Of course, money laundering and terrorism financing (‘ML/TF’) are risks of the whole society and every industry needs to take necessary steps to prevent ML/TF, for not only it is a duty of care to the society, but also past four decades created a global regulatory environment, where the companies are obliged to take preventive and detective measures. However, by nature, some industries are more fragile to ML/TF, as they might ease the ML/TF processes, which are placement, layering and integration.

No need to say that Finance sector, in particular banks, have been on the spot from the very first day of realization of the AML concept during heavy drug trafficking period. During these days, banks were the primary concern of the regulators, as they were needed by the money launderers in every step of money laundering activity.

Years passed and finance sector gained depth day by day, not only the products provided by the banks had been increased, but also the technology paved way to emergence of new services and business sectors. One considerably new term covering these new sectors is money service businesses (‘MSBs’), which is used by financial regulators to describe businesses that transmit or convert money. The definition was created to encompass more than just banks which normally provide these services to include non-bank financial institutions.

In terms of AML/CTF legislation, MSBs are defined as companies providing one or more services listed below:

  • Currency dealing/exchanging;
  • Cheque cashing;
  • Money remitting; and
  • Issuing, selling and redeeming stored value and monetary instruments, such as money orders and traveler’s cheques.

Although AML/CTF legislation is different in different jurisdictions, the measures that MSBs need to take are similar with the banks. This is very understandable when the natural vulnerabilities of MSB sector for money laundering activities, including:

  1. the simplicity and certainty of MSB transactions;
  2. worldwide reach (in case of money remitters);
  3. the cash character of transactions;
  4. low thresholds;
  5. less stringent customer identification rules that are applied to low value transactions compared with opening bank accounts; and
  6. reduced possibilities for verification of the customer’s identification than in credit or other financial institutions.

Likewise the banks, MSBs can be used at all stages of the money laundering process. Currency exchanges specifically are an important link in the money laundering chain. Once the money has been exchanged, it is difficult to trace its origin. Also, considering that many are small businesses, currency exchanges can be more easily prone to takeover by criminals and used to launder money.

A summary of steps that an MSB needs to prevent AML/CTF risks:

1.   A Comprehensive Risk Assessment and following a ‘Risk Based Approach’, where MSBs hold sufficient information about the circumstances and business of their customers to manage their AML/CTF Risks effectively and to provide a basis for monitoring customer activity and transactions, thus increasing the likelihood that they will detect the use of their products and services for money laundering and terrorist financing;

2.   An AML/CTF Compliance Policy/Program or Policy Statement, which touches all attributes of the strategy from governance to transaction level controls;

3.   Defining Customer Due Diligence (CDD), Enhanced Due Diligence (EDD) and Simplified Due Diligence (SDD) activities, which clarifies ownership and control, nature and purpose of the business relationship;

4.   Ongoing monitoring system, including both account basis monitoring and general monitoring to detect suspicious activities;

5.   Ongoing Training Activities for employees having a role in AML/CTF related tasks;

6.   Independent periodical audit for the AML/CTF compliance, covering all aspects from governance to transaction level controls;

7.   Last but most importantly, appointment of an officer in the most senior management level for the supervision of the whole system with appropriate authority and resources for effective control.

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Bekir Ozdemir, CFE Freelance Management Consultant Managing Director, FCA Risk Consulting bekirozdemir@fcarisk.com

*Based on review of legislation and project experience