Globally, governments recognise certain areas within a business increase the risk of ML/FT occurring. These areas include the (a) nature, size and complexity of the business, (b) the types of clients or customers that the business deals with (B2B and B2C), (c) the products or services that the business provides, (d) the methods used to deliver the products or services, (e) the geographies dealt with and (f) the types of relationships that exist with other businesses.
Any one of these areas can expose a business to unwittingly facilitating ML/FT. When two or more of these areas are found to have higher risk, the risk compounds, increasing the probability of ML/FT occurring. Let’s look at each of these areas and the variables that, if present, increases the risk.
Nature, size & complexity
Certain sectors within the financial industry have higher vulnerability of facilitating money laundering or financing of terrorism.
To assist businesses to understand the risks they must manage, most governments provide sector and national risk assessments. The sector assessments detail the characteristics that increase vulnerability and the national risk assessment will provide information relevant to the environment with sufficient breadth and depth about
potential threats. This includes knowledge of the types and scope of proceeds-generating offences that have been detected by law enforcement agencies.
Before undertaking a money laundering risk assessment, businesses must make themselves familiar with these important information resources.
The next step is to obtain corporate data which will allow statistical measurement of risk exposures.
Below are some characteristics to indicate the nature, size and complexity of a business.
Annual Turnover
The annual turnover of a business assists to determine the size of business operations. AML/CFT risks: The exploitation of a business for money laundering or the financing of terrorism is increased if the business has a large turnover – thus reducing the opportunity for money laundering or the financing of terrorism transactions to be identified.
Structure
The greater the number of subsidiaries or branches, the greater the level of controls required to ensure your business policy is applied consistently. AML/CFT risks: Those seeking to undertake money laundering or the financing of terrorism will target businesses with more than one branch if they are able to identify weaknesses in AML/CFT compliance controls. This will allow the launderer to facilitate the placement and/or layering stages.
Management Oversight
Having all management onshore assists to reduce risks due to easier communicating channels. AML/CFT risks: Poor oversight of business operations can provide an avenue through which to exploit practices and procedures directly for the purposes of money laundering and the financing of terrorism.
Size of Client Base
The greater the number of clients the greater the exposure to ML/FT. Your business should operate with client risk profiling systems so you know which clients present the highest risk. AML/CFT risks: The ability to hide amongst other clients is a crucial factor for those seeking to undertake money laundering or the financing of terrorism.
Product or Service Diversity
The greater the number of products or services provided, the greater the opportunity for a launderer to use a business to layer their dirty funds and integrate with cleansed funds. AML/CFT risks: Each product and service must be risk profiled against vulnerability for ML/FT. This will allow your business to more readily identify account activity that is posing a higher risk.
Geographic Spread
AML/CFT risks: Placing geographical distance between the client and the client’s funds reduces the risk of detection. Many activities are undertaken by people in or through countries with weak or failed AML/CFT controls. The Financial Action Task Force acts as the international watchdog in determining the strengths and weaknesses of a country’s AML/CFT regime.