As the financial sector expands across the globe, the associated risks arising from the complexity of the financial instruments, securities and group structures are increasing as well. Due to this, the identification and verification procedures must be detailed enough to identify a suspicious transaction. Therefore, it is becoming more and more frequent to hear buzzwords around Anti-money Laundering and Combating the Financing of Terrorism (AML/CFT). The European Union and the Financial Action Task Force (FATF) implemented various legislations to tackle money laundering (ML) and terrorism financing (TF). The said legislations ensure integrity, stability and reputation of the international financial sector.

Until today, the European Union issued six Directives, with the four of them to be transposed into national legislation. Within 2020, CySEC will announce the transposition of the EU 5^th Anti-Money Laundering Directive (AMLD) into national legislation. The 40 FATF recommendations have been revised five times with the latest revision in 2012. The international task force (FATF) is comprised of 36 members (34 countries and 2 organisations) including the European Commission.

In a previous commentary, the SALVUS team provided guidance into the creation of a strong AML compliance culture within the organization. In it we discussed the AML obligations of all stakeholders and their annual training requirements.

In this commentary, we discuss the relevant risk indicators to look for suspicious activity, the reporting process and the personal ML offences on failure to report a suspicious transaction.

We further provide tips of relevant key concepts for candidates preparing towards the AML certification examination.

Similarities between ML and TF

The major difference between ML and TF is the origin of funds. ML is the use of illegally sourced funds to perform legitimate activities. TF is the use of legally obtained funds to finance illegal activities, in particular terrorism. However, a lot of similarities between ML and TF exist in
1. the methods used with the aim to disguise the link between the funding sources,
2. using inconsistent ways of performing activities, following deficiencies in Country’s system and avoid detection or investigation, and
3. the locations used as they are attracted to countries with insufficient and weak AML/CFT controls.

Risk indicators to identify a suspicious activity

The definition and the types used to conduct a suspicious transaction for ML and TF are almost unlimited. A lot of information must be collected in order to conclude that an activity or transaction is categorized as suspicious.

Suspicious activity will often be inconsistent with the customer’s economic profile of the legitimate and normal business activity. Therefore, a non-exhaustive list is provided which includes a number of risk indicators or red flags to look for.
– the investor has unusual or nervous behaviour,
– the investor discusses the record-keeping procedures and/or the reporting requirements with the intention of avoiding them,
– the investor is non-responsive to calls and/or avoids any contact,
– the investor threatens or suggests a gratuity to an employee with the aim to discourage record-keeping or reporting,
– the investor provides suspicious identification documents and refuses to provide the originals,
– the investor is reluctant to reveal personal details, its business activities and does not provide a clear picture of the existence of group structures,
– the investor uses a number of offshore accounts,
– the investor has frequent and/or large transactions, with no record on past or present employment experience,
– the transactions are unnecessarily complex and/or the size of the transaction is not consistent with the normal business activity,
– a large volume of transactions is conducted which does not appear to justify the normal business activity,
– the investor conducts frequent transactions in the same financial instrument without obvious reason and with unusual conditions such as churning,
– a transaction settlement is requested by a third person,
– the investor seems uninterested in the usual decisions about the investment accounts, such as fees, commissions, margins,
– the investor intends to liquidate large positions through a series of small transactions,
– the investor deposits cash, money orders, traveller’s cheques or cashier’s cheques in amounts under the reporting threshold to fund an investment account,
– the investor deposits a large amount of money for online trading, yet the account remains idle for some time or has very low activity,
– a public official opens an account in the name of a family member who makes large deposits not consistent with the known sources of legitimate family income,
– a student or a person without financial background exchanges large sums of money,
– transactions in high-risk jurisdictions or secrecy off-shore tax heavens,
– an employee frequently overrides internal controls, an established approval procedure and circumvents policies,
– an employee assists on transactions where the identity of the ultimate beneficiary or counterparty is undisclosed,
– an employee lives a lavish lifestyle that could not be supported by his or her salary.

The Obliged Entity should ensure that it maintains adequate information and knows enough about its customers’ activities in order to recognize on time that a transaction or a series of transactions are considered as unusual or suspicious.

Reporting process

All obliged entities should communicate to all stakeholders the internal procedures and support them through relevant training to identify suspicious activity. The below reporting process shall be followed;
1. Employees identify and report suspicious activity to the Compliance Officer (only) and via the Internal Suspicious Report,
2. The Compliance officer examines and evaluates the reported activity, following by documenting the results into the Internal Evaluation Report, including the reasons for deciding not to notify the Unit,
3. The Compliance Officer submits the Compliance Officer’s Report to MOKAS or the Unit for Combating Money Laundering via the GoAML system*,
4. The client account (and other connected accounts) are closely monitored by the Compliance officer**. The Unit might instruct the obliged entity to delay the execution of the identified transaction for a period of 7 days (with an extension of up to 30 days).
5. The Compliance officer periodically notifies the senior management*** and/or the BoD of suspicious transaction fillings.
* The report submitted to GoAML shall be kept in a printed form.
** The Compliance Officer always acts as the first point of contact with the Unit.
*** The obliged entity shall appoint a senior management member with knowledge and expertise, as a Compliance Officer, and receive internal reports and suspicious transaction filings.

An execution delay due to instructions by the Unit cannot be considered a breach of any contractual or other legal obligation on the legal person and/or its employees. The same exception applies when a customer fails to provide sufficient information for customer due diligence (CDD).

ML offences and personal penalties

Any person who knows or ought to have known that a property is the result of illegal activities and carries out activities to conceal or disguise the illicit origin of the funds, is committing an ML offence. When a person cannot prove with reasonable grounds its intention to disclosing its suspicion to the Unit, is subject to the following penalties;
– person who knows: 14 years imprisonment and/or penalty up to 500,000 EUR,
– person who ought to have known: 5 years imprisonment and/or penalty up to 50,000 EUR.

A person notifying a customer or third persons that a transaction is monitored by the Unit and/or cause obstruction to negatively affect the investigations, is subject to tipping-off offence. A tipping-off offence is subject to 2 years of imprisonment and/or penalty up to 50,000 EUR.

To conclude, it is highly important for all stakeholders of the obliged entity to be aware of their obligations and their responsibilities against AML/CFT. Thus, the entity must conduct frequent education and training programs to ensure they are fully aware of their legal obligations.

We remain at your disposal should you have any questions covered in this article.

The team at SALVUS is ready to support you get successfully prepared for the AML certification exam. The seminars will count towards your CPD requirement hours for 2020 – contact us at info@salvusfunds.com.

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.