Chapter five of our Guide to Anti-Money Laundering (AML) For Cross-Border Payments and Remittances discusses some of the practical challenges arising from compliance requirements and the underlying risks associated with these. Here, we explore a few of these challenges and highlight how high-quality data and regulatory technology (regtech) can help compliance teams to tackle them. 

1. Knowing when to perform enhanced due diligence (EDD)

When conducting a settled business relationship, firms need to know who their customer is, be assured that they and their activities are legitimate, and have enough information about them to identify unusual activity against an expected baseline. This is the essence of customer due diligence (CDD).

When potential clients may be deemed higher risk, firms must undertake enhanced due diligence (EDD) measures to attain assurance. In some situations where the prominence or scale of a business is significant, this might require the engagement of outside resources from some of the many business intelligence companies now providing EDD services. However, most high-risk clients will not warrant this level of activity, leaving many firms to conduct in-house, desk-based research on the sources of a potential client’s wealth and income, as well as their wider connections. 

An invaluable addition to this is automated adverse media screening, which can provide a wider body of background risk information about potential clients, their associates, and their activities. Such material can help a firm better calibrate whether a client sits within their risk appetite and clarify concerns on other risks, such as potential sanctions exposure. 

2. Building strong partnerships

Executing cross-border payments often involves working with partners of varying types. While banks typically work through a correspondent banking network, dedicated cross-border payment service providers – depending on their size – will work with various larger financial institutions. In every case, a significant amount of trust is involved, with firms needing to rely on other chain elements to fulfill their AML/counter-terrorist financing (CTF) and other anti-financial crime obligations. If they do not, there is a significant risk that an individual firm can unwittingly become a conduit for illicit funds. 

A major part of the response to this challenge is ensuring the technology being deployed by the vendor is leading edge. In addition to being efficient, effective, and in line with global standards – such as ISO data requirements – firms should look for a vendor whose technology is easily interoperable with partners’ platforms through, for example, the use of APIs. 

For AML solutions like transaction monitoring and screening, one important feature compliance teams should look for is ‘plug and play’ capabilities that make the set-up process more efficient. Examples may include a pre-built library of rules and typologies, a rule library, an API guide, and dummy data for testing. 

3. Meeting regulator expectations

Firms should ensure the areas of their policies, procedures, and controls that relate specifically to cross-border operations and risks are well-documented and explained, providing a reasoned and auditable record that can be used during regulatory examinations. If, for instance, a firm has decided to apply more detailed transaction monitoring requirements on certain client segments that use cross-border payments regularly, the reasons for this need to be set out clearly. While regulators applaud applying a risk-based approach, they also wish to understand its logic. 

Although regulators continue to take a ‘solution neutral’ approach to how firms implement AML/CTF requirements, others – such as the Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA) – are also now nudging firms towards the use of advanced technologies, such as artificial intelligence, to fulfill a wider array of compliance requirements. 

Given the volume and velocity of transactions cross-border firms handle, the savviest teams are exploring the benefits of extensive automation both to support practical and risk-based compliance objectives. Regulators will therefore be looking for firms to deploy regtech solutions that are not simply innovative for their own sake but can deliver effective outcomes in identifying risk. Technologies that can deliver this at scale, such as machine learning and cloud computing, will likely become increasingly staple requirements for meeting regulatory requirements over time. 

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In chapter six of our Guide to Anti-Money Laundering (AML) For Cross-Border Payments and Remittances, the hallmarks of effective AML compliance are discussed. From maintaining an iterative mindset to viewing AML and counter-terrorist financing (CTF) as a strategic priority from the outset, the following list of best practices aims to help cross-border payment firms mitigate risk and remain compliant in the face of shifting regulatory and risk environments. Firms may use this as a checklist to build their AML infrastructure and manage their day-to-day risk management processes. 

1. Stay across the latest updates from key regulators 

It is vital that firms know, understand, and act upon the relevant licensing, registration, AML/CTF, and sanctions laws and regulations in all the jurisdictions in which they operate. While grasping the fundamentals outlined by the Financial Action Task Force (FATF) is extremely helpful, it is important to account for local nuances, which can affect various customer due diligence (CDD) measures. 

In addition to keeping pace with local authorities, the savviest of firms pay attention to the region’s regulators known to drive forward innovation. The Australian Transaction Reports and Analysis Centre (AUSTRAC), the Monetary Authority of Singapore (MAS), and the Hong Kong Monetary Authority (HKMA) are often regarded as the industry’s ‘first-movers’, providing topical guidance for supervised firms and running consultation periods to inform regulatory reform. 

Regardless of whether a firm is registered in any of the aforementioned regulators’ jurisdictions, the resources they produce are worth paying attention to as they often outline industry best practices informed by a risk-based approach. Some resources to be aware of include the following:

• AUSTRAC’s industry-specific guidance.
• MAS’ consultation papers.
• HKMA’s regulatory guides.  

2. Know your partners

Cross-border payments often involve working with other businesses, whether legacy firms, overseas agents within a payments network, or correspondent banks. Firms must assess their partners’ anti-financial crime approach and be satisfied that it complies with relevant laws and regulations. Practically, this means asking questions surrounding the partner’s technology, people, and policies. How do they manage vast amounts of data? Do their fraud and AML teams work in silos? Are thorough records kept regarding client accounts and activities? Additionally, firms can ensure they understand the ownership structures of any potential partners with a robust know-your-business (KYB) screening solution. 

At the same time, to be an appealing partner themselves, firms also need to demonstrate that they meet relevant standards, and it is essential to have documented policies and procedures to hand to show this. A further requirement here is to ensure a consistent approach between cooperating firms to eliminate major gaps in compliance or potential future operational bottlenecks. 

3. Thoroughly understand the risk environment

There are substantial financial crime risks around cross-border payments, whether linked to major predicate crimes such as fraud, money laundering, terrorist financing, or sanctions evasion. As a result, firms need to understand their risk environment and how the typologies, behaviors, and wider geopolitical environment vary in every jurisdiction in which they operate. 

It is often a primary criminal aim to get illicit funds out of a country before the authorities can interdict them. Firms need to monitor the FATF, regulators, law enforcement, and other sector publications to understand criminal typologies and the abuse of emerging products and channels. For example, we have recently reported on MAS’ warnings to regulated entities about wealth management sector risks and money mules. In most cases, guidance papers like these will include practical insight surrounding financial red flag indicators that can help firms enhance their customer screening and transaction monitoring tools.

4. Use RegTech solutions prudently

With the right platforms and data, automation can bring large efficiencies combined with increased effectiveness. But this is not an assured outcome with every platform, and firms must think carefully about how they deploy systems. Some ‘sub-principles’ to consider are listed below:

• Reliable and real-time: The volume and frequency of cross-border payments are high and rising. The systems need to be able to onboard, monitor, and screen customers and must therefore be capable of managing vast amounts of data and doing this consistently, 24 hours a day, making cloud computing essential.
• Targeted and risk-focused: The types of financial crime risks in the cross-border operating space are wide-ranging, and there is a risk with some less sophisticated platforms that firms will be drowned in a sea of false positives. Therefore, firms must look for platforms that use artificial intelligence (AI) and machine learning to reduce waste and target real risks. 
• Adaptable and scalable: Platforms must be flexible enough to respond swiftly to changing environments. But they also need to be rapidly scalable for periods of major business growth and adaptable enough to work with new products and delivery channels as the firm expands its offering.

5. Keep long-term goals in sight 

While it can appeal to firms to chase short-term, box-ticking compliance objectives to get through the next audit or keep an executive stakeholder happy, the best compliance teams will keep their longer-term vision in mind. Given the importance of automation, this means having a long-term technology roadmap allowing time to assess vendors, manage internal stakeholders, and secure the budget and approvals needed to support this transition.

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Founded in 2021, DolarApp is a dollar USDc account for Mexico and Argentina. We met with co-founder and COO Álvaro Correa Gallardo to find out more.

Introducing DolarApp

Backed by investors such as Y Combinator and Kaszek, DolarApp was created to help solve the problem Latin American citizens face when trying to access banking in US dollars.

“After living and working across Latin America, from Panama to Mexico to Colombia, my co-founders and I realized the big existing problems people faced when trying to dollarize their finances, with some people ultimately traveling to the USA frequently just to be banked in dollars. People’s motives for wanting to dollarize their finances vary; some want to protect their savings in a more stable currency, some travel often to the US and need to pay in dollars frequently, while others work for companies in the US and receive a salary in USD. Until now, the only solutions for these problems were credit cards that might charge up to 3% foreign transaction fees, or remittance providers who charge around 5% transaction fees when making or receiving USD transfers. Ultimately this leads to a poor financial experience for people in LatAm just because of where they happen to be born”, said Correa.

While working at Revolut, Correa and his co-founders, Fernando Terrés and Zach Garman, began thinking about how to provide people in LatAm the ability to manage their everyday finances in USDc, achieving financial stability while avoiding these high fees.

From Peso to USDc and Back Again

“With DolarApp, users can get account details in Mexico and USA, allowing them to go from peso to USDc and back in a matter of seconds,” explained Correa. “Users can also invest in digital dollars, earning 3% annually, and pay with an international Mastercard with up to 4% cashback.”

Additionally, users can send and receive payments in the US for a flat fee of $3 versus the $3 fee plus a 2% charge that other money transfer companies charge. DolarApp supports this by offering both USA and México account details in the same app, which removes the need for remittances across the US-LatAm corridor.

DolarApp’s Social Impact

“The thing I love most about building DolarApp is that we’re solving a massive problem that drastically improves the lives of millions of people. Since we first launched our beta in June, we’ve seen massive interest in the product, which reinforces the demand is there and people love the initial offerings. I also haven’t seen other products available in the region that offer the kind of rewards and cashback that DolarApp does!”

What’s next for DolarApp?

DolarApp is currently working on improving their account details in the US for people in Latam by offering direct debit payments, expanding their product to more countries such as Argentina and enabling Apple Pay and Google Pay.

Are you an early stage FinTech and need a KYC and AML solution?

Ready your start-up for scale with free access to our transaction monitoring and customer screening tools through ComplyLaunch.

Register for ComplyLaunch today

Follow DolarApp:

Website
LinkedIn
Twitter
Facebook
Connect with Álvaro Correa Gallardo
Connect with Fernando Terrés
Connect with Zach Garman

The post ComplyLaunch Customer Spotlight: DolarApp appeared first on ComplyAdvantage.

The post A Guide to AML for Cross-Border Payments & Remittance appeared first on ComplyAdvantage.

On a mission to do just this, pawaBank is a new solution for the Ghanaian diaspora that provides comprehensive management and oversight of all payments, savings, and investments for its users. As of February 2022 the company is in its pre-launch phase, so we caught up with pawaBank Compliance Officer, Ama Otoo, to learn more.

Introducing pawaBank

“PawaBank is an African facing FinTech startup with a primary focus on Ghana,” says Otoo. “And our mission is to put an end to the workarounds, family favors, and hacks that the African community have to partake in whenever they try to send money back home, or invest, or do whatever they need to do when it comes to sending cross-border payments.”

Founded in 2021 by Kresten Buch and Oluwatosin Ajibade, aka Mr Eazi, pawaBank was built on the conviction that something needed to be done for the “ people who want to send, spend, or invest their own hard-earned money” in an environment often viewed by compliance teams as high risk. 

“Because diaspora communities are not properly understood or looked into enough” continues Otoo, “their transactions are always highly scrutinized […] resulting in high volumes of payments getting declined or blocked. […] At pawaBank, we’re on a mission to guide the diaspora and create a smoother financial journey for them.”

Breaking the cycle

As more payments get declined or blocked, a cycle begins where “law abiding citizens have to use a workaround that, by proxy, gets them into trouble and makes it even more likely for their payments to get declined or blocked next time around.”

By mitigating the need for workarounds, pawaBank hopes to remove friction from the transaction process. But, in order to break this cycle, trust and understanding around specific cultural practices need to be introduced into the system.

“Strong compliance and better insight on our customers and their extended networks will enable us to do this,” says Otoo. “This way, we’ll have a well rounded view of who these people are and why they transact the way they do, which will ultimately allow them to have an easier, more efficient financial journey when transferring funds.”

Understanding cultural differences 

“Since the banking system is formulated around the spending patterns of Europeans, compliance teams have a good understanding of what’s considered ‘normal’, but when it comes to the African diaspora, they have no clue. They know we send money back home, but that’s not all we do.

“A prime example of this came up in my own personal life recently, where a friend of mine was having her wedding in Ghana but had her account frozen because of the large sum of money she was trying to send back home to cover the weddings costs. Weddings cost a huge amount of money but my friend was made to feel like a criminal under the intense scrutiny she received because she was sending money to Africa.

“This is what pawaBank wants to change and we want the diaspora to understand that we understand you, we hear you, we see you, we know you. And we’re going to help you make things more compliant.”

Serving an interesting niche.

“The reason I love pawaBank is because of what it wants to do and the problem it wants to solve,” says Otoo. “Due to COVID and a rise in remote working, there has been a large influx of diasporans working back home over the last couple of years. During this time we have seen a lot of these payment issues come further into the light because the diaspora don’t have proper visibility of their UK account when they are away, making some transactions very difficult and very expensive. 

“Again, this leads to workarounds where diasporans need to send their money to someone for them to withdraw and hand back to them, which of course is very high risk and requires a lot of trust. 

“Having control over your finances is something we are very passionate about. Diasporan communities should be able to move freely and spend, send, and invest wherever they go whilst also being compliant as the law-abiding citizens that they are.

“That’s why I love pawaBank, because we are serving a unique group of people.” 

What’s next for pawaBank? 

PawaBank is currently in its beta testing mode for the next year or two. “We’re currently trying to involve as many beta testers as possible and listen to their feedback so that we can make something that they can get really excited about!”

“When you get used to hustles, you can sometimes forget that it’s a hustle in the first place. So, we’re really excited to be making something that will benefit and change the lives of so many people and improve cross-border relations.”

Are you an early stage FinTech and need a KYC and AML solution?

Ready your start-up for scale with free access to our transaction monitoring and customer screening tools through ComplyLaunch.

Register for ComplyLaunch today

Follow pawaBank:

Website
LinkedIn
Twitter
Instagram
Facebook
YouTube
Connect with Ama Otoo
Connect with Kresten Buch 

The post ComplyLaunch Customer Spotlight: pawaBank appeared first on ComplyAdvantage.

The guide, Preventing misuse and criminal communication through payment text fields, aims to raise awareness of how criminals are using payment text to communicate with each other – or to harass, stalk or threaten victims – rather than for the purpose of transferring funds.

The growth of digital-first fintechs, alongside an increasing amount of data and number of payment platforms, has enabled larger character limits to be applied to payment text fields, and criminals are making use of this facility to carry out illegal activities. 

Common themes within payment text fields identified by AUSTRAC include:

• Technology-facilitated abuse
• Threats or extortion attempts
• Criminal communication
• Threats of suicide and self-harm

Additionally, communications involving child abuse, illicit drugs, firearms, ideologically-motivated extremism and outlaw motorcycle gang activity have been spotted. 

Westpac bank research shows that more than half (51%) of Australians have received some form of online abuse, including via email, mobile and social media channels. One in four (26%) admit to having used some form of inappropriate language in payment transactions.

The guide, created in collaboration with public-private partnership the Fintel Alliance, provides financial service providers with insight and examples to help them target, detect and disrupt this practice.

“Financial service providers should use indicators in this report and their own business knowledge to conduct further monitoring and identify if a suspicious matter report (SMR) needs to be submitted to AUSTRAC,” the guide states.

Guidance on identifying the misuse of payment text fields includes how to determine if text is a threat or a joke, the use of abbreviations and slang to hide meanings, references to self-harm and suicide, how emojis can be used to convey threatening or abusive messages, and how criminals can refer to a shipment of illicit goods or planned event in their messaging. 

Potential red flags to look out for include payments below $10, high frequency payments and relationship patterns, along with incorrect spellings and the use of slang. 

A real-world example describes how a 23-year-old man was identified by a financial services provider after sending 10 payments of less than $5 to a female victim. Messages within the payment text field asked the victim to contact him and threats to take his own life. After a report to AUSTRAC, police arrested and charged the man for breaching a Protection Order.

Key Takeaways

This guide highlights the importance of agility in transaction monitoring, which can be challenging for firms – what counts as suspicious activity for one customer may be normal business for another. 

With constantly changing typologies and global regulatory expectations, false positives can be common and the risk of missing illegal behavior increases. For example, slang words and emojis are not fields a firm would traditionally expect to have to screen for, and context can be a challenge. Managing high volumes of false positives and unfamiliar alerts can also impact a firm’s wider operational efficiency.

It also underlines some of the changing demands on transaction monitoring systems. Firms need to  weigh up whether building a transaction monitoring solution in-house is right for them, or whether buying a solution that will push through updates automatically to cover emerging anti-money laundering (AML) risks would be more cost effective and efficient in the long-run.

At 13-pages, the guide provides a quick and easily digestible format for compliance teams and is well worth a read. It should be assessed in the context of the firm’s own business/industry, as part of a wider risk-based approach.

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Advances in technology have made moving funds to different parts of the world easier than ever and contributed to the growth in money remittance and foreign exchange service providers. The World Bank reports that, between 2008 and 2018, the amount of money moving through remittance services rose from $43.5 billion to $689 billion: that figure is suspected to have grown by 3.5% in 2019. Unfortunately, money laundering through foreign exchange and remittance is attractive for money launderers, as they use the relative anonymity and cash-intensive format of the services to clean their illegal funds and make it difficult for global financial authorities to track them. 

Given those vulnerabilities, service providers should make compliance with anti-money laundering remittance and FX regulations a top priority.

Money Laundering Through Foreign Exchange: Risks

FATF has identified a range of money laundering vulnerabilities in the remittance and FX industries. The growing volume of remittance and FX providers, and their worldwide accessibility to customers, allows criminal elements, including drug dealers and human traffickers, to employ a variety of methodologies to launder money. Accordingly, to detect and prevent money laundering through foreign exchange and remittance, firms should be aware of the key AML/CFT vulnerabilities associated with the services they provide.

Anonymity: Remittance and foreign exchange services may offer money launderers a degree of anonymity that other financial services do not. Using cash transfers under local reporting thresholds, criminals may be able to use FX and remittance services without triggering customer due diligence (CDD) measures designed to verify their identities, and send money to accomplices or bank accounts in other lower-regulation countries. Similarly, criminals may employ “money mules” to conduct transactions on their behalf or simply use forged identity documents in order to thwart any CDD checks that are conducted by the service provider. 

Money Laundering through foreign exchange occurs as many remittance and FX firms operate exclusively online, without physical premises. Online remittance and FX firms are not only harder to physically police but allow money launderers to operate with a further level of anonymity while evading the AML/CFT requirements of their jurisdiction. 

Structuring: The complexity of AML remittance and FX regulations in different international jurisdictions may also help criminals to launder money through foreign exchange and remittance. The disparity between AML/CFT regulations leaves remittance and FX firms vulnerable to structuring: the practice of disguising the source of illegal funds once they have entered the legitimate financial system, making them harder for authorities to track. 

Structuring, in the context of money laundering through foreign exchange, might involve the use of multiple individuals making multiple remittances or exchanges, in multiple currencies, through a number of firms. Ultimately, laundered funds are returned to the originators after passing through the legitimate financial mechanisms several times. Remittance and FX transactions may also be structured to take place just below regulatory thresholds to avoid reporting in the jurisdictions in which they take place.  

Disparity between jurisdictions: AML remittance and FX efforts may also be undermined by the disparity between regulatory standards in different jurisdictions. Since both types of financial service are likely to involve international money transfers, differences in AML/CFT regulations and a lack of communication between international financial authorities may be relatively easy for money launderers to exploit. A transaction threshold in an originating country, for example, may not match the threshold in a receiver country. Similarly, suspicious activity reporting requirements may diverge between jurisdictions  

Ownership: Thanks to the increasing proliferation of remittance and foreign exchange services, criminals may be able to gain ownership of such a business, either online or as a physical premises, and begin using it to launder money as part of the wider money transfer network. 

In this context, criminals may own the business directly (or through a sub-agent relationship) or leverage the original owners to launder money for them. Once the business is acquired, however, it may be particularly difficult for authorities to detect money laundering activities, since specific AML/CFT mechanisms depend on the application of appropriate CDD/KYC checks, which the criminals may seek to avoid or manipulate.

How to Comply with AML Regulations for Remittance and Foreign Exchange

Money laundering through foreign exchange and remittance service providers is a significant risk, so firms should ensure that their AML/CFT response is robust enough to detect criminal activity and satisfy their compliance obligations. On an administrative level, firms should ensure that they satisfy any licensing or registration requirements imposed in their jurisdiction and develop an understanding of the sector, services and transaction channels that they will be dealing with on an ongoing basis. 

Under FATF guidelines, firms must take a risk-based approach to AML/CFT, which means implementing an AML/CFT program that is capable of assessing the level of money laundering risk that each customer poses and adjusting its AML/CFT response accordingly. Those risks should be assessed on an ongoing basis in order to ensure that AML/CFT measures are up-to-date and effective.  

AML remittance and FX red flags: Following FATF recommendations, AML compliance for remittance and FX firms should involve the implementation of suitable CDD mechanisms to accurately establish the identities of customers, and the implementation of transaction monitoring and screening measures. Those measures should be focused on identifying high-risk customers and transactions, characterized by “red flag” behaviors and activities. 

In more detail, those money laundering through foreign exchange red flags include:

• Suspicious transactions patterns (high frequencies or large volumes of money transfers) or transactions taking place in unusual circumstances.
• Customers using non-face-to-face remittance or FX services (over the internet, for example).
• Customers who send agents or mules to conduct transactions on their behalf. Examples might include customers who seem to know little, or are reluctant to disclose details, about the payee.
• Customers who falsify or conceal their identities. 
• Structured transactions involving multiple connected transfers in different currencies or into and out of different countries.
• Transactions involving transfers to high-risk countries or to online gambling sites. 
• Transactions with charities or similar non-profit organizations that are not subject to the same monitoring regulations as other financial services firms.
• Customers who are politically exposed persons (PEPs), are the subject of adverse media stories or who are on sanctions lists. 
• Customers who are, or have been, the subject of a law enforcement investigation.

Ongoing Compliance

To prevent money laundering through foreign exchange, in addition to CDD and transaction monitoring and screening measures, AML for remittance and FX services should meet the additional requirements of risk-based AML/CFT that are set out by FATF. These include implementing an appropriate ongoing training schedule for employees and appointing an AML officer to oversee the firm’s AML program. 

AML for FX and remittance services requires the collection and analysis of large amounts of data. In order to avoid the inefficiencies and potential human errors inherent in manual analysis of that data, firms should seek to implement suitable AML/CFT software to manage their data analysis needs and help them deliver regulatory compliance on an ongoing basis.

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Since 2012, the United Nations Convention against Corruption (UNCAC) Article 52 has significantly impacted FIs’ identification and management of PEPs. This article requires enhanced due diligence (EDD) for PEPs, meaning stricter background checks, verification of wealth sources, and close monitoring of transactions for suspicious activity, expanding on previous regulations by including foreign PEPs and domestic officials, their families, and close associates. 

Of course, being a PEP does not equate to being a criminal or suggest a link to abuse of the financial system. However, as PEPs are higher-risk customers, FIs and DNFBPs must be familiar with the PEP red flags and indicators used to detect such abuse. 

What are 7 PEP red flag indicators?

The Financial Action Task Force (FATF) has developed a list of PEP red flags/indicators to assist in detecting misuse of the financial system by PEPs during a customer relationship. 

Often, matching one or two of these indicators indicates a statistically raised risk of doing business with a particular customer, and several indicators need to be met before grave suspicion is warranted. However, in some cases – depending on specific circumstances – matching just one or more of these indicators could lead directly to suspicion of illegal activity, such as money laundering.

The FATF’s recommended red flags, as outlined in recommendations 12 and 22, are as follows:

 1. PEPs attempting to shield their identity

PEPs know their status may facilitate the suspicion of illicit behavior. With that in mind, they may conceal their true identity through various means to avoid detection, protect unearned assets, or evade legal trouble. Under the FATF’s recommendation, some of the key red flags to watch out for include the following:

• The use of corporate vehicles to obscure (i) ownership, (ii) involved industries, or (iii) countries.
• Use of corporate cars without a valid business reason.
• Use of intermediaries that don’t match with everyday business practices
• Use of PEP relatives and close associates (RCAs) as legal owners.

2. Suspicious behavior from PEPs 

When liaising with entities and monitoring activity, firms need to stay vigilant regarding a PEP’s movements and general behavior.  In particular, firms should be aware of any unusual inquiries about their AML/CTF policies, alongside uncommon transfers to accounts in different countries. As a result, the FATF encourages firms to monitor the following: 

• Investigate any inconsistencies between the information provided by entities and publicly available data, such as asset declarations or salaries, as these discrepancies could warrant further investigation.
• Pay close attention to entities conducting business in your jurisdiction without a clear and justifiable reason – a legitimate business purpose should be readily available.
• Carefully scrutinize entities that provide inaccurate or incomplete information, as deliberate misinformation is highly suspicious and requires further investigation.
• Entities who inquire about a firm’s AML/PEP policies, which could signal potential attempts to exploit vulnerabilities.
• Be cautious of entities seeking services they wouldn’t usually require, as this might suggest attempts to hide assets.
• Monitor entities who frequently transfer funds to countries with no apparent connection, as these unrelated financial activities raise concerns about potential illicit sources of income.
• Conduct additional due diligence for entities denied a visa to your country, as entry restrictions might suggest past issues or security concerns.
• Closely monitor entities from countries with restrictions on foreign account ownership, as country-specific limitations on holding accounts can be a risk factor.

3. The PEP’s position or involvement in business 

While the previous section highlighted behavioral red flags, understanding a PEP’s position and power within their organization adds another crucial layer to the risk assessment. As outlined by the FATF, individuals holding roles with greater control, authority, and influence can be inherently more susceptible to involvement in illegal activities. Here’s why: 

• Substantial authority over or access to state assets, funds, policies, and operations.
• Control over regulatory approvals, including awarding licenses and concessions.
• The formal or informal ability to control mechanisms established to prevent and detect money laundering and terrorist financing (ML/TF).
• If they (actively) downplay the importance of their public function or the public function they’re associated with.
• The PEP does not reveal all positions (including ex officio).
• Access to or control or influence over government or corporate accounts.
• Own or control financial institutions or DNFBPs, either privately or ex officio.
• The PEP (partially) owns or controls the financial institution or DNFBP (privately or ex officio) that is a counterpart or a correspondent in a transaction.
• The PEP is a director or beneficial owner of a legal entity that is a client of a financial institution or a DNFBP.

4. High-risk industries and sectors for PEPs 

Alongside the PEP’s position in their organization, connections with high-risk industries can raise their risk level. FIs and DNFBPs should use national guidance and conduct thorough risk assessments per the FATF’s recommendation 1. While high-risk industries will indubitably vary from country to country, the FATF presents the following as examples of higher-risk sectors in its recommendations 12 and 22:

• Arms trade and defense.
• Banking and finance.
• Businesses active in government procurement (i.e., those whose business is selling to government or state agencies).
• Construction and (extensive) infrastructure.
• Development and other types of assistance.
• Human health activities.
• Mining and extraction.
• Privatization.
• Provision of public goods and utilities.

5. Transaction indicators 

Accurate transaction monitoring is essential as a PEP’s transactions and banking history can reveal a complete overview of their income, spending, and saving activity for any period. The purpose of a transaction, as well as the nature of the business relationship behind it, should be scrutinized, along with the examples below:

• Private banking.
• Anonymous transactions (including cash).
• Non-face-to-face business relationships or transactions.
• Payments received from unknown or unassociated third parties.
• Using several separate bank accounts for unknown purposes.
• Consistent use of rounded amounts that can’t be justified.
• An account shows a sudden flurry of activity after a dormant period.

6. Products, services, and delivery channels red flags 

Another key indicator, depending on the nature of the PEP, is their connection to certain industries, products, services, transactions, or delivery channels that can be labeled as high-risk and easy to exploit for money laundering or other illicit purposes. Some of these include:

• Businesses that mainly cater to (high-value) foreign clients.
• Trust and company service providers.
• Correspondent and concentration accounts.
• Dealers in precious metals, precious stones, and other luxurious goods.
• Dealers in luxurious transport vehicles (such as cars, sports cars, ships, helicopters, and planes).
• High-end real estate dealers.

7. Country-specific PEP red flags and indicators

As defined by the FATF in recommendation 19, due diligence is vital if a foreign or domestic PEP is from a higher-risk country. Additionally, the FATF also recommends taking the following geographical considerations into account when entering into a business relationship with a PEP: 

• Foreign or domestic PEPs from countries that have yet to sign or ratify relevant anti-corruption conventions (or otherwise have not or have only insufficiently implemented these conventions), such as the UNCAC and the OECD Anti-Bribery Convention.
• Foreign or domestic PEPs from countries with mono-economies (economic dependency on one or a few export products), especially if their countries have export control or licensing measures.
• Suppose a PEP from a high-risk country has control or influence over decisions that aim to address any shortcomings in the anti-money laundering and combating the financing of terrorism (AML/CFT) system. In that case, it can lead to additional risks.
• Foreign or domestic PEPs from countries that depend on the export of illegal substances, such as narcotics.
• Foreign or domestic PEPs from countries with high levels of organized crime.

Detect red flags with automated solutions 

With so many red flags to be wary of, manually analyzing a PEP’s financial transactions, wealth sources, and business relationships can be time-consuming and prone to human error. 

Fortunately, advanced AML solutions offer sophisticated tools that empower comprehensive EDD for PEPs. These solutions surpass basic EDD by delving deeper into their finances and finding the true nature of wealth and transactions. 

Even after initial due diligence, continuous monitoring remains crucial – dynamic screening tools can provide a safeguard by automatically monitoring transactions and activities for suspicious patterns or red flags that may indicate money laundering or other financial crimes.

Implementing these solutions can offer significant advantages – streamlined data analysis and automated workflows significantly reduce operational burdens, freeing up resources for your team to focus on strategic tasks.

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