When you engage a new business client, it’s important to know as much as possible about this new, unknown company. This is particularly relevant at present, with the UK recently rated second-highest in the global money-laundering stakes, with an estimated £88,000,000,000 (that’s 88 billion in case you were guessing) worth of money cleaned annually through UK-based companies.
To protect your firm and your professional reputation, it’s crucial to have strict Know Your Customer (KYC) (or sometimes known as Know Your Client) and Customer Due Diligence (CDD) checks in place when onboarding a brand-new client. Anti-Money Laundering checks are a core component of these robust compliance checks and due diligence processes.
Let’s take a look at why Anti-Money Laundering compliance is so important, and what the key red flags are when reviewing a new client’s financial transactions and history.
3 key reasons to focus on Anti-Money Laundering compliance
Anti-Money Laundering (AML) checks are a crucial element of your KYC and CDD checks and your firm’s standard onboarding processes. When a prospective client approaches the firm, you want to get as detailed an overview of their business as possible.
AML checks are fundamental to this process for three key reasons.
1️⃣ Compliance with legal and regulatory requirements
AML checks are needed to ensure your firm’s compliance with the laws and regulations relating to money laundering and terrorist financing. Governments worldwide have enacted AML laws to prevent criminals from using financial systems to legitimise their illicitly obtained funds.
In the UK there are a number of laws that legislate AML – the main two being the Proceeds of Crime Act (2002), and The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (also know as MLR 2017)
2️⃣ Reputation and trust
By conducting AML checks, your firm can demonstrate its commitment to ethical business practices and maintaining the integrity of the financial system. Clients, stakeholders and regulators expect firms to have robust AML procedures in place, so failure to comply can damage the firm's reputation and could even result in legal consequences and stiff penalties.
3️⃣ Risk mitigation
AML checks help your firm assess the risk when taking on prospective clients. By identifying and verifying the identities of clients, as well as scrutinising their transactions and sources of funds, you can identify suspicious activities and spot any potentially high-risk clients. Based on these checks, you can make informed decisions about whether to engage with a client and can put appropriate risk-mitigation measures in place to protect the firm.
Money-laundering red flags to be aware of
For your AML checks to bear fruit, everyone in your team needs to be proactive and diligent about spotting the signs of money laundering and illicit business activities.
Training your practice staff to be aware of the key signs of money laundering is a major part of having a successful due diligence process. When the whole team knows the red flags to look out for, it becomes second nature to identify these issues and to take the required action.
The specific red flags may vary depending on the jurisdiction you practise in and the business circumstances of your clients, but here are some common indicators to look out for:
- Unusual or inconsistent transactions – large, frequent or complex transactions that are inconsistent with a client's known business activities can be suspicious. Transactions involving high-risk countries or individuals known for criminal activities are also red flags.
- Lack of documentation or incomplete information – be wary when clients provide incomplete or inconsistent identification documents, refuse to provide necessary information or have inadequate records. This lack of information may be an attempt to hide their true identities or the sources of their funds.
- Unexplained or disproportionate wealth – when clients demonstrate significant wealth without a clear legitimate source, this should be explored. If their financial activities don’t align with their known income or business activities, this should raise suspicions.
- Complex ownership structures or offshore accounts – look out for clients who employ overly complex corporate structures, use nominee directors or shareholders, or operate through offshore jurisdictions. If these jurisdictions are known for their lax regulations, they may be an attempt to conceal the true beneficiaries or origins of funds.
- Involvement in high-risk industries – certain industries (for example, casinos, money services businesses or shell companies) are considered higher risk, due to their potential for facilitating money laundering. Clients operating in these sectors warrant additional scrutiny and may require Enhanced Due Diligence (EDD) checks.
- Politically exposed persons (PEPs) – PEPs who hold prominent public positions, their family members and their close associates, can pose higher AML risks. This is due to their potential access to public funds and influence. Engaging with PEPs requires EDD checks and strict monitoring.
Firmcheck: identifying the red flags to protect your firm
Keeping up to date with current AML legislation and potential threats is a must.
It's also important to note that the presence of a single red flag may not always indicate illicit activity. When you find a red flag, this should be a prompt to carry out further investigation and to think about the overall risk profile of the client.
If your firm is looking to improve its AML policies and procedures, Firmcheck is the perfect software solution for the job. Instead of spending hours of practice time researching prospective clients, Firmcheck can help you quickly verify the individuals or companies you're dealing with, and their backgrounds, so you can make a smart risk-based decision.
Schedule a demo to see how Firmcheck streamlines your whole AML management.
(NB: This article doesn't constitute legal advice and is intended for general informational purposes only. Always consult with a legal expert or compliance consultant for guidance specific to your firm.)
