Unconventional Business Deals Raise Red Flags
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Financial regulators are increasingly scrutinizing clients who engage in unusual or unconventional business practices to prevent money laundering and terrorist financing.
Complex Ownership Structures
One area of concern is clients with complex ownership structures that make it difficult to identify the beneficial owner. This can include:
- Situations where management appears to be acting on instructions from unknown or inappropriate persons
- Unnecessarily complicated company structures
Cash-Intensive Businesses
Another red flag is cash-intensive businesses that operate outside of their typical business profile, such as:
- Non-profit organizations that may not be subject to monitoring in the same way as for-profit companies
- Businesses that receive payments from unknown third parties or pay fees in cash
Unusual Transactions
Transactions that take place outside of a company’s established business profile or expected activities are also being scrutinized, including:
- Large international payments with no apparent business rationale
- Inexplicable changes in ownership
- Frequent legal structure alterations without explanation
Trust and Company Service Providers (CSPs)
In the financial services industry, CSPs play a crucial role in ensuring that their clients’ transactions are legitimate. However, some CSPs may offer services that can be used to conceal beneficial ownership or source of property, such as:
- Pooled client accounts
- Safe custody of client money or assets
Services That Assist Money Launderers
Regulators are also paying attention to companies that provide services that may assist money launderers, including:
- Advising on the setting up of legal persons or arrangements without a legitimate purpose
- Setting up trusts to obscure ownership or real economic purpose
The Importance of Due Diligence
In the end, financial regulators are urging CSPs and their clients to be vigilant in identifying and reporting suspicious transactions and activities that may be indicative of money laundering or terrorist financing.
Geographic Location: A Key Factor in Risk Assessment
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Geographic location has long been recognized as a contributing factor in assessing the level of risk associated with a client or transaction. However, it is not the only factor at play.
Conducting Thorough Due Diligence
In today’s global economy, transactions can take place across borders and jurisdictions, making it essential for CSPs to have a thorough understanding of their clients’ business activities and locations. Regulators are advising CSPs to conduct thorough due diligence on their clients, including:
- Reviewing their business profile
- Analyzing their ownership structure
- Examining their transaction history
By conducting thorough due diligence, CSPs can help ensure that suspicious transactions are identified and reported in a timely manner, thereby preventing money laundering and terrorist financing.