Trusts and corporate entities can be an attractive vehicle for money launderers looking to hide assets and obscure ownership.
By understanding your risks, implementing robust compliance measures and fostering a culture of compliance in your firm, you can effectively mitigate these dangers.
What’s the risk?
A well-documented example of how the proceeds of crime are laundered is through use of complex trust and corporate structures to obfuscate the true owners of assets.
Money laundering poses serious risks not just to the financial sector but also to society at large. Criminals may try to use TCSP services to clean money generated by crimes such as drug trafficking, human trafficking, corruption, and other illegal enterprises that cause immense harm.
Trusts are often set up in complex multi-layer structures spanning different jurisdictions, to make it difficult for authorities to trace the source of funds back to these illicit activities. Professional trustees in offshore financial centres provide an extra layer of secrecy. Funds can be moved between trusts quickly to further obscure the money trail.
While trusts serve legitimate estate planning and wealth management purposes, accountants need to be aware of how their unique features could be exploited for money laundering.
Companies can also be misused to launder money and obscure ownership. Shell companies with anonymous ownership are often used. Criminals set up complex corporate structures across jurisdictions to disguise the source of funds.
Over- and under-invoicing of goods and services between companies can transfer value without raising suspicion. Trade-based money laundering exploits legitimate trade to justify fund movements. Loans, investments and payments between companies can be used in the same way.
How to stay protected
Keep your risk assessment up to date
If you’re a TCSP, you must assess your exposure to money laundering risks and take appropriate steps to mitigate those risks. This involves identifying and documenting the risks associated with the types of customers, countries or geographic areas, services and transactions that your firm deals with.
The risk assessment helps determine the level of due diligence needed for customers. Higher risk clients, such as politically exposed persons (PEPs) or complex corporate structures, might require enhanced due diligence, which simply put means gathering more proof and evidence, and further monitoring of the client.
Ongoing monitoring also enables you to keep the risk assessment current and make any necessary adjustments to AML policies and procedures. For example, if your firm expands services to a new high-risk country, the risk assessment would need to be updated accordingly.
By understanding the vulnerabilities specific to your practice, you can target your AML resources effectively and implement controls tailored to mitigate the biggest risks. This might also include establishing risk-based policies for who you do (and don’t do) business with.
Look out for suspicious activities
The best way to arm yourself against your services being unwittingly used for money laundering is to be informed.
Which is where your customer due diligence (CDD) comes in. This doesn’t just involve identifying the client and verifying your client. It means identify the beneficial owners who ultimately own or control the business and getting to know the business.
By understanding who you are dealing with, you can better monitor for suspicious activities, such as any unusual behaviour or transactions that have no apparent economic or legal purpose, or that don’t match the client’s expected activity. For example:
- Activities that are inconsistent with the customer’s known legitimate business or personal activities or means
- Activities linked to high-risk jurisdictions
- Unnecessarily complex transaction structures for no clear economic purpose
- Activities involving unknown or unassociated third parties
- Activities where the counterparty to the transaction is unknown or difficult to identify
- Transactions where records do not quite make sense or appear fabricated
- Transactions where the customer is reluctant to provide details or provide insufficient details
- Customer advising the firm on how to structure a transaction to avoid reporting thresholds
Keep records
TCSPs must maintain records of services and clients to in a written audit trail. This includes key documents like copies of customer identification, business correspondence and records of transactions for five years after the end of the business relationship.
Having a robust record-keeping system enables you to quickly retrieve relevant information on clients and services rendered if requested during an inspection. It also helps demonstrate to regulators that proper AML procedures were followed.
Thorough records also make it easier for you to identify any unusual activity if they need to conduct an internal investigation or report suspicious transactions.
Report your suspicions
Accountants have a legal obligation to file a suspicious activity report (SAR) if they know or suspect that a client is engaged in money laundering.
If you suspect money laundering, you must report it to the National Crime Agency (NCA) as soon as possible. There is no minimum threshold for suspicion – any knowledge or suspicion of criminal activity must be reported, even if no proof exists. The NCA advises an “if in doubt, report” approach.
Once submitted, the NCA will review the report and may launch an investigation if warranted. The accountant must comply with any requests for additional information.
The key is to be proactive
Offering trust and company services does expose you to money laundering risks, but you can take proactive steps to understand and mitigate these risks.
As your employees are on the front line of detecting suspicious activities, invest in regular training to ensure everyone understands their roles and responsibilities in preventing money laundering in your firm.
By making AML a priority using an all-in-one compliance solution like AMLCC, you can protect your businesses while contributing to wider efforts to stop financial crimes. Find out more.
Richard Simms, MD of AMLCC, is a licensed insolvency practitioner, accountant and leading authority on anti-money laundering. He is a sought-after guest at accountancy and AML conferences worldwide due to his expertise in changes in guidance and legislation that impact DNFBPs.
