Unconventional Clients and Services Spark Alarm Bells for Financial Regulators

Financial regulators are on high alert to combat money laundering and terrorist financing by identifying clients and services that operate in unconventional circumstances. These entities often employ complex structures, use unusual payment methods, and engage in transactions that raise red flags.

Unclear Beneficial Ownership

One common concern is clients with unclear beneficial ownership, where the structure of the entity makes it difficult to identify the true owner. This can be due to:

• Nominee directors or shareholders
• Shell companies
• Trusts without clear beneficiaries

Unusual Management Companies

Another area of focus is management companies that appear to be acting on instructions from unknown or inappropriate individuals, such as:

• Companies controlled by someone outside their normal sphere of influence or expertise
• Instructions or funds received outside their typical business profile or expected activities

Cash-Intensive Businesses and NPOs

Regulators are also scrutinizing cash-intensive businesses and non-profit organizations (NPOs) not subject to monitoring, which may have the potential to conceal financial transactions.

Unusual Payment Methods

Warning signs include clients who receive instructions or funds outside their typical business profile or expected activities, such as:

• Cash payments
• Transactions in precious metals or stones
• Large international payments with no apparent business rationale

Virtual Assets and Anonymous Payment

Regulators are also monitoring clients who use virtual assets and other anonymous means of payment and wealth transfer, including companies that offer services that conceal beneficial ownership or provide more anonymity than normal under the circumstances.

Unconventional Services

Examples of unconventional services that may be used to launder money or finance terrorism include:

• Pooled client accounts or safe custody of client money or assets without justification
• Advice on setting up legal persons or arrangements that obscure ownership or real economic purpose
• Use of trusts, companies, or other legal entities for complex group structures or to conceal beneficial ownership
• Services that provide anonymity or confidentiality without a legitimate purpose

Regulatory Action

Regulators are working closely with financial institutions to identify and mitigate these risks. By monitoring clients and services in unconventional circumstances, they aim to prevent the misuse of the financial system and protect national security.

Source: FATF Guidance on Trust and Company Service Providers (TCSPs) [https://www.fatf-gafi.org/media/fatf/documents/reports/RBA-Trust-Company-Service-Providers.pdf]