Money laundering and Terrorist Financing in High-Risk Industry
All financial industries are facing the threat of Money laundering and terrorist financing, consequently they take appropriate action to control the same. So based on the risk involved in the industry, certain industries are labelled as high-risk Industry, some as mid and low. Let’s understand the concept of Money laundering and how it happens.
When Money is coming from illegal activities but appears in account as if money is coming from a legitimate business. For example, Hotel owner is taking money from drug trafficking rings in cash, which is considered dirty money – and the “launderer” will deposit the cash in his bank and show it as his income from the hotel business.
The money laundering process involves three steps:
Placement: Placement involves the criminals to put the dirty money into a legitimate financial system, like a bank or other financial institution.
Layering: It covers the illegal source of the money by executing a series of transactions and adjustments, hence it becomes tough to trace the source and destination of the fund.
and integration: The last step is integration. In this step, the dirty money is accumulated at one place, after being processed through a series of transactions and it will become a huge amount. Criminals can use it again for illegal purposes. To know more about AML, please click here
Terrorist financing means the collection of money, which is routed through legitimate financial institutions and used to support terrorist organizations or acts. The funds can have legitimate or illegal sourcing, but the perpetrator wilfully aims to use the money to support terrorism. The target of terrorist financing is not essentially to cover up the source of the funding, but rather to conceal the nature of the movements they are financing. In this scenario, the crime is financing terrorist activities or organizations.
How does High-Risk Industries involve in Money laundering and Terrorist Financing?
Whenever money is being exchanged, risk of money laundering is involved. But in high-risk industries the amount of risk is significantly higher. It may be financial institutions like banks, currency exchange houses, check cashing facilities, and payment processing companies, Gaming, and Gambling Industry, Adult Industry, which deal with huge amounts of money and support cash transactions.
The following attributes are indicators of a high-risk industry:
If an industry has clients that primarily pay with cash, it can be an indicator of illegal activities. Suppose real estate transactions that are paid up in cash and the source of that cash is vague.
Secondly, when clients are hesitant to provide information and intentionally create unnecessarily complex ownership structures, there is a sensitivity to money laundering and terrorist financing.
Thirdly, Politically Exposed Persons – dealing with PEP, also puts a merchant at higher risk for money laundering or terrorist financing. These people often hold high net worth and can influence the government easily and are able to manipulate public decisions.
Lastly, if a client exhibits strange behaviour at the time of spending money and doesn’t want to disclose the source of income. There is mismatching between earning and spending behaviour of the client. So, there is a high probability that the client is involved in criminal activities.
There is also a risk when customers are identified to have a criminal history or are connected to terrorist organizations.
High-Risk Products or Services
Many electronic payments like ACH, wire transfers, remittances, and prepaid cards, in which there is no provision to verify the identities of the consumers, can be symbolic of illegal movements. There is also the possibility that several transactions are being processed and layering a big amount. When a business is involved in electronic banking services and permits for online account opening or remote mobile deposits, there is a high possibility that criminals will try to exploit them. These industries comprise investment businesses, Gaming, Gambling, Adult, Forex trust and company services, accounting services where books and records can be fabricated easily.
High-Risk Geographic Locations
Countries that don’t have strong AML structures are susceptible to corruption. They are more prone to have companies that conduct illegal activities using their financial systems. Other places that are at higher risk like bank concealment shelters, few emerging countries where there is a significant volume of illegal drug trafficking, in certain countries have an intrinsic risk of money laundering and terrorist financing. The Financial Action Task Force (FATF) or other international governing bodies identify such locations.
In short, the High risk industry is labelled as high risk , as sometimes a business entity is having high risk clients, sometimes dealing with high risk products , or sometimes business is located or functioning at high risk geographical locations.