by criminals and terrorists.
  • That’s how UK keeps assessing itself and upgrading the regulations for combatting money laundering practices.
The UK Anti-Money Laundering laws are set out in the following:

Proceeds of Crime Act 2002 (POCA) [As amended by the Serious Organised Crime and Police Act 2005 (SOCPA)]

  • It expands the scope of acts that, if committed by any person, constitute money laundering

      • Concealing, Disguising, Converting, Transferring, or Removing Criminal Property
      • Entering into or Becoming Concerned in an Arrangement
      • Acquisition, Use, and Possession of Criminal Property

These illicit acts are punishable by a maximum penalty of 14 years’ imprisonment and/or a fine. The act provides a framework for the following:
  • Submission of Suspicious Activity Report (SARs) to the UK Financial Intelligence Unit (UK FIU)
  • Submission of Defence Against Money Laundering (DAML) SAR
  • Asset Recovery.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) and its subsequent amendments

  • It provides for Relevant Persons in the UK to ensure:

    • ML/TF Risk Assessment
    • Risk-Based CDD
    • Establish AML/CFT Policies and Procedures to manage ML/TF risks.
    • Ensure ongoing compliance with AML/CFT Policies and Procedures
    • Ensure Staff Awareness and Training
    • Ensure Adequate Record-Keeping

  • It implements the EU Fifth Money Laundering Directive in the UK.
  • It extends the scope of the regulated sector, changes to customer due diligence and enhanced due diligence.
  • Added a new requirement to make reports to Companies House in relation to discrepancies between information collected during customer due diligence and information on the Persons with Significant Control register, also known as the Ultimate Beneficial Owners (UBOs).

Definition of Terrorist Financing

Terrorist Financing or Terrorism Financing is an activity that supports terrorist activities by using funds from both legitimate sources, like personal donations, business profit and criminal activities, like drug trade, weapon smuggling, etc. TF enablers move these funds through the formal banking system and by informal value transfer systems like hawalas and hundis, as well as by physically transported cash, gold, and other valuables. These funds are basically used for purchasing weapons, training people, providing accommodation, planning and executing terror attacks.

Process of Terrorism Financing

Terrorism Financing is a process through which terrorists collect funds to use for their further terror attack plans. This process includes four steps:

1) Raise: This is the collection stage, where the terrorism enablers gather money from legal and illegal means. Raising includes:

  • Direct donations by individuals and organisations
  • Use of charities and
  • Generate funds from legal business operations for TF purposes.

2) Store: The second stage includes storing, where terrorism enablers tend to store the funds in a manner that doesn’t attract the authorities’ attention. Storing includes:

  • Depositing cash in several bank accounts.
  • Use trade-based methods like over- or under-invoicing
  • Invest funds in cryptocurrencies and high-value assets.

3) Move: In the Moving stage, funds are mobilised by various formal and informal channels. Moving is a crucial step and is carried out with great confidentiality to avoid attention from law enforcement authorities. Moving includes:

  • Bulk cash couriers
  • Informal value system transfers
  • Sale and transfer of virtual assets.

4) Use: “Use” is the final stage where the funds intended for TF purposes reach the terrorists, and are used for the following purposes:

  • Direct operations like purchasing weapons
  • Training camps and recruitments
  • Support for Allied groups or political activities.

Background of Anti-Terrorism Financing Legislation in the United Kingdom

The background of the UK’s Anti-Terrorism Financing Legislation is elaborated as follows:
  • The requirement to criminalise terrorist financing was added to the FATF standards at a special plenary session of the FATF in the months following the 11 September 2001 attacks in the US. Before the 9/11 attacks, there was the Terrorism Act 2000 in the UK, but it was regarded as a temporary emergency measure.
  • After this attack, the UK developed an effective counter-terrorism mechanism and followed the guidelines of the FATF, remaining a nation where the threat was being managed. After the attack, the UK has been working on
  • According to the UK’s HMG publication, Counter-Terrorist Financing remains one of the UK’s priorities under the National Security objectives set out in the UK’s National Security Strategy.

The counter-terrorism regime in UK consists of:

The Joint Terrorism Analysis Centre (JTAC)

  • JTAC was founded in 2003
  • JTAC is an independent authority on terrorism assessment, defines the national terrorism threat level, and issues warnings to government departments and law enforcement agencies.

Counter Terrorism Strategy (CONTEST)

  • CONTEST is the UK’s Counter Terrorism Financing strategy, established in 2003
  • CONTEST’s core components provide for protecting UK citizens from terrorism by:
  • Preventing
  • Pursuing
  • Protecting
  • Preparing
  • Refreshed in 2018 and 2023, it governs and monitors cross-government counter-terrorism performance.

The Terrorism Act (TACT) 2006

  • TACT provides the length of time that a terror suspect could be detained without charge
  • TACT elaborates on acts of terrorism by creating offences of publication or dissemination of terrorist publications
  • TACT provides institutions with the ability to submit SARs to the UK FIU and file DAML.

Sanctions and Anti-Money Laundering Act (SAMLA), 2018

  • It provides the legal framework for the UK to impose, update and lift sanctions.

The ISIL (Da’esh) and Al-Qaida (United Nations Sanctions) (EU Exit) Regulations, 2019

  • It ensures sanctions under the UN sanctions regime in respect of ISIL (Da’esh) and Al-Qaida continue to be implemented effectively.

The UK Counter-Terrorism (International Sanctions) (EU Exit) Regulations, 2019

  • It allows the UK to implement autonomous UK listings with an international focus related to Counter-Terrorism and ensures the UK implements its international obligations under the UN Security Council Resolution 1373

The Counter-Terrorism (Sanctions) (EU Exit) Regulations, 2019

  • SAMLA came into force at the end of the EU exit transition period.
  • SAMLA allows the designation of individuals, groups or entities with a clear UK nexus where the designation will be in the interests of countering terrorist threats and/or protecting UK national security.
The UK has a robust legislative framework which criminalises the financing of terrorism in all its forms, and which continues to evolve alongside the more technological and complex threats that the UK and its interests may face.

Importance of Understanding the Nexus Between Money Laundering and Terrorist Financing

A better understanding of the two concepts and their nexus or inter-relationship is important for combating ML/TF and implementing the best AML/CFT compliance measures. Be it Bristol, Liverpool, or Plymouth, relevant persons across UK need to understand the nexus between ML and TF due to their inherent vulnerability to exploitation by illicit actors. Relevant Persons in the UK can safeguard their business from ML/TF threat by:
  • Enhancing suspicious activity and transaction detection
  • Implementing a risk-based approach to mitigate ML/TF risk
  • Enforcing robust internal AML/CFT Policies, Procedures, and Controls.

Similarities Between Money Laundering and Terrorist Financing

While addressing similarities between ML/TF, the following considerations need to be made:

Same Compliance Requirement: Both ML/TF compliance procedures are the same from the registration of the relevant Person to the appointment of the Nominated Officer, to Firm-Risk Assessment, the CDD procedure that includes KYChe investigation procedure of the Suspicious Activity Report (SAR) of both ML/TF is done by the UK Financial Intelligence Unit (UKFIU).

Same Legal Framework: Both ML/TF are governed by The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 in the UK.

Shared Placement Pathways: Both ML/TF processes involve the placement, i.e., the introduction of funds into financial systems, such as banks, charities, and high-value assets. Launderers and terrorism enablers are focused on the same path to channelise their funds.

Difference Between Money Laundering and Terrorist Financing

Money Laundering and Terrorist financing are often mentioned together, but there are critically important differences between the two crimes.
Basis of Differentiation Money Laundering Terrorist Financing
Origin of Funds The funds arise from illegal activities only. The funds can arise from both legal and illegal activities.  
Process Money Laundering is a circular process as it starts with the person who obtained the dirty money from the predicate offence then moves on to wire transfers to hide the source, the money then returned to the original person in a way that it appears legitimate. Terrorism Financing is a linear process where the money will be transferred to the terrorist for the collection weapons and destructive materi als, training, and carrying out terrorist attacks.  
Threats According to NRA 2020, Money Mules and Trade Based Money Laundering (TBML) are threats to the UK as it exploits both domestic trade practices and the international trade practices. . According to NRA 2020, Islamist Terrorism and Far-Right Terrorism  

Nexus Between Money Laundering and Terrorist Financing

As money laundering and terrorist financing are used as the same terms, there are certain ways that both money launderers and terrorists use for ML/TF. The following points are ways that both launderers and terrorists use to circulate the funds:

1. Shell Companies

Shell companies are those which are just on paper but are not operational companies. Shell companies are misused by criminals to further money laundering and terrorist financing activities. The Relevant Person, while doing the AML compliance procedure, should make sure that they check the ownership structure of the business and their purpose structure so that an initial check can be done to see whether it is a legal operational company or a shell company made for illegal purposes.

For example: An authorised signatory of agricultural business comes to a Relevant Person, (High Value Dealers of Precious Metals And Stones) for purchase of precious stones worth millions, here the Relevant Person (High Value Dealers of Precious Metals And Stones) needs to check the economic rationale of the proposed business relationship and the Money Laundering Reporting Officer (MLRO) or the Nominated Officer (NO) should decide whether or not to file SAR on the NCA portal based on the facts of the case, so that the relevant person doesn’t unwittingly help the launderer or terrorism enabler (agriculture business, in this example).

2. Complex Transactions

Complex transactions, as the name suggests, are transactions where understanding the Source of Funds (SoF) and Source of Wealth (SoW) is difficult. Criminals use such transactions to make it difficult to detect the source of illicit money. The Relevant Person should ensure that their employees conduct the CDD procedure very carefully and know the red flags for the timely identification of suspicious transactions and activities so that the filing of SAR can be done in time.

3. Trade-Based Money Laundering (TBML)

Trade-Based Money Laundering (TBML) is a method where invoice values are manipulated by either over- or under-invoicing. Both ML/TF actors utilise this method to manipulate transactions and conceal the movement of illicit funds in the economy.

The relevant person should ensure regular CRA to detect red flags. These red flags should also be inculcated within the AML/CFT policies and procedures so that they help the employees and the Relevant persons detect the launderers or terrorism enablers at the initial stage.

4. Shared Vulnerabilities

The word vulnerable literally means lacking protection against attack or harm. In the context of ML/TF, businesses are susceptible to exploitation by criminals who may misuse them as vehicles to facilitate money laundering and terrorist financing activities.

So, the Relevant Person while developing their Firm-wide risk assessment (FWRA) should consider their weak/vulnerable points for creating better controls and prevent themselves from being an unwitting vehicle to the launderers and terrorists.

5. Overlap in Regulatory Compliance

The Relevant Person must ensure the formulation, implementation, and compliance with AML/CFT policies and procedures, which include measures such as Customer Due Diligence (CDD), ongoing monitoring, regulatory reporting, and external independent audit. Relevant Persons operating in multiple jurisdictions must ensure that their compliance processes do not overlap.

6. International Cooperation

ML and TF are inherently cross-border crimes which often involve complex networks that span multiple countries. To effectively combat these illicit activities, international cooperation is essential. Also, the Relevant Person needs to be very cautious while doing international trade as the other side’s business could be a launderer, terrorist or their agent.

7. Mutual Dependence Between Money Laundering and Terrorist Financing

Money laundering and terrorist financing go hand in hand; their pathway to channel funds is the same, by which they affect the financial and non-financial systems of countries. They are mutually interdependent as terrorist do use a money laundering network to transfer the money they receive from their benefactors.

Challenges Faced by Relevant Persons in UK Com While Combatting Money Laundering and Terrorism Financing Risks

The complexities of combating money laundering and terrorist financing risks arise due to numerous factors, such as:

Emergence of New Typologies

As there are new compliance processes for preventing and combatting ML/TF practices, there are new typologies made by the launderers and terrorists to continue the illicit practices. This is possible because no law is perfect; every law has loopholes, and the launderers and terrorists find such loopholes to break into the system. According to the NRA 2020, the following are the emerging typologies of ML/TF practices:
  • Mule Accounts
  • Organised Crime Groups (OCGs)
  • Professional Money Laundering.
The relevant person needs to be aware of these new typologies and conduct firm-wide risk assessments on a regular basis so that the firm/business has updated trigger points and red flags.

Mismatch in Regulatory Controls

As money laundering and terrorist financing are cross-border crimes, the rules, regulations and laws pertaining to AML/CFT vary from one country to another. Criminals involved in money laundering and terrorist financing (ML/TF) take undue advantage of regulatory variations to transfer funds for their own purposes.

There are numerous laws and acts in the UK governing AML/CFT, which tend to confuse the relevant persons, having multi-jurisdictional presence, as it becomes burdensome for them to go through all the regulations of different countries and maintain consistency across cross-border AML/CFT compliance requirements.

Lack of trained AML Professionals

The shortage of trained Anti-Money Laundering (AML) professionals in the UK presents several critical challenges that can impact operational efficiency. Operational challenges such as the scarcity of skilled AML professionals necessitate higher compensation packages to attract and retain talent, and the resource constraints lead to delays in processing and increased risk of oversight.

Lack of Awareness in the Non-Financial Sector

Many businesses in the non-financial sector, which come under AML/CFT compliance purview, often face difficulties in staying abreast of regulatory changes, leading to potential non-compliance, associated risks, and failure to comply with AML/CFT regulations can also lead to significant legal and financial repercussions, including fines, sanctions, and reputational damage.

UK’s Global Efforts in Fighting ML/TF

Most countries in the world follow FATF guidelines. The United Kingdom is one of them. Since 1990, the UK has adhered to FATF guidelines, and the recent Mutual Evaluation 2018 concluded that the country was compliant with 31 of the FATF’s recommendations. The UK was placed on the regular follow-up process immediately after the adoption of its third-round Mutual Evaluation Report (MER).

The Joint Money Laundering Steering Group (JMLSG) is a UK-based organisation that produces guidance (JMLSG Guidance) to assist those in financial industry sectors represented on JMLSG by their trade member bodies in complying with their obligations under UK anti-money laundering (AML) and counter-terrorist financing (CTF) legislation and the regulations prescribed pursuant to it.

Anti-Money Laundering and Counter-Terrorism Financing Need Stringent Compliance Procedure: Concluding Thoughts

Money laundering is a crime that the world faces financial loss from, and terrorist financing is a crime that the world suffers human loss from. If these crimes and their sources are not detected and stopped, then it will only lead to a world where neither money nor mankind is safe. Therefore, it is crucial for the Relevant Person to have stringent measures in place to detect such acts at the earliest stage, so that launderers and terrorists are unable to take them to the next stage or exploit the Relevant Person as an unwitting vehicle to carry out their illicit practices.

The Relevant Person must follow the guidelines and implement stringent compliance procedures with trained staff, ensuring that the process from registration to customer due diligence, filing SAR/STR, and record-keeping is carried out smoothly.

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.

Reach Out to Pathik

Global Warriors: International Organisations Battling Financial Crimes

Global Warriors: International Organisations Battling Financial Crimes

Globalisation has made it easy for criminals to move illicit funds across the borders. It is essential that global standardised policies, procedures and practices exist to combat Money Laundering, Terrorist and Proliferation Financing (MLTPF). In this blog, we will discuss the international organisations involved in battling financial crimes and protecting the world’s economy. These global warriors work tirelessly to combat MLTPF and provide a safe international financial system. The top international organisations working towards combating MLTPF crimes are as discussed below.

Financial Action Task Force (FATF)

The Financial Action Task Force (FATF) is an inter-governmental body formed in 1989 by the G-7 countries, which aims at the development and implementation of international policies and procedures to prevent and combat MLTPF.

The FATF promotes and recommends international standards and effective legal, regulatory and operational measures to combat financial crimes and threats to the integrity of the international financial system.

It publishes research to raise awareness of the movement of illicit funds to ensure the prompt detection and mitigation of MLTPF risks.

It also monitors the progress of countries around the world in implementing Anti-Money Laundering (AML), Counter-Terrorist Financing (CTF), and Counter-Proliferation Financing (CPF) measures. More than 200 countries have committed to implementing FATF’s recommendations, leading to a collective and global response against financial crimes. UK has been a member of the FATF since 1990.

Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL)

MONEYVAL is a part of FATF’s global network. It is a monitoring body, tasked with assessing and evaluating compliance with AML/CFT/CPF international standards as well the effectiveness of such compliance for Council of Europe countries. Through this, MONEYVAL aims to improve the capacities of countries to fight against financial crimes. Presently, UK is a member of MONEYVAL.

Egmont Group of Financial Intelligence Units

Egmont Group comprises 177 FIUs around the world. It acts as a platform for the secure exchange of expertise and financial intelligence between the FIUs to help in the fight against financial crimes across borders.

Organisation for Economic Cooperation and Development (OECD)

OECD is an international organisation that aims to encourage and promote sustainable development and economic growth.

It helps countries fight international tax evasion, money laundering, and other financial crimes.

It works with governments to develop evidence-based standards, implement best practices and have access to data that helps improve the economic and social well-being of people around the world.

It aims to facilitate collaboration between member countries on economic issues and financial crimes.

Transparency International (TI)

Transparency International (TI) is another global organisation that aims to fight against corruption financial crimes, and promote transparency.

It works to identify and remove the loopholes in the global financial system that lead to corruption and the stolen money to be laundered.

It also advocates transparency in beneficial ownership and works with governments to help set up systems that aim to disclose the real owners of companies so they are not used for conducting illegal activities.

Sharing Electronic Resources and Laws on Crime (SHERLOC)

SHERLOC is a knowledge management portal. It has been developed by the United Nations Office on Drugs and Crime (UNODC).

It aims to disseminate information on the United Nations Convention against Transnational Organized Crime and its three Protocols.

Its scope includes resources concerning crimes such as money laundering, terrorism, corruption, etc.

Stolen Asset Recovery Initiative (StAR)

StAr is a partnership between the World Bank and UNODC that works to help countries recover stolen public assets and end safe havens for corrupt money.

It assists in international collaboration and cooperation to promote the mitigation of MLTPF through asset recovery and accountability.

It plays an important role in recovering assets that are obtained through bribery, embezzlement, or other corrupt conduct and thus restoring confidence in the rule of law.

It also focuses on tackling the misuse of legal structures for moving illicit funds through Beneficial Ownership transparency.

International Consortium of Investigative Journalists (ICIJ)

ICIJ is a non-profit independent global network of investigative journalists and media organisations across the world with the aim of exposing international social and financial crimes and corruption.

Their explosive work has led to various reforms. It has published some of the biggest cross-border investigative projects highlighting how illicit funds flow globally.

In 2021, ICIJ was nominated for the Nobel Peace Prize for reporting that made it difficult for arms dealers and human traffickers to launder their dirty money.

International Compliance Association (ICA)

ICA is a body that provides professional qualifications and training in subject areas like AML, governance risk and compliance, financial crime prevention, customer due diligence, cyber risk, and managing sanctions risk.

It aims to educate the international compliance community to perform better and empower compliance and financial crime prevention through support, education and advocacy.

Association of Certified Financial Crime Specialists (CFCS)

ACFCS is an international organisation that provides training and certifications to professionals who work in the detection and prevention of financial crimes.

Many countries recognise the certification provided by ACFCS. CFCS certification aims to equip financial crime specialists with tools, resources and knowledge on subjects like AML, corruption, crypto, tax evasion, cyber risk, data analytics and security, compliance and regulation, etc. and help them to fight, prevent and detect any financial crimes.

Anti-Money Laundering and Financial Crime (AMLFC) Institute

AMLFC is an institute that provides certification and programs in collaboration with various universities relating to AML and other financial crimes.

It also conducts academic research to advance knowledge in the field of AML/CTF/CPF and financial crime prevention. Its aim is to provide professionals globally with high standards of ethics and knowledge to fight against financial crimes.

Association of Certified Anti-Money Laundering Specialists (ACAMS)

ACAMs is a global organisation that provides training, certifications, and ongoing support to AML and anti-financial crime specialists.

Over 175 countries have professionals who are members of ACAMS and support various organisations to build robust Anti-financial Crime readiness mechanisms.

It also creates networking platforms and hosts conferences for sharing best practices, publishing information and imparting continuing professional education to various professions internationally.

Association of Certified Fraud Examiners (ACFE)

ACFE is an internationally recognised organisation that imparts anti-fraud training, is instrumental in setting industry standards, and offers credentials to anti-financial crime specialists.

CFE certification demonstrates expertise in fraud detection, prevention and investigation.

By offering the CFE credential and fostering a global community of anti-fraud professionals, the ACFE helps in combating fraud and financial crimes worldwide.

Organisations Battling Financial Crimes: Final Words

The financial systems and economies of the countries are affected globally by financial crimes like money laundering as networks of financial criminals spread worldwide. To prevent and detect such financial crimes, it is crucial to have best practices and internationally recognised standards in place. Therefore, Relevant Persons in UK can enhance their AML/CTF/CPF Program by adopting the international standards, best practices, recommendations, etc, of these global warriors that work to combat financial crimes

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

One-Stop Guide to Building a Strong AML/CTF/CPF Program

One-Stop Guide to Building a Strong AML/CTF/CPF Program

In a world where financial systems form the backbone of global commerce, protecting these systems from financial crimes is of utmost importance. In UK, Relevant Persons under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) are required to implement an Anti-Money Laundering, Counter-Terrorist Financing, and Counter Proliferation Financing (AML/CTF/CPF) measures. Building a strong AML/CTF/CPF Program helps Relevant Persons meet their AML/CTF/CPF obligations as well as detect, manage, mitigate financial crime risks.

In this blog, we will discuss the meaning, need, and components of a strong AML/CTF/CPF Program.

What Is an AML/CTF/CPF Program?

An AML/CTF/CPF Program defines and lays down the standards, practices, policies, procedures, governance, controls, and other related aspects, that have been put in place by the Relevant Person to protect itself from financial crimes such as Money Laundering, Terrorist, and Proliferation Financing (MLTPF) and meet its AML/CTF/CPF regulatory obligations. It serves as a comprehensive framework, demonstrating a Relevant Person’s commitment to AML/CTF/CPF compliance and establishing a compliance culture throughout the organisational structure of the Relevant Person.

Why Is an AML/CTF/CPF Program Required?

Enhances Protection Against MLTPF Risks

The various components of the AML/CTF/CPF Program are all geared towards detecting, reporting, and mitigating financial crimes, enhancing the Relevant Person’s ability to protect itself from MLTPF risks. For example, a Firm-Wide Risk Assessment helps Relevant Persons evaluate their MLTPF risk exposure, while AML/CTF/CPF Policies, Procedures, and Controls establish systems to manage the risks.

Facilitates Compliance with AML/CTF/CPF Obligations

AML/CTF/CPF Program helps Relevant Persons put in place systems to meet their compliance obligations under the AML/CTF/CPF regulatory regime in a comprehensive manner.

Establishes a Mechanism for Investigation and Reporting of MLTPF Risks

Reporting MLTPF through the Suspicious Activity Report (SAR) is a mandatory requirement for Relevant Persons. An AML/CTF/CPF Program establishes mechanisms to identify MLTPF risks through red-flags, monitoring software, and internal investigation. It also lays down the procedures and timing of SAR submission.

Enables Continuous Improvement

When AML/CTF/CPF Program is defined and put in place, it allows Relevant Persons to continually review and revise its existing systems to ensure that they are up-to-date and resilient enough to mitigate the evolving MLTPF threats.

Establishes a Culture of AML/CTF/CPF Compliance

Framing and implementing an AML/CTF/CPF Program portrays a Relevant Person’s commitment to fighting against financial crime risks, as well as ensures the inculcation of AML/CTF/CPF compliance culture throughout the organisational structure of the Relevant Person.

Delineates Roles and Responsibilities of AML/CTF/CPF Functions

AML/CTF/CPF Program clearly defines and delineates roles and responsibilities regarding the performance of AML/CTF/CPF compliance functions. For example, front-facing staff may be tasked with collecting customer information for customer identification and verification, while AML/CTF/CPF Compliance Officer may be tasked with overseeing the fruitful implementation of the AML/CTF/CPF Program.

After discussing why making and implementing an AML/CTF/CPF Program is essential, let us now discuss the various components to include for a comprehensive AML/CTF/CPF Program.

Components of an AML/CTF/CPF Program

Firm-Wide Risk Assessment

Under MLR 2017, conducting a Firm-Wide Risk Assessment (FWRA) is mandatory for Relevant Persons. An FWRA is the process of identifying and assessing the MLTPF risks that a Relevant Person is exposed to, after considering a range of

Therefore, the foundational step of making an AML/CTF/CPF Program is FWRA. This helps Relevant Persons assess its risk exposure and adopt the most appropriate risk mitigation measures, helping it focus its limited resources on the areas of higher risks.

AML/CTF/CPF Risk Management Practices

This includes practices the Relevant Person has implemented to manage the risks assessed during FWRA, its risk appetite, derisking policies, etc. This includes risk management tools such as AML software solutions, decision-making hierarchy regarding risks, etc.

AML/CTF/CPF Governance

Relevant Person must define and establish internal controls or governance structure with respect to AML/CTF/CPF compliance. This section must also include the duties and responsibilities of the relevant roles.

The governance structure must designate the roles and responsibilities of the following positions:

  • Compliance Officer: The compliance officer is the individual in charge of the relevant person’s compliance under MLR 2017. This individual must be a member of the board of directors or senior management of the Relevant Person.
  • Nominated Officer: The Nominated Officer of a Relevant Person is in charge of receiving disclosures under the Terrorism Act 2000 or the Proceeds of Crime Act 2002 Whenever an MLTPF risk is detected by an employee of the Relevant Person, the employee needs to make an internal report regarding the same to the Nominated Officer. The Nominated Officer must review and investigate the internal report and then report the same to the National Crime Agency of UK, which houses the Financial Intelligence Unit of UK.
    Under MLR 2017, when the Compliance Officer or Nominated Officer is appointed, or there are subsequent changes to this appointment, the Supervisory Authority must be informed within 14 days of this appointment.
  • AML/CTF/CPF Compliance Department: The AML/CTF/CPF Compliance Department is established under the AML/CTF/CPF Compliance Officer and helps the Relevant Person comply with all its AML/CTF/CPF. This department may include roles such as:
    • Screening Analyst
    • KYC Analyst
    • Risk Analyst
    • Compliance Analyst
    • Subject Matter Experts
  • Frontline Employees: These are the employees who interact with the customers directly and are in a unique position to identify MLTPF red flags through customer behaviour, hesitancy in providing customer details, etc. They also perform AML/CTF/CPF tasks such as customer identification and verification, conducting name screening, etc.

Customer Due Diligence

Customer Due Diligence (CDD) is a mandatory part of a Relevant Person’s compliance obligations under MLR 2017. Under the AML/CTF/CPF Program, a Relevant Person must lay down the policies and procedures for the following components of a CDD process:
  • Identification and verification of the customer and their Beneficial Owners and persons authorised by the customer to act on their behalf
  • Obtaining information on the purpose and nature of the business relationship, or occasional transaction
  • Conducting Name Screening, which includes Sanctions Screening, Politically Exposed Person (PEP) Screening, Adverse Media Screening
  • Customer Risk Assessment (CRA), including its methodology and assigning risk scores and levels to various risk factors
  • Type of CDD to be adopted based on the level of MLTPF risks a customer poses, as assessed during the CRA process
  • Ongoing CDD to ensure that the information collected during the CDD process is updated and accurate

Sanctions Compliance Policy

During CDD and Sanctions Screening, if a sanctions match is found, the same must be reported to the Office of Financial Sanctions Implementation (OFSI) the authority for implementing financial sanctions in UK. The Relevant Person is obligated to follow compliance requirements under laws related to the sanctions regime, including the Sanctions and Anti-Money Laundering Act 2018, Counter Terrorism Act 2008, and Anti-Terrorism, Crime and Security Act 2001.
The AML/CTF/CPF Program of the Relevant Person detail:
  • Sanctions Screening mechanisms, including screening software, subscribing to the required sanctions lists such as the UK Sanctions List, etc
  • Procedures on disambiguating sanctions screening results, and if a match is found, reporting the same to the OFSI
  • Procedures on Asset Freezing, preventing transactions or access to financial resources to the designated persons or organisations
  • Training employees on sanctions compliance

Customer Acceptance and Exit Policy

In this part of the AML/CTF/CPF Program, the Relevant Person should define its policies with respect to customer engagement. This includes the factors that make a customer acceptable to the Relevant Person, based on the Customer Risk Profile, or circumstances that make a customer unacceptable. It should also describe situations in which a Relevant Person would adopt derisking measures, to avoid MLTPF risks it cannot manage.

Transaction Monitoring and Ongoing Monitoring

A Relevant Person must specify its transaction monitoring and ongoing monitoring policies and procedures, as well as the mechanisms it has adopted to achieve the same. Monitoring must be conducted throughout the course of the business relationship for:
  • Transactions to ensure that the same is in line with the customer’s business, risk profile, and known information about the customer. MLR 2017 specifies that the following transactions should be scrutinised:
    • Complex transactions
    • Transactions that are unusually large
    • Unusual patterns in transactions
    • Transactions without economic or legal purpose
    • Transactions indicating MLTPF risks
  • Existing customer records and information to ensure that the same are accurate and up-to-date

Employee Screening

Relevant Person must establish policies and procedures to screen the Relevant Employees before their appointment and throughout the duration of their appointment.
The Relevant Employees include the following:
  • Employees involved in the Relevant Person’s compliance under MLR 2017
  • Employees contributing to the identification, detection, mitigation, and prevention of MLTPF risks faced by the Relevant Person
The Employee Screening must assess the following components:
  • Skills
  • Knowledge
  • Expertise
  • Conduct
  • Integrity

Suspicious Activity Reporting

The Relevant Person must establish an internal mechanism for reporting and investigating suspicious activities indicating MLTPF risks to ensure that the same is reported to the UK FIU, housed within the NCA, in a timely manner. The Relevant Person must implement policies and procedures for suspicious activity reporting, which must include the following:
  • Training to their staff to detect MLTPF threats in a prompt manner and making internal report to the Nominated Officer
  • Investigation of the MLTPF threat by the Nominated Officer and making the Suspicious Activity Report (SAR) to the NCA
  • Policy and Procedures for filing Defence Against Money Laundering (DAML)
  • Procedures to ensure that there is no “tip-off”
  • Policy on relationship with the customer after SAR filing

Staff Awareness and Training

MLR 2017 provides that the Relevant Persons must train their staff on the following:
  • MLTPF risks and red flags and AML/CTF/CPF law
  • Their responsibilities in the AML/CTF/CPF Program
  • The various components of the AML/CTF/CPF Program of the Relevant Person
  • Relevant Person’s procedures and how to identify and address potential MLTPF risk, including making internal report to the Nominated Office
The staff training should be conducted regularly, with records maintained of the same. The AML/CTF/CPF Program of the Relevant Person must provide policies and procedures on staff training and awareness.

Independent Audit Function

As a part of its AML/CTF/CPF Program, the Relevant Person must establish an independent audit function. The objective of an independent audit function is to analyse and monitor the adequacy and effectiveness of the AML/CTF/CPF Program, detect any vulnerabilities, and adopt recommendations to fill these vulnerabilities.

Record Keeping

MLR 2017 provides that Relevant Persons must keep up-to-date and accurate records for five years on AML/CTF/CPF related tasks, which include the following:
  • CDD related information and documents
  • Records on transactions
  • Internal and external reports on suspicious activities
  • Training and its effectiveness
  • Compliance monitoring
The AML/CTF/CPF Program of the Relevant Person must include policies and procedures for maintaining these records for the required time period.

Data Protection Policy

MLR 2017 obligates Relevant Persons to ensure that any personal data that the Relevant Person collects for the purposes of fulfilling their obligations under MLR 2017 must only be processed to prevent MLTPF. It must also adhere to the provisions of the Data Protection Act 2018.

The AML/CTF/CPF Program of the Relevant Person must include its Data Protection Policy, detailing its obligations and procedures to meet these obligations.

Building a Strong AML/CTF/CPF Program: Final Words

An effective AML/CTF/CPF Program is indispensable for ensuring compliance with regulatory obligations under MLR 2017. It fosters a culture of compliance and ethicality across the organisational structure of the Relevant Person. It also ensures that staff at all levels understand their roles in AML/CTF/CPF Program and implement it properly. Continuous improvement through health checks and independent audits, regular staff training and awareness, etc., enhance the Relevant Person’s resilience against financial crime threats.

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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