Six misconceptions around money launderingby
John Dobson covers key misconceptions that accountants may have about money laundering.
Most peoples’ understanding of money-laundering comes from pop culture, such as films, and TV which portray shady backroom deals with duffel bags stuffed with cash. In reality, more often than not, money laundering relies on anonymous transactions via shell companies – a far cry from the heart-pounding escapades of hit shows like Ozark or Narcos.
Here are some common misconceptions that many – including accountants – have with regard to money laundering.
Money laundering is easy to spot
Money laundering is big business. The United Nations estimates between $800m and $2tn is laundered every year, and only 1% of that is seized by global authorities. With such vast amounts involved, it is no wonder that criminals take precautions to avoid detection.
The key to money laundering is to hide behind layers and layers of seemingly banal transactions and entities to avoid raising any suspicions which make illicit funds difficult to spot.
If accountants are relying solely on gut instincts or experience then this is unlikely to prove an effective strategy. Instead, comprehensive, sophisticated tools are needed in order to ensure that all transactions are above-board.
To help with this, there are some red flags to be aware of. For instance, if the information provided is inconsistent, or the client is evasive when asked basic questions, these can be clues that not all is as it should be. But the majority of the time, the criminals are well versed in these transactions and are able to conceal their true motive successfully.
It’s not an accountants’ role to do AML
A recent study from Oxford Economics, in conjunction with the Cabinet Office, found UK financial services firms are already spending a total of £28.7bn on compliance processes annually.
However, 99% of criminal profits are still going undetected. This is why accountants need to be vigilant. Money launderers like to focus on areas where they know there will be less oversight, and where they can operate with relative anonymity, such as with bitcoin.
Moreover, different institutions may have different requirements for KYC (know your customer) and AML (anti-money laundering) checks that are not completely in alignment with your own.
To put it simply, AML compliance needs to happen at every stage and in every area where there is a potential risk. Accountants are at the forefront of this.
AML is a box-ticking exercise
It is easy to go through the motions when doing anti-money laundering. Maybe a quick glance at the passport, which looks okay. Does it match the selfie? There is a resemblance. And who looks like their passport photo anyway?
According to financial action task force head Dr Marcus Pleyer, “There is a huge reality gap between the FATF’s global standards and the action being taken on the ground.”
Accountants need to ensure they go beyond box-ticking and should be looked at as an opportunity. The know your customer procedure can be streamlined enough to take just a few seconds and save accountants massive amounts of time and effort.
Compliance systems are a nightmare to change
It may be a generalisation, but we have found that the financial services sector has a tendency to select its IT systems based more on the cost of implementation, than the functionality and effectiveness of what it does. The price may be right, but the solution can be found wanting in its ability to spot fraud and money laundering activity.
To that extent, it’s a completely false economy to think you can save a few million pounds on the IT solution because if you do get caught out, the accounting firm could face multi-million-pound fines.
Another concern about the procurement process for a lot of larger firms is the length of time it can take for systems to be implemented.
It can take anything from one to three, or even four years in some cases, for the process to go through, during which time a lot will have changed in terms of technology. At the same time, regulations will change or new ones introduced, which makes it essential that systems can be updated and kept in line with those changes.
Physical document checks are more reliable than automatic checks
Documents hold a psychological advantage for some as they are physical. They exist. You can hold them in your hand. In fact, bank statements, passports, driving licenses and payslips are still seen by many to be the gold standard for identity verification.
However, in the technologically advanced age that we live in, it is perfectly possible to forge all of these documents in ways that are virtually undetectable, even to the trained eye.
Luckily, while technology has made these skilful forgeries possible, it has also given us the means to detect them. Combining the right sources of information, including digital fraud checks, credit reference data, and biometric facial recognition produces what is known as a “composite digital identity” that is all but impossible to fake.
With more people preferring to do business remotely as a result of the coronavirus, being able to verify someone’s identity digitally provides not just convenience but also security.
One way to do this is through an automated anti-money laundering solution. By inputting a few details – name, date of birth and address, the system will confirm a person is legitimate in just two seconds, and also screen them against sanctions and PEP (politically exposed person) lists.
Most businesses don’t need to invest in AML compliance
It is understandable that many companies, particularly small ones with few resources to spare, would baulk at the need to implement additional processes. At the same time, businesses that knowingly or unknowingly involve themselves in money laundering can face serious consequences, both legally and financially.
While complying with AML regulations can be daunting, the recent Sixth Money-Laundering Directive coming into force in June 2021 adding new layers for regulated businesses to contend with.
However, AML compliance doesn’t have to be complicated. There are many services on the market that enable organisations to carry out fast, secure and accurate checks in a matter of seconds. They allow businesses to carry on with their day-to-day work without fear of stumbling into an international (or domestic) money laundering ring.
Most people think of money laundering in an abstract sense – as a practice that is wrong but has no impact on their businesses or daily lives. In fact, money laundering affects us all. To give just one example, money that is being laundered is also money that is not being taxed – which means that the burden falls much more heavily on law-abiding citizens.
It’s up to all of us – and particularly those involved in financial transactions – to play our part in preventing it.