Managing and mitigating risks of money laundering

In accordance with regulation 33 of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, a relevant person must apply enhanced customer due diligence measures and enhanced ongoing monitoring, in addition to the customer due diligence measures, in order to manage and mitigate the risks of money laundering or terrorist financing.

It is therefore vital to have a process for identifying when enhanced due diligence is required and then the measures that are required to be put in place.

A. Situations when enhanced due diligence is required

1. When the customer is not physically present at the time of identification checks.

2. When entered into a business relationship with a ‘politically exposed person’.

‘Politically exposed person’ (PEP) is a term describing someone who has been entrusted with a prominent public function. A PEP presents a higher risk for potential involvement in bribery and corruption, by virtue of their position and the influence that they may hold. 

Typically, a PEP can be either a foreign or domestic individual such as senior politician, senior government, judicial or military official, senior executive of state owned corporations, or important political party official.

Requirements for a PEP apply to family members or close associates, any individual publicly known or known by the financial institution to be a close personal or professional associate.

3. When entered into a transaction with a person from a high-risk third country.

A high-risk third country is one identified by the European Commission as having strategic deficiencies in their national anti-money laundering and counter financing of terrorism regime. HM Treasury maintains lists of financial sanctions imposed in the UK by country, administration or terrorist group.

What is prohibited under each financial sanction depends on the financial sanction regulation. Regulations are imposed by the:

• United Nations Security Council – the UK is a member so automatically imposes all financial sanctions created by the UN
• European Union – as a member of the EU, the UK imposes all financial sanctions created by the EU
• UK government – a small number of financial sanctions are created by the UK government.

Check which jurisdictions are subject to sanctions.

4. In any other situation where there is a higher risk of money laundering.

For example:

• In cases where the client has provided false or stolen identification documentation or information
• In cases where the client has entered into transactions that are complex and unusually large
• In cases where the client has entered in an unusual pattern of transactions, and the transactions have no apparent economic or legal purpose
• In any other case which by its nature can present a higher risk of money laundering or terrorist financing, such as: 
  a) the client is a business that is cash intensive
  b) the corporate structure of the client is unusual or excessively complex given the nature of its business
  c) the client’s product, service, transaction or delivery channel are high risk. For example, the product involves private banking or the product or transaction is one which might favour anonymity.

B. Measures to undertake/consider

1. The enhanced due diligence measures when dealing with customers who are not physically present and other higher risk situations include:

• obtaining additional independent, reliable information to establish the customer’s identity
• applying extra measures to check documents supplied by a credit or financial institution
• making sure that the first payment is made from an account that was opened with a credit institution in the customer’s name
• finding out where funds have come from and what is the purpose of the transaction.
  

2. The enhanced due diligence measures when dealing with a politically exposed person are:

• making sure that only senior management gives approval for a new business relationship
• taking adequate measures to establish where the person’s wealth and the funds involved in the business relationship come from
• carrying out stricter on-going monitoring of the business relationship.
  

3. Other enhanced due diligence measures include:

• as far as reasonably possible, examining the background and purpose of the transaction
• increasing the degree and nature of monitoring of the business relationship in which the transaction is made to determine whether that transaction or that relationship appear to be suspicious
• taking additional measures to understand better the background, ownership and financial situation of the customer, and other parties to the transaction
• taking further steps to be satisfied that the transaction is consistent with the purpose and intended nature of the business relationship.