The recent turmoil in the Middle East has had many implications for companies with dealings in the region. Increased scrutiny has fallen on several countries that have previously been regarded as safe havens by treasurers. But as well as the more obvious exposures, such as currency and counterparty risk, there is political risk, and with it the need to comply with anti money laundering (AML) and fraud regulation.
“Everyone is reassessing their business relationships,” says Dr Tony Wicks, director of AML Solutions at NICE Actimize, in an interview with gtnews. Of course, political turbulence is nothing new, but increased globalisation and the regulatory drives for financial transparency coming from the UK and the US have required a higher level of due diligence from both customers and institutions. With the increased level of straight-through processing (STP), forewarned is forearmed because once the money has passed through the system, it is almost impossible to retrieve it.
Where there are sanctions put in place, for example by the UK, the EU or the UN, companies have a legal responsibility not to do business with those countries or, in the case of financial institutions, to freeze accounts held by those in question. However, as Wicks explains, this is not always straightforward. “The challenge is to identify those accounts,” he says. “There may be multiple levels of ownership, or nested ownership, making it hard to see who is the ultimate owner.” Identifying those with beneficial ownership (those who benefit from an asset, even where they are not the named owner) can be harder still. The identification of politically exposed persons (PEPs) is a key part of this process.
Many of these issues mainly affect banks, which are having to work much harder to ensure that they are not contravening sanctions. However, corporate treasurers also need to consider the impact of dealing with counterparties who might be engaged in ‘corporate flight’ activities, or moving assets to where they won’t be found. Various techniques and technologies are being developed to counter money laundering, many which overlap heavily with fraud prevention techniques.
The right technology can identify whether a potential customer is a PEP or the presence of any ‘negative news’ about that individual or institution:
- Customer due diligence solutions. These provide information on existing or potential customers, which is used to assess the risk of money laundering, alerting the company as to whether additional checks need to be performed.
- Watch list filtering is about identifying sanctioned individuals, which is part of the greater global drive towards financial transparency.
- Customer transaction monitoring. Distinct from ‘know your customer’ (KYC), which is about ensuring the transaction is taking place with the individual a company believes it is doing business with, customer transaction monitoring is about tracking behaviour patterns and spotting anomalies in transaction types or markets.
The US Patriot Act, the EU Money Laundering Directives I-III and the UK Proceeds of Crime Act (POCA) all place companies under the obligation to monitor and report suspicious financial transactions. However, these are treated differently by the UK and the US. In the former, money laundering and fraud are considered under the single umbrella of financial crime, despite that fact that the business case for one is cost saving and the other reputational. In the US there is a clearer separation featuring four pillars relating to reporting suspicious activity, appointing a compliance officer, training staff properly, and demonstrating staff procedures to auditors.
“We are moving towards a global standard and there is a lot of convergence associated with this legislation, whereby countries are coming from different perspectives to the same conclusions,” Wicks notes.
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