For firms subject to AML regulations, there’s been a host of new rules and guidance. Here are the key reminders and  takeaways

The Law Society has published proposed updates to Legal Sector Affinity Group (LSAG) as an addendum. They await Treasury approval of the wording. The changes are largely reminders and clarification on certain points and are not likely to have a large impact. 

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Last week saw the third in VinciWorks’ successful series of AML core group meetings and the first of 2024. These meetings are an opportunity for AML professionals in the world’s leading law firms to come together to share ideas and best practice hosted and facilitated by the VinciWorks and Compliance Office team.

Impact of ECCTA

VinciWorks’ Business Development Director Tom Evans gave a recap of the Economic Crime & Corporate Transparency Act (ECCTA) and its impact on KYC processes for firms. ECCTA has brought the biggest ever changes to Companies House since its inception, giving it new powers to act as an active gatekeeper to check and reject company registration details. ECCTA also introduces reforms to how LLPs are managed. LLPs must now have a UK-registered office. Many of the core group members have set up working groups on ECCTA.

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As more Hamas leaders come under international sanction, their relationship with international aid agencies and charities has come under scrutiny. The United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) is a UN agency that is meant to provide essential services to Palestinians who fled or were displaced during the 1948 War of Independence. With a staff of over 30,000, primarily Palestinians, UNRWA operates in Gaza as well as Jordan, Lebanon, Syria and the West Bank, with a mandate to provide medical care, education, and other social services to vulnerable families and individuals.

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The Economic Crime and Corporate Transparency Act 2023 makes a number of important changes to corporate transparency and compliance in the UK.

It is going to be easier to prosecute companies for wrongdoing 

Prosecutors will no longer have to prove that “the directing mind and will” of a company was behind wrongdoing. Now, any “senior manager” who has engaged in criminality around fraud, tax evasion, sanctions breaches, money laundering, false accounting and bribery can find their actions result in corporate prosecution.

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The UK’s AML system is undergoing a significant overhaul aimed at tackling money laundering and terrorist financing. A series of new regulations are designed to close loopholes and enhance due diligence measures across various sectors.

Cryptoasset businesses under the microscope

One of the most significant changes is the introduction of the “Travel Rule” for cryptoasset firms. This rule, which is in line with recommendations from the Financial Action Task Force (FATF), requires businesses to share customer data with each other for transactions exceeding €1,000. This will make it more difficult for criminals to use cryptocurrencies to launder their illicit gains.

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Thanks to Binance, Chinese nationals are able to move money into the US undetected

Jerry Yu is a 23-year-old NYU student and a Chinese national. He is also the majority owner of a Texas-based crypto mining facility called BitRush. But it appears that there is more to the company, which was acquired last year. It was recently revealed that the company, bought for $6 million, is backed by undisclosed Chinese investors thanks to Tether, a cryptocurrency routed through Binance, a cryptocurrency exchange.  

According to a recent report from The New York Times, the story started with a series of lawsuits from contractors who claimed they weren’t paid for the work they did on the facility, located in Channing, Texas. 

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Money laundering is the term used to describe the act of disguising illegal money to make it seem like it came from a different – and legitimate – source. Criminals make the proceeds of crime appear to be legally obtained in order to get away with their crime and avoid raising suspicion. Without money laundering, criminals cannot bank large sums of money without the authorities tracing it back to the crime. Since buying expensive items in cash would also raise suspicion, it’s important for money to be laundered in order to be banked.

‘Proceeds of crime’ refers to any asset that is gained from criminal activity. An example of this could be a car bought with stolen money, this makes the car criminal property, and therefore a proceed of crime.

The term “laundering” comes from the fact that criminals attempt to ‘clean’ (or legitimise) money gained from crime, making it hard for authorities to trace its origin.

How Money Laundering Works

Money laundering begins with a crime which generates profit. This could be credit card skimming, modern slavery, manufacturing/selling drugs, and so on. Let’s take a closer look at an example of cyber-crime, a fake website selling goods that don’t exist (usually high end goods for unbelievably low prices to lure customers in):

Money laundering in this example will attempt to confuse authorities by creating lots of fake paths and dead ends as to where payments have come from, and also where they were processed and what for. Goods may be bought legitimately (from unwitting real customers who will never receive their goods), or they may be purchased using stolen credit cards and fake identities.

Often, money laundering is all about speed and criminals making a quick buck. In the example of our online store, then, the website may only exist for a few days until it’s taken down and erased. Any money collected is then moved through different accounts before reaching its final destination. Again, this makes the money’s origin hard to trace since the receiver will appear to have no link to the crime whatsoever. They could even be in different countries.

Sometimes criminals will buy and sell assets in order to launder money. Using stolen bank accounts/identities to originally deposit money and purchase items, but then selling the property so that money returns to them from a legitimate buyer.

This example highlights how quickly criminals can work in order to reduce the chances that they will ever be caught because of how the money can be laundered into the system without anyone noticing, reducing the chance it will ever be retrieved again.

Remember: as well as hiding its origin, money laundering can also take place in order to disguise the destination of money. Examples of this include money spent organising terrorist activity or arranging up human trafficking.

Three Stages of Money Laundering

  1. Placement: This is the movement of the money from its original source. Once it is taken from the source, it is moved into circulation through different regulated sectors such as financial institutions or casinos.
  2. Layering: This stage is when criminals are trying to make it more difficult for anyone to track the money back to the original source; techniques include moving the proceeds of crime through different accounts, institutions, and even overseas, all in the attempt of reducing the chances of the authorities ever suspecting them.
  3. Integration: The final stage is when laundered money is moved into the economy through banking systems, completing the journey that the money goes on because now it appears to be regular income. The laundered money now appears completely ‘clean’.

The Evolution of Money Laundering

The reality is that money laundering occurs in incredibly high volumes each year. The nature of the services and products offered by the financial services industry (namely managing, controlling and possessing money and property belonging to others) means that it is vulnerable to abuse by money launderers looking to ‘clean up’ criminal profits.

Criminal proceeds amount to 3.6% of global economy, and a whopping 2.7% of this is from laundering, coming to roughly £1.2 trillion! However, due to the surreptitious nature of the transactions, the exact amounts are unavailable, so the amount of money that is laundered every year can only ever be an estimate. However, the level we can estimate already shows that the frequency of the crime is high all over the world.

As soon as taxation started, money laundering became a loop hole that people took advantage of to make some extra money. Chinese merchants used to hide their wealth to avoid taxation and moving the money around to avoid being found out. In this case, the crime is tax avoidance, and the laundering comes into it by moving around the money in order to avoid it being detected by the authorities.

Over time, offshore banking and tax evasion has developed in its sophistication, but all with the intention of keeping money out of the eyes and hands of the authorities. The scale, velocity, and ease at which criminals can carry out money laundering means that the problem isn’t going away any time soon.

The rise of global financial markets now makes money laundering easier than ever because there are countries with bank-secrecy laws that are connected to countries that have bank-reporting laws. This means that you can anonymously deposit money made from crime into one country and then have it transferred to anywhere else for personal use. Transfers from these countries would be considered high risk for money laundering.

Money laundering is the term used to describe the act of taking illegal money from source A and making it look like it came from source B, a legitimate, legal source. Criminals make the proceeds of crime appear to be legitimate in order to get away with their crime without raising suspicion. Until they do this they are unable to use the money without authorities tracing it back to their crime.

The proceeds of crime refer to an asset that is linked to crime. An example of this could be a car bought with stolen money, this makes the car criminal property, and therefore becomes a proceed of crime.

The term “laundering” comes from the fact that criminals disperse the money gained from the crime, by spreading it out, investing in businesses, dividing it up into many bank accounts and so on. These actions make it more difficult for the authorities to trace the money back to the crime.

Knowing what to look out for to spot the signs of money laundering is vital for all employees working within the regulated sector.

5 Signs of Money Laundering to Look out for:

Spotting the warning signs when it comes to money laundering could be make or break for a company depending on how fast you detect and respond to threats.

  1. 1. Reluctance to Provide Information
  • According to the Financial Action Task Force, the body set up to fight against money laundering, if the customer is secretive and evasive, then you should take it as a red flag.
  • It sounds obvious, but if they’re reluctant to disclose any of information, data or documents that you need, you should avoid any business with them.
  1. 2. Incomplete or Inconsistent Information
  • Lowers Risk Group suggest accountants should be on the lookout for customers that use multiple tax IDs, documents that cannot be verified, and are difficult when it comes to the identification of partners and owners within the company.
  1. 3. Irregular Money Transfers and Transactions
  • Money changing hands in unusual ways should always raise concerns. Accountants in charge of onboarding new clients should be aware of funds transferred to and from “locations of concern”, seeing it as a warning sign straight away.
  • The movement of money/assets when there doesn’t seem to be a business relationship between the parties, or transactions between groups that differ in their commercial arrangements should be looked into further.
  • Unusually high turnover from cash-based businesses that are above average compared to similar-sized organisations in the same sector may also require further explanation because of their irregular figures.
  1. 4. Complex Group Structures
  • Criminal schemes are often pretty sophisticated. So if you notice a complex structure with no explanation behind it, look into it further.
  • Their complexity could be deliberately set up to confuse and obscure others, so they can get away with the layering and integration stages of money laundering.
  1. 5. Negative Reviews
  • This may seem too simple, but if there are bad reviews of the customer that you can find by simply searching the internet, chances are you should stay well clear. An everyday internet search could reveal information that could hint at unusual business activities.
  • By carrying out appropriate due diligence, following up any issues until resolved or reporting to the National Crime Agency when needed will protect your organisation’s reputation as well as the UK economy.

How you can protect yourself –

Customer Due Diligence

This means making the effort to check out the people you’re planning on doing business with to increase your security when it comes to business relations and reducing the chances of problems occurring in the future as a result.

If you fail to carry out due diligence checks, you could be used to facilitate money laundering, something that means you become tainted if the ‘dirty’ money moves through your business, whether you realise it or not.

Due diligence can’t be ignored because it checks out the assets, liabilities, cash flow, and general financial management of the customer in question. It’s win-win really because you either gain peace of mind before getting involved with them, or it saves you any problems caused by them in the future.

Internal controls and monitoring

The importance of efficient internal controls and monitoring systems cannot be stressed enough. They mean that the right people are alerted straight away so that they can take the right steps to prevent the threat from becoming anything more serious.

Some good controls are:

  1. Nominated officers are figures within a business that employees can report to, creating a clarity in the whole process of reporting and responding
  2. If you have a larger business, having a compliance officer can help maintain a consistent level of understanding across the whole workforce around the rules they should be following
  3. Providing senior managers with regular information on the risks in money laundering means that they’re aware of their responsibilities and importance in the issue of AML
  4. Make sure your employees are clear on the problems they could face too, this can be dealt with through effective training
  5. Regularly updating AML policies, controls and procedures, as well as completing a policy statement that you stick to

Proceeds of crime refer to money/assets that have been acquired directly or indirectly through crime. Usually, money gained from committing crimes is used to buy assets, making said assets proceeds of crime. An example of this could be a car bought with stolen money, this causes the car to become criminal property, and therefore a proceed of crime.

The aims of laundering are simple: criminals make illegal money from source A, and then try and make the money look like it came from source B, a legitimate income. Criminals make the proceeds of crime appear to be legal so that they ‘blend in’ with normal life, avoid suspicion, and may continue to make money illegally.

The term “laundering” stems from the fact that criminals disperse the money gained from the crime and spread it out throughout numerous accounts and financial institutions in order to hide its origin. By doing so, it quickly becomes much more difficult for the authorities to trace money back to the crime itself, and so ‘dirty’ money (illegal money) becomes ‘clean’ and available to spend – it has been laundered.

Spotting Proceeds of Crime

Proceeds of crime may come in a number of forms, as either a sum of money, stolen goods, or assets bought with illegally obtained money. If it is money, it will usually be laundered in some way so that it can be banked and used to make investments and purchases. This tactic entails criminals essentially creating different trails for authorities to follow when trying to track down the source or destination of the money. The aim will be to disguise the money’s origins or its final destination and make it hard to prove that the money was ever part of criminal activity.

This variability of what a proceed of crime looks like means that they are very hard to spot. Over time, money laundering has developed to include offshore banking and tax evasion, all with the intention of keeping money out of the hands of the authorities and to avoid rules and regulations.

The rise of global financial markets makes money laundering easier than ever because of the ease at which you can move money between countries across the world (different countries vary in their approach and legislation around secrecy and reporting laws). This means criminals can anonymously deposit money made from a crime in one country and then have it transferred to another country to use without declaring how it came to be.

A red Ferrari and a Bentley Continental car, jewellery, watches and properties in London and the surrounding areas are among the proceeds of crime that the Metropolitan Police have recovered from criminals in the last five years. Anything that is bought with the money gained from crime becomes “tainted” straight away as a result. These are all proceeds of crime and they can all be repossessed by the police and other relevant authorities.

There are very few ways to know when somebody is benefiting from proceeds of crime, naturally, since the whole point of money laundering is to disguise this fact. One sign that something could be a proceed of crime might be that it was quickly paid for in cash, or that the person making the purchase is unlikely to be able to afford the asset taking into account their job or income.

Anti-money laundering (AML) is the process of identifying and preventing criminals from concealing proceeds of crime and profiting from them. Money laundering is a criminal activity that both damages the economy and facilitates and funds criminal acts. There are a number of regulations and laws surrounding anti-money laundering efforts, including the Proceeds of Crime Act (2002), the Terrorism Act (2000), and the Anti-Money Laundering Act (2018).

The impact and authority of anti-money laundering laws and regulations are far reaching and call for organisations in the regulated sector to perform due diligence checks, abide by their reporting obligations, and cooperate with officers of the law when requested by the court.

The UK’s AML regime has stepped up recently; 2018 saw the launch of a new watchdog to strengthen defences against money laundering and terrorist financing. The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) is a group that works with AML supervisors and law enforcements to improve cooperation and improve general standards for AML efforts.

Proceeds of Crime Act 2002 (POCA)

This Act deals with the process of recovering assets that have been gained through crime. Prior to the Act, confiscation and recovery couldn’t occur until after a conviction had taken place, but in 2002 this changed, meaning that assets could be recovered upon suspicion of crime and held until conviction (or release).

Put simply, the primary aim of POCA is to reduce the number of loop-holes in the financial system and to reduce the number of cases where criminals can profit from crime. The aim is to cut the criminals off from their motivations – money and assets, and prevent them from hiding any ill-gotten gains prior to conviction.

The Act was introduced to improve the legislation around money laundering, and the treatment of proceeds of crime, laying out much more concrete and transparent rules for authorities.

The changes that the POCA brought about highlight how effective it has been too. Between 2010 and 2014 more than £746 million of criminal assets were seized, as well as assets worth more than £2.5 billion being frozen.

Terrorism Act 2000

The Terrorism Act (2000) is a piece of permanent anti-terrorism legislation in the UK. It aims to combat the global problems of terrorism, along with its financing – something that is often facilitated through reverse money laundering.

In many cases, terrorist operations are fuelled from legitimate sources of money. By using this once ‘clean’ money for deadly causes, they are tainting it, which is why it’s called reverse money laundering.

Despite its name The Terrorism Act works heavily to prevent the financing of terrorism and, as such, is an important piece of legislation in the anti-money laundering fight. It aims to leave people more vigilant about where money goes to once it is transferred, increasing vigilance and awareness in the regulated sector and empowering staff to raise suspicion if they see cause.

Criminal Finance Act 2017

The Criminal Finance Act (2017) gives law enforcement agencies more powers so that they can recover the proceeds of crime, as well as tackle money laundering, tax evasion, corruption, and the financing of terrorism.

The Act makes companies and partnerships criminally liable if they fail to report suspicion of crime (whether this is due to a member of staff or an external agent). The Act is far reaching and can be upheld even where the business was not involved in the Act or aware of it at all. A prosecution could lead to both a conviction and hard-hitting penalties for any organisation that fails to report suspicion.

Anti-Money Laundering Act 2018

Before this Act was passed, the UK’s domestic sanction regimes were confined to terrorism. The introduction of the Anti-Money Laundering Act in 2018 meant that England and Wales would have the power to impose sanctions independently if necessary, i.e. post-Brexit.

The Anti-Money Laundering Act (2018) complies with the UK’s obligation to conform to standards set by the United Nations regarding anti-money laundering. It pushes towards the investigation and prevention of money laundering and terrorist financing and works to reduce and overcome threats to the integrity of the international financial system.

Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017

This Act introduces the provisions of the European Union’s Fourth Anti-Money Laundering Directive (4 MLD) into national law. These regulations override the Money Laundering Regulations (2007) and the Transfer of Funds (Information on the Payer) Regulations (2007).

These developments increase the emphasis on a risk-based approach to money laundering. A whole series of internal controls and procedures were brought in with the Act, including customer due diligence, record keeping, and imposing a number of obligations on senior management and employers. Organisations must keep up with the changes, ensuring that policies and procedures are in place to deal with the potential risks they could face.