Anti-Money Laundering (AML) practices and policies are aimed at keeping money that stems from criminal activity out of the mainstream financial ecosystem. Given this definition, owners and operators of legitimate businesses may rightly wonder why in the world they would need to think about AML at all. They need to, unfortunately, because increases in fraudulent activity over the past several years and corresponding pressures to prevent it are having unintended impacts on lawful businesses.
In this post, we examine how widespread money laundering is, the types of businesses that are prone to money laundering issues, and how to put AML practices and policies in place to protect one’s business.
When bad actors possess large sums of cash that they want to place into the financial system without raising flags, money laundering techniques such as “structuring” are used. With structuring, the large sums are divided into individual deposits of less than $10,000 made by different people at different institutions and different accounts to evade reporting requirements. The logic of the bad actor is that because none of the respective transactions exceed the cash-reporting threshold and no alerts are generated, the money will ultimately be accessible to use and move as they wish. The acclaimed series Breaking Bad provides a particularly good summary (see below) of money laundering mechanics.
Still, many may think money laundering remains mostly the stuff of movies and TV shows like the one above, but a wide range of data suggests otherwise. An estimated $300B is laundered in the U.S. annually while more than 90% of the crimes go undetected. It’s also estimated that more than 1/3 of all U.S. $100 bills are currently held by illegal businesses around the globe. These alarming statistics and their recent rise have triggered crackdowns from authorities seeking to turn the money laundering tide.
Among these AML measures are increased pressures on financial institutions to scrutinize customers and transactions more deeply and to report all suspicious activity. Financial institutions that fail to do so, whether knowingly or unknowingly, face hefty penalties. In 2020, banks worldwide were fined $10.4B for violations in AML practices. To avoid such fines, banks are erring further on the side of caution – so much so that it’s affecting legitimate businesses and individual account holders. Actions banks are taking range from requiring customers to submit additional information to, in some cases, freezing or closing accounts.
Certain types of businesses have historically been shown to be more susceptible to money laundering activity than others. As a result, they’re also more susceptible to impacts like those described above. These types of businesses include currency-based businesses such as food service, laundromats, salons, and related operations. Other business categories viewed as being more easily disposed to money laundering activity include real estate, art, luxury goods, charities, insurance, and cryptocurrency. Although the overwhelming majority of these businesses aren’t involved in money laundering activity, they face the same scrutiny as those that are.
A recent example involving a well-established and growing business within one of the aforementioned categories illustrates this vulnerability. Although fully compliant with all regulatory requirements and guidelines, the business received a “Know Your Customer” questionnaire from its bank as part of the bank’s portfolio review and ramped-up AML efforts. After the business submitted the information asked for in a timely and complete manner, the bank responded that they would be ending their business relationship.
Working with vcfo’s finance experts, the business has been able to further codify its policies and procedures, secure interim bridges to ensure payroll and deposit continuity, and strengthen the information packages submitted to prospective new banking partners. Collectively, these efforts are helping them weather the storm and emerge on the other side in a stronger position.
The example above and others like it are eye opening. Businesses that brush off AML policies and procedures can open themselves to increased regulatory, legal, financial, and reputational risk. In short, money laundering needs to be discussed and assessed as part of risk management policy in all companies.
Evaluating one’s AML efforts can strengthen not only the organization’s compliance with regulatory requirements, but also its operations generally. These evaluations typically begin with exploring several important questions:
Answering these and related questions helps to inform steps the organization needs to take to put the right AML policies and procedures in place. These policies and procedures normally span several layers and lines of defense. Providing AML awareness training for employees at every level empowers eyes everywhere and aligns the enterprise with its obligations. An effective compliance function designates a compliance or Money Laundering Resource Officer (MLRO), enables proper surveillance, and establishes Dual Controls. It also ensures independence (access to upper management) and confidentiality. Other aspects of AML include transaction-monitoring technology and procedures that clearly spell the organization’s AML standards and practices.
Money laundering impacts not only those engaged in illegal activities but also those working every day to run their businesses the right way. Not having proper AML policies and practices in place can open a business up to a range of risks and disrupt its ability to access and use financial institutions’ products and services.
Every business owner and executive should understand money laundering’s prevalence, know which businesses are more susceptible to money laundering issues, and effectively assess where AML policies and practices need to be shored up in their operations.
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Is this topic a new one for you? Unsure whether your business has the right Anti-Money Laundering practices and policies in place to both comply as required but also protect yourself from banking interruptions? Request a Free Consultation from a vcfo expert who can help you assess your situation and make any appropriate recommendations. We’ve seen a thing or two, partnering with more than 5,000 businesses in our 27 years and would love to share our expertise and experience with you.