Money Services Business and Money Laundering

From the time money was borne, human beings have been transferring money in different ways. With the advent of technology, sending money through a bank account has become much easier and faster. People now use online money transfer transactions rather than traditional money transfer methods.

With technology development, transaction infrastructures are developing incredibly. But at the same time, criminals are developing the infrastructure of the methods they use to launder money for these transactions.

Historically, money services businesses have always been susceptible to different risks. Organized crime ring have utilized their services to perpetrate the terrorist attacks in past. As such, Money Transfer Companies are now required to be cautious to avoid money laundering and terrorist financing. Certification in AML for Money Service Businesses is detailed course on this topic.

The money sent by the money transfer company is considered secured. During the transfer money laundering and terrorist financing should not occur or this process should not be vulnerable to cyber-attacks. Money Transfer Companies must comply with regulations set by the respective countries such as GDPR.

Money services business may be subject to sanctions by regulators if they fail to comply with these regulations. These sanctions could be monetary fines or disciplinary penalties. In addition, Money service businesses if found involved lose the reputation in business.

Risk of Money Laundering for MSBs

Money Transfer Companies use electronic funds transfer (EFT) or Remittance Transactions systems to send money. In the modern world, sending money outside the country, making international payments has become faster. Data is exchanged instantly. On the other side, this has opened new avenues for the launderers to remit money faster. 9/11 investigations revealed that services of money remittance companies were used for planning the terror attack on United States.

This was the first time, the world realized the importance of the informal method of remittance.

Hawala remittance systems also called alternative remittance systems by Financial Action Task Force (FATF). These are informal financial systems that allow the transfer of funds both at home and abroad. Hawala, a cheap, fast and reliable money transfer system, is primarily used by immigrant workers who send money to their families abroad. In the terrorists attack this method was used by the masterminds of 9/11 attack to transfer money.

India had been grappling with the use of hawala for terrorist financing well before September 2001. The 1993 Mumbai serial blasts, carried out by the Dawood Ibrahim crime syndicate, were financed through hawala. Since then, the hawala angle has cropped up in multiple investigations related to terrorist financing, including in the 2006 Mumbai train blasts.

Looking for hawala transactions in terrorist financing was a search for a needle in a haystack. Even today, hawala transactions are highly anonymous. Hawaldars, for business reasons, were reluctant to ask questions about the source of the money and the purpose of a transfer. Lack of a proper paper trail further complicates investigations.

However, after the 9/11 attacks, US came down heavily on these hawaladars. Now they are also brought under the purview of the definition of money services business.

AML Compliance Program for MSBs

Money Service Business should establish systems for the detection and reporting of suspicious activities, and also ensure the continuity of these systems. Otherwise, they may face heavy fines. There are legal AML compliance programs for criminal liability or company management. Anti-Money Laundering (AML) Compliance program covers every activity of companies at risk of financial crime in combating financial crime and compliance processes.

FATF and the European Union announced the measures that organizations should take with various guidelines and reports each semester. Money Transfer Companies must also follow this published guide. Money Transfer Companies should develop and monitor compliance programs, provide personnel training, make recommendations regarding money laundering risks, and assess the risks that may occur in transactions.

Risk Assessment for Money Service Businesses

Generally, Money Transfer Companies conduct a risk assessment to identify the nature and extent of AML or CFT resources needed to reduce and manage this risk. High Risk transactions should always be properly documented and regularly updated. The risk assessment should be commensurate with the nature and complexity of the company. The type of products and services offered, the conditions of the proposed transactions, and the characteristics of the customers are important considerations of risk assessment.

Money Services Businesses should also gather market intelligence about the business risks. Market Intelligence is the informal information obtained about the different type of risks posed to the money services businesses.

Though, money laundering can never be eliminated from the system, it can definitely be reduced.

Risk Based KYC Approach in Money Services Business

Money Transfer Companies are expected to identify, use, and understand the ML or TF risks they are exposed to. Money transfer companies are required to take the risk based approach to complete the KYC processes. When evaluating ML or TF risk, Money Transfer Companies should analyze and try to understand how they identify and take appropriate measures to reduce risks. Therefore, risk assessment provides the basis for the risk-based implementation of AML / CFT measures.

When making the Money Transfer Companies Risk-Based Approach, firstly, it performs Customer Due Diligence and determines customer procedures to determine the customer risk level. Some of the most used methods to determine customer risk levels are a PEP and adverse media scanning. After these checks, the risk profile of the customer is determined.

KYC Requirements for Money Services Business

The process of getting to Know Your Customer (KYC) is done in Money Transfer Companies to verify their customers’ identity before or during the opening of an account. KYC procedures are very broad and these procedures are very important globally. The FATF’s recommendations also emphasize the necessity of KYC procedures because these procedures are an important step to prevent illegal financial transactions.

KYC is the first line of defense for the money transfer companies. It protects them in the face of a possible financial crime. During the 9/11 attacks when the investigations started, money remitting companies provided the identification documents to the enforcement agencies. This helped them from facing the regulatory fines. MSBs are required to perform following activities during the process of account opening

  1. Gathering customer information and checking its accuracy
  2. Conducting Customer Due Diligence
  3. Enhanced Due Diligence if necessary, creating a control program suitable for the customer’s risk level.

Customer Due Diligence (CDD) in Money Services Business

Customer Due Diligence (CDD) process is used in Money Services Business to meet FATF standards and national legal requirements. Money Service Businesses recognize their customers with CDD and reduce their risks.

Customer Due Diligence requires the MSBs to identify the ultimate beneficiary of the business. It is very important to apply the CDD process in new business relationships. Also, every suspicious transaction needs to be investigated further to eliminate these potential risks. Enhanced Due Diligence should be conducted on all high risk customers.

Enhanced Due Diligence

Money Services Business deal with the high-risk customers on daily basis. The transmit the money for Politically Exposed Persons (PEP), when such people are your customers, you perform Enhanced Due Diligence procedures to scan them. It is necessary to identify the high risk customers. These are the customers whose dealings get the money service businesses in trouble.

Ex: Money transmitting company fails to conduct the EDD on an individual sending the money to his counterparts in Pakistan. This transaction could be a small part of the plot to perpetrate a terror attack. Eliminating the enhanced due diligence creates the problem for the money service businesses.

Transaction Monitoring in Money Services Business

Transaction Monitoring, one of the best methods of combating financial crimes, is a very important and necessary application for Money Transfer Companies. Just like CDD, Transaction Monitoring emphasizes the importance of FATF reports and suggestions. Transaction Monitoring is software that helps instantly monitor customer transactions. Thus, Money Transfer Companies can instantly control billions of transactions by automating the transaction tracking process. If there is any risky situation that triggers the rules during customer transactions, transaction monitoring software generates an alarm.

Transaction Monitoring process stops when the alert is generated. The alerts are reviewed in detail by the Firm’s Compliance or Risk Department. After the review, the Suspicious Activity Report (SAR) is generated for the transactions. Only high risk transactions are consolidated and the reports is sent out to the Financial Intelligence Unit.

With the risk of money laundering, Money Transfer Companies can reduce these risks with this software Transaction Monitoring and protect their companies against money laundering and terrorist financing. It also complies with the AML Compliance Program and is exempt from penalties that may occur.