Preventing money laundering in a digital world
The recent Global Financial Crime Report 2024 by Nasdaq highlights that money laundering remains a serious issue, with an estimated £3.1 trillion in illicit funds flowing through the global financial system in 2023, largely from drug and human trafficking, and fraud. Also, according to the United Nations Office on Drugs and Crime (UNODC) it’s estimated that money laundering accounts for between two to five per cent of the world’s GDP.
While there are a wealth of global and regional laws and regulations around anti-money laundering (AML) that require those in financial services to identify prospective customers and activities by existing customers that could be linked to money laundering, this isn’t proving enough to reduce it.
Identifying and preventing money laundering, particularly as digitalisation creates new opportunities for it to take place, is proving a challenge for financial institutions who are on the front line in trying to prevent it. However, they must do more to stop it. No financial organisation wants to support criminal activity or risk substantial fines from regulators that also damage their reputation.
Red flags
A good place to begin to avoid money laundering is to be aware of some red flags. For instance, the reluctance of a prospective customer to provide relevant personal information, such as their address, and where appropriate, documentary proof of their identity. Most people have no issue with sharing such information about themselves, when opening an account or applying for a mortgage, for example. However, if a prospective customer does seek to evade the provision of or provide false information it should set off alarm bells. People should never be onboarded without completing the required know your customer (KYC) verification process.
Another red flag is the geographic location of prospective and existing customers. While money laundering is not limited to any particular geographic region, the risk is higher in some countries that are more exposed to corruption and organised crime due to weak regulations and poor governmental insight. According to the Basel AML 2022 report, countries including The Democratic Republic of Congo, Haiti, Myanmar, Mozambique and Madagascar have high money laundering risks. Hence, it’s worth prioritising due diligence for those with an address from any of these countries.
To combat money laundering in the digital world it’s ID verification services in the cloud that are leading the way.
Electronic identity verification (eIDV)
eIDV tools available via software-as-a-service (SaaS) are of particular relevance. Such platforms can, in real-time, cross-check the names, addresses, email addresses and the phone numbers provided by prospective customers. It is best to source a SaaS eIDV platform with access to billions of consumer records from reputable sources from around the world, such as from government, utility and credit agencies. Using such a tool is significantly quicker, more accurate and cost-effective way to undertake ID verification when compared to manual checks. Some even provide a full service ID verification offering by including wider KYC checks, such as KYB, sanctions screening, PEPs and RCA checks and adverse media screening.
Know Your Business (KYB)
Undertaking KYB checks is vital with money laundering and fraud frequently committed by shell companies or organisational structures that just don’t exist in reality. It can be very hard to source who the owners of these are. And where there is such complexity these can be fronts for financial crime, even terror financing. To fully comprehend the risks posed by new and existing business customers and suppliers it’s important to carry out KYB checks – something most regulators around the world require financial institutions to undertake. For an effective and cost-effective approach to KYB screening it’s advisable to cross-check a company name, address, business registration number and operational status against recognised sources of business data, such as from a business registry or regulator, like Companies House.
Have up-to-date sanctions lists
Access to up-to-date sanctions lists remains as important as ever. While it’s a regulatory requirement to screen for those who have been sanctioned, it’s surprising how many financial institutions aren’t set up to effectively do this. It’s essential to obtain an up-to-date sanctions list that can undertake automated sanctions screening in real-time, around the world.
Deliver PEP and RCA checks
Simply having an up-to-date list of those who have been sanctioned is not sufficient. Those in financial services need to also screen against politically exposed persons (PEPs) and relatives and close associates (RCAs) of PEPs from around the world, because there’s a greater likelihood for these groups to be involved in or drawn into crime. In the UK, financial organisations are legally obliged to undertake enhanced checks of both domestic and foreign PEPs.
Adverse media screening
Adverse media checks are a very important part of the best practice AML process. By sourcing adverse media screening technology with a global reach financial institutions can keep abreast of the latest news and alerts, in real-time, on any arrests or court cases, for example, against their customers who may be PEPs and RCAs, and others who could have a potential negative regulatory, financial, or reputational consequences to their organisation.
In summary
With money laundering remaining a significant issue paying attention to red flags around it and undertaking steps to deliver AML compliance by using a platform like eIDV, which can offer a full ID verification service in the digital world, including KYB checks and sanctions data, for example, is vital. Taking such an approach will help to prevent money laundering and fraud, significantly lessen the likelihood of being fined by regulators and the reputational damage this can cause.
This guest blog was written by Barley Laing, UK Managing Director at Melissa. To learn more about Melissa, please visit their LinkedIn and Twitter page.
Ella Gago-Brookes
Ella joined techUK in November 2023 as a Markets Team Assistant, supporting the Justice and Emergency Services, Central Government and Financial Services Programmes.
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Authors
Barley Laing
Barley Laing joined Melissa and set up the UK office in 2014 during an exciting expansion phase of the California headquartered company.