In deep waters
26 Oct 2022
Deep Pool’s Roger Woolman outlines why a flood of money laundering instances in recent times have piled pressure on financial institutions’ defences
Image: dennisvdwater/stock.adobe.com
Europol estimates indicate that approximately 1 per cent of the European Union’s annual GDP is “detected as being involved in suspect financial activity”.
Figures from the United Nations Office on Drugs and Crime suggest that between 2 per cent and 5 per cent of global GDP is laundered each year.
Faced with such a vast problem, the European Commission says the fight against money laundering is now vital for financial stability and security – hence the extensive package of legislative proposals it put forward last year aimed at improving activity detection and closing the loopholes criminals use to launder money.
The 3 stages of money laundering
For the banks, investment managers, trust companies, advisors and fund administrators at the front line of the anti-money laundering (AML) fight, an effective defence entails a company-wide understanding of the three stages of money laundering, with appropriate countermeasures implemented to stop them.
Placement
Placement is where the ‘dirty’ money from criminal activity enters the financial system. Common methods include blending illegal funds with legitimate takings of cash businesses such as car parks, car washes, casinos, tanning studios and strip clubs; raising dummy invoices to make it look like a true payment has been made; depositing small amounts of money below the AML reporting threshold into bank accounts; and hiding laundered money in offshore accounts to conceal the real beneficial owner’s identity.
Layering
Layering distances the illicit money from its source by adding layers of financial transactions, often involving international movements of the funds. The aim is to obscure the audit trail and make tracing the source and ownership of the funds as hard as possible. Layering transactions may include converting cash into travellers’ cheques, money orders, wire transfers, letters of credit, stocks or bonds, or purchasing assets such as art and jewellery.
Integration
During the integration stage, the now-laundered and apparently legitimate money is reintroduced into the economy as ‘legal’ tender and reunited with the criminal. Investing in luxury items such as art, jewellery and expensive cars, making financial investments and buying businesses or real estate are common techniques.
AML best practices
Each of the three money laundering stages can be extremely complex, posing huge challenges for financial institutions as they work to spot and stop incidents. With different jurisdictions adding their own spin to local AML rules, firms’ controls need to be both robust and adaptable.
Training is one crucial component in institutions’ AML efforts – ensuring staff know what red flags to watch for, and that they adhere to well-defined processes.
Those processes also need to be effective and consistent. The criminal conviction and £265 million fine meted out to the UK’s NatWest Bank in December 2021 stemmed from its failure to properly monitor and scrutinise suspicious transactions. The case revealed how over a five-year period £365 million was deposited in the NatWest accounts of Yorkshire gold trader Fowler Oldfield, including £264 million in cash. Fowler Oldfield had been misclassified for periods as both a low-risk and medium-risk business, and was not reviewed annually. And while staff raised concerns about the deposits, no action was taken by the bank.
Client onboarding
Combatting money laundering today is impossible without a sophisticated, multi-jurisdictional AML infrastructure able to deliver automated, real-time visibility and control at every stage of the customer lifecycle. An effective AML programme demands complete and accurate information, so it needs to be right from the get-go. That starts with client onboarding, an area where global rules continue to tighten.
The EU’s recent legislative proposals call for more granular customer due diligence measures. Tougher beneficial ownership laws will introduce new requirements around nominees and foreign entities, and more detailed rules to identify beneficial owners of corporations and other legal entities.
It echoes the US AML 2020 Act, under which corporations and limited liability companies must now disclose their beneficial owners – with higher fines for AML violations. Meanwhile, stricter beneficial ownership rules agreed in March by the Financial Action Task Force, the world’s AML watchdog, significantly strengthen the requirements for beneficial ownership transparency globally to tackle concealment and the abuse of legal persons.
Yet many institutions’ onboarding steps remain paper-based and highly manual, making account set-up processes tedious and error prone. Client onboarding teams must perform hundreds of manual tasks each day to verify the identity and assess the risk and suitability of every new customer.
Typically that involves numerous back-and-forth interactions between firm and client, with reams of paper deliverables. Employees may be forced to re-key the same data into multiple systems and spreadsheets, manually access third-party systems and liaise with different teams across the globe. The data will be spread across different departments, with no single source of truth. The levels of AML rigour regulators now seek become impossible to achieve, increasing the risk of hefty fines and lasting reputational damage.
The solution lies in a digitalised, automated onboarding framework – one that can deliver the risk controls regulators demand, while providing significant internal operating efficiencies, proper scalability and a smoother onboarding experience for legitimate clients.
An automated risk-profiling capability collates and weights multiple data points, such as the investor’s occupation and country of domicile, or the industry an organisation belongs to. It enables firms to develop a risk-based picture of prospective clients when performing their initial due diligence, helping determine what level of checks and ongoing monitoring are required. Integrating with third-party watchlists to check for flags of any criminal behaviour further strengthens the risk profiling.
Identifying and tracking underlying beneficial owners is a particular pain point for institutions, demanding levels of transparency and ongoing monitoring that many struggle to meet. Advanced investor and beneficial owner screening able to track complex, multi-level ownership structures enables users to identify and verify underlying customer and beneficial ownership identities, and flag high-risk relationships.
Checking the source of a client’s wealth and funds adds an extra layer of screening protection.
Automated document checklists then ensure all the supporting information each jurisdiction requires has been captured and that the firm’s compliance responsibilities in every market have been met.
Ongoing due diligence
AML does not stop with onboarding. Ongoing client due diligence is just as important to identify, mitigate and manage fraud risk, with zero room for error.
Client profiles and accounts must be reviewed periodically (typically every year for high-risk clients) to ensure all documents and data remain current. Missing or expired documentation needs to be updated. Continued screening and risk profiling to monitor for any change in client status are similarly vital.
A change of circumstance such as a name or address update, or any information modification – revising the name on a bank instruction, for example – can be a red flag.
Monitoring for unusual or suspicious transaction activity is another priority. This was one of the big deficiencies in ABN AMRO’s anti-money laundering programme, a shortcoming that ended up costing the bank €480 million.
Failure to transition from a manual transaction monitoring and case management set-up to an automated capability was likewise a major factor in the $30 million penalty the New York State Department of Financial Services (DFS) handed down in the summer to Robinhood Crypto.
“Transaction monitoring is a cornerstone of an effective BSA/AML programme,” observed the DFS order. “It must be conducted thoughtfully, efficiently, and in a manner commensurate with institutions’ business profiles.”
Definitions of suspicious activity change over time and across jurisdictions, and monitoring capabilities need to keep pace, though many firms rely on manual reviews to investigate suspicious activity, conducted in retrospect.
Real-time suspicious activity monitoring tools can help expose fraud by spotting AML risks and creating automated alerts of suspicious activity or behaviours, enabling any potential issues to be addressed before they become an actual breach. Automatically blocking accounts or transactions when suspicious events occur offers an additional safeguard.
Where the transaction alerts warrant, suspicious activity reports need to be sent to the relevant regulatory body within their stipulated time frames – another area where Robinhood Crypto was found wanting.
Can you meet your responsibilities?
Money laundering is a growing, multinational blight, one that employs increasingly sophisticated tactics to achieve its goals.
Financial institutions need matching preventative capabilities if they are to fulfil their responsibilities as front-line guardians of the international financial system.
That requires integrated AML systems and processes that are truly up to the job. Are yours?
Figures from the United Nations Office on Drugs and Crime suggest that between 2 per cent and 5 per cent of global GDP is laundered each year.
Faced with such a vast problem, the European Commission says the fight against money laundering is now vital for financial stability and security – hence the extensive package of legislative proposals it put forward last year aimed at improving activity detection and closing the loopholes criminals use to launder money.
The 3 stages of money laundering
For the banks, investment managers, trust companies, advisors and fund administrators at the front line of the anti-money laundering (AML) fight, an effective defence entails a company-wide understanding of the three stages of money laundering, with appropriate countermeasures implemented to stop them.
Placement
Placement is where the ‘dirty’ money from criminal activity enters the financial system. Common methods include blending illegal funds with legitimate takings of cash businesses such as car parks, car washes, casinos, tanning studios and strip clubs; raising dummy invoices to make it look like a true payment has been made; depositing small amounts of money below the AML reporting threshold into bank accounts; and hiding laundered money in offshore accounts to conceal the real beneficial owner’s identity.
Layering
Layering distances the illicit money from its source by adding layers of financial transactions, often involving international movements of the funds. The aim is to obscure the audit trail and make tracing the source and ownership of the funds as hard as possible. Layering transactions may include converting cash into travellers’ cheques, money orders, wire transfers, letters of credit, stocks or bonds, or purchasing assets such as art and jewellery.
Integration
During the integration stage, the now-laundered and apparently legitimate money is reintroduced into the economy as ‘legal’ tender and reunited with the criminal. Investing in luxury items such as art, jewellery and expensive cars, making financial investments and buying businesses or real estate are common techniques.
AML best practices
Each of the three money laundering stages can be extremely complex, posing huge challenges for financial institutions as they work to spot and stop incidents. With different jurisdictions adding their own spin to local AML rules, firms’ controls need to be both robust and adaptable.
Training is one crucial component in institutions’ AML efforts – ensuring staff know what red flags to watch for, and that they adhere to well-defined processes.
Those processes also need to be effective and consistent. The criminal conviction and £265 million fine meted out to the UK’s NatWest Bank in December 2021 stemmed from its failure to properly monitor and scrutinise suspicious transactions. The case revealed how over a five-year period £365 million was deposited in the NatWest accounts of Yorkshire gold trader Fowler Oldfield, including £264 million in cash. Fowler Oldfield had been misclassified for periods as both a low-risk and medium-risk business, and was not reviewed annually. And while staff raised concerns about the deposits, no action was taken by the bank.
Client onboarding
Combatting money laundering today is impossible without a sophisticated, multi-jurisdictional AML infrastructure able to deliver automated, real-time visibility and control at every stage of the customer lifecycle. An effective AML programme demands complete and accurate information, so it needs to be right from the get-go. That starts with client onboarding, an area where global rules continue to tighten.
The EU’s recent legislative proposals call for more granular customer due diligence measures. Tougher beneficial ownership laws will introduce new requirements around nominees and foreign entities, and more detailed rules to identify beneficial owners of corporations and other legal entities.
It echoes the US AML 2020 Act, under which corporations and limited liability companies must now disclose their beneficial owners – with higher fines for AML violations. Meanwhile, stricter beneficial ownership rules agreed in March by the Financial Action Task Force, the world’s AML watchdog, significantly strengthen the requirements for beneficial ownership transparency globally to tackle concealment and the abuse of legal persons.
Yet many institutions’ onboarding steps remain paper-based and highly manual, making account set-up processes tedious and error prone. Client onboarding teams must perform hundreds of manual tasks each day to verify the identity and assess the risk and suitability of every new customer.
Typically that involves numerous back-and-forth interactions between firm and client, with reams of paper deliverables. Employees may be forced to re-key the same data into multiple systems and spreadsheets, manually access third-party systems and liaise with different teams across the globe. The data will be spread across different departments, with no single source of truth. The levels of AML rigour regulators now seek become impossible to achieve, increasing the risk of hefty fines and lasting reputational damage.
The solution lies in a digitalised, automated onboarding framework – one that can deliver the risk controls regulators demand, while providing significant internal operating efficiencies, proper scalability and a smoother onboarding experience for legitimate clients.
An automated risk-profiling capability collates and weights multiple data points, such as the investor’s occupation and country of domicile, or the industry an organisation belongs to. It enables firms to develop a risk-based picture of prospective clients when performing their initial due diligence, helping determine what level of checks and ongoing monitoring are required. Integrating with third-party watchlists to check for flags of any criminal behaviour further strengthens the risk profiling.
Identifying and tracking underlying beneficial owners is a particular pain point for institutions, demanding levels of transparency and ongoing monitoring that many struggle to meet. Advanced investor and beneficial owner screening able to track complex, multi-level ownership structures enables users to identify and verify underlying customer and beneficial ownership identities, and flag high-risk relationships.
Checking the source of a client’s wealth and funds adds an extra layer of screening protection.
Automated document checklists then ensure all the supporting information each jurisdiction requires has been captured and that the firm’s compliance responsibilities in every market have been met.
Ongoing due diligence
AML does not stop with onboarding. Ongoing client due diligence is just as important to identify, mitigate and manage fraud risk, with zero room for error.
Client profiles and accounts must be reviewed periodically (typically every year for high-risk clients) to ensure all documents and data remain current. Missing or expired documentation needs to be updated. Continued screening and risk profiling to monitor for any change in client status are similarly vital.
A change of circumstance such as a name or address update, or any information modification – revising the name on a bank instruction, for example – can be a red flag.
Monitoring for unusual or suspicious transaction activity is another priority. This was one of the big deficiencies in ABN AMRO’s anti-money laundering programme, a shortcoming that ended up costing the bank €480 million.
Failure to transition from a manual transaction monitoring and case management set-up to an automated capability was likewise a major factor in the $30 million penalty the New York State Department of Financial Services (DFS) handed down in the summer to Robinhood Crypto.
“Transaction monitoring is a cornerstone of an effective BSA/AML programme,” observed the DFS order. “It must be conducted thoughtfully, efficiently, and in a manner commensurate with institutions’ business profiles.”
Definitions of suspicious activity change over time and across jurisdictions, and monitoring capabilities need to keep pace, though many firms rely on manual reviews to investigate suspicious activity, conducted in retrospect.
Real-time suspicious activity monitoring tools can help expose fraud by spotting AML risks and creating automated alerts of suspicious activity or behaviours, enabling any potential issues to be addressed before they become an actual breach. Automatically blocking accounts or transactions when suspicious events occur offers an additional safeguard.
Where the transaction alerts warrant, suspicious activity reports need to be sent to the relevant regulatory body within their stipulated time frames – another area where Robinhood Crypto was found wanting.
Can you meet your responsibilities?
Money laundering is a growing, multinational blight, one that employs increasingly sophisticated tactics to achieve its goals.
Financial institutions need matching preventative capabilities if they are to fulfil their responsibilities as front-line guardians of the international financial system.
That requires integrated AML systems and processes that are truly up to the job. Are yours?
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