Any company that is obliged to apply measures for the prevention of money laundering, the due diligence measures Anti-Money Laundering and Combating the Financing of Terrorism (“AML”), also needs to think about money laundering reporting.
After you have finished reading this article, you should have a general understanding of what money laundering reporting means and when do obliged entities have to report money laundering.
In order to explain the concept of money laundering reporting, it is necessary that you first understand what money laundering is.
In short, money laundering is a process where proceeds from illegal activities are used to make a transaction which results in the illegal proceeds appearing legitimate. First, the illegal proceeds need to find their way into the financial system. Then, through a set of one or several transactions with the funds, the actual source of the funds becomes less evident. Finally, the funds acquired from illegal proceeds can be used for the personal benefit of criminals or for committing other illegal acts.
To get a better understanding of the meaning of money laundering, take a look at our article on that topic.
As explained, money laundering refers to the “laundering” of proceeds from illegal activities. Most common money laundering examples are associated with illegal activities such as drug cartels, human trafficking, terrorism, etc. Some of the most notable money laundering cases from the recent years revolve around abuse of political power. Many of them have their origin in countries which are subject to international financial sanctions.* Even a person committing a minor theft would need to legitimise their illegal proceeds.
To launder money, criminals have often engaged themselves in a business which receives a substantial part of its revenue in cash. By operating a cash-intensive business, the illegal proceeds can be merged with the proceeds from the legal money flow and shown as part of the revenue generated by the business.
* International financial sanctions are political trade tools put in place mainly by international organisations in response to major international events (i.e. terrorism or other type of aggression towards other countries or regions). Financial institutions are obliged to take in relation to the persons who are subjects of international sanctions certain steps to prevent them from benefiting from the financial system (including refusal to service these persons, freezing of funds or assets, or refusal to finalise a transfer of funds to the subject of international financial sanctions).
We have explained what money laundering is, but we have yet to explain what is anti-money laundering.
To avoid facilitating illegal activities, financial institutions and certain other obliged entities need to run anti-money laundering checks when onboarding new clients or monitoring existing clients. This means that they need to identify a client, verify their identity, collect information about the client’s background and origin of wealth, as well as understand the purpose of the business relationship the client wishes to establish with the obliged entity.
We have further explained this topic in our article “What is anti-money laundering”.
As stated above, AML checks need to be run by financial institutions and certain other obliged entities. Such other entities could be financial institutions, gambling operators, virtual currency service providers, and certain other service providers and professionals who operate in fields which have a high money laundering risk. For an exhaustive list of obliged entities in your jurisidiction, please check the local AML regulation. The higher the risk of money laundering associated with a specific economic sector, the greater the importance of anti-money laundering procedures.
So, what are the benefits of anti-money laundering and who benefits from it?
AML allows the obliged entites to safeguard the integrity of the financial sector. By running AML checks, an obliged entity takes the risks associated with its business under its own control. Should any suspicion arise that its services are used or are planned to be used for money laundering or any other malicious activities, the obliged entity has to have procedures in place to deal with such suspicious clients.
Operating in a sector with high money laundering risks can cause distrust by law enforcement authorities. Obliged entities are companies which have the first-hand data on transactions with funds potentially from illegal sources. For law enforcement authorities, this information may be vital for discovering crime or for solving complex cases. To ensure a good cooperation between the obliged entities and the public sector, there are reporting channels which the obliged entities can make use of to inform the public sector of their discoveries.
The reporting obligation arises if a financial institution or any other obliged entity has suspicions in relation to a client or a transaction. For that purpose, the obliged entities are usually required to have compliance officers and may be required to appoint a reporting officer as well. The compliance officers help the employees of an obliged entity to detect and monitor money laundering, as well as report to competent authorities any transactions which are required to be reported under anti-money laundering reporting requirements (adopted by the authorities in the country where the obliged entity operates). Persons other than the obliged entities are also encouraged, but not obliged, to inform the competent authorities of any suspicious activities.
It is generally not possible to report money laundering anonymously as the competent authority may need further information from the person submitting the report to go forward with the case. Nevertheless, the competent authorities are deemed to keep confidential the information they have received, including the identity of the person submitting the report.
There are usually two stages to the reporting obligation – internal reporting and reporting to the competent authority. Internally, the personnel of a financial institution or any other obliged entity must report to the compliance officers any and all suspicions they have in relation to their clients. The compliance officers are responsible for determining whether the suspicion must be addressed internally, or a report would have to be submitted to a competent authority as well.
In the course of an internal investigation, the compliance officer must determine whether there is any suspicion that:
Information on transactions made using a considerable amount of cash must usually also be submitted to the competent authority, regardless of any additional suspicion as regards the source of the funds. Transactions in cash in any case entail a higher money laundering risk.
If any such valid suspicion arises, the compliance officer must report the suspicion to the competent authority, regardless of whether any such transaction was an attempted or a finalised transaction and regardless of the value of such transaction. There may be additional money laundering reporting requirements applicable in the country where the obliged entity operates which may supplement the list of suspicions which need to be reported to the competent authority.
For the avoidance of doubt, the mere fact that a client or a transaction has been reported to the competent authority does not by itself mean that the obliged entity must have proof that the client has committed an illegal act. It merely means that the obliged entity must have a suspicion.
The reports are usually submitted via an online platform of the competent authority. Competent authorities may have guidelines explaining the report form. Usually, there are different types of reports depending on the basis for submitting the data (for example, unusual transaction, suspicious transaction, cash transaction or potential terrorism financing). Submitting the report in a form determined by the competent authority ensures that they can process the information efficiently.
Submitting a report cannot be postponed and there should not be any undue delays. Under the recommendations of the Financial Action Task Force, the global money laundering and terrorist financing watchdog, any reports should be submitted to the competent authorities promptly, which means as soon as a suspicion is determined. This is to ensure that the competent authority is able to take actions to prevent that the funds are used for any additional criminal activities.
The suspicious activities must be reported to a competent authority, generally it is the financial intelligence unit of the country where the obliged entity operates. The financial intelligence unit has the sole responsibility of collecting and analysing the data received from obliged entities and other available sources as well as sharing the information with the law enforcement authority who investigates money laundering. The financial intelligence units generally do not conduct investigations and do not have the same powers as the law enforcement authorities.
Where to report money laundering? This depends on the country where money laundering needs to be reported. Most financial intelligence units have their own online platforms for collecting information. Due to the financial intelligence units receiving large amounts of data on a daily basis, obliged entities may not be permitted to submit the data outside of the designated online platform.
Putting sufficient care into your AML checks is essential to ensure the sound fulfilment of the money laundering reporting obligation. This is where Veriff can help you out.
With their complete AML & KYC Compliance solution, you'll have certainty that your customers are honest in their intentions, and won't present any problems for your compliance officers. Visit the page to learn more, and then talk to our team for more details and a demo.