Anti-Money Laundering: Small Firms and Risk Assessments

Money laundering is a term used to describe how criminals disguise and integrate illegal financial movements into legitimate economic systems. It can pose problems in both the short and long-term and has the potential to disrupt the integrity of entire financial institutions. 

National economies and currencies can become undermined if enough corporations, small or large, fall victim to large-scale money laundering schemes. Because of these severe consequences, anti-money laundering, or AML, has been at the forefront of legal business policy for several decades. 

AML – Red flags

Thirty years ago, the Financial Action Task Force (FATF) was established in Paris, France, to combat money laundering. Since then, branches of the task force have established various regulations and requirements to guide international markets across the globe.  

Criminal enterprises are often extremely masterfully constructed. They are professionals at disguising themselves to look legitimate. In recent years, technology has also become a convenient way for organisations to hide their legitimacy (or illegitimacy, instead). If a client is reluctant to meet in person or refuses to take meetings in their office space, you may want to probe deeper. 

There are several red flags for money laundering schemes. These include:

•  Inconsistencies or incomplete information submitted in official documents such as annual reports
• Complex group structures that cannot be fully explained
• Transactions which do not fall within the business context
• Clients who cannot offer a plausible explanation as to their payments or charges

When many think of money laundering, it may seem like an issue that should be predominantly referenced concerning larger firms. However, it is unfortunate that smaller firms are just as much at risk of being involved.

Contrary to expectation, smaller firms may be at greater risk of falling victim to money laundering. The increased risk may be attributable to a lack of oversight boards and specialised compliance teams that larger corporations can hire. Fewer resources are typically allocated to more uncommon, but more serious, illegal activities, such as money laundering. 

Maintaining proper risk-based due diligence is central to identifying threats of money laundering before they take off. Recognising this underemphasised heightened threat, several legal regulations that target smaller firms specifically have emerged. Most recently, the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations of 2017 (MLR 2017) have posed significant checks and challenges. These regulations, which came into effect on 26 June 2017, require numerous added considerations for small firms in particular. 

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Anti-money laundering risk assessments

A money laundering risk assessment is an analytical process applied to businesses to measure the likelihood that the firm may unintentionally engage in money laundering or other illegal financial activities. The risk assessment is a powerful tool because it identifies the aspects of a business that are most likely going to attract money launderers or other criminals who hope to profit through legitimate financial institutions. A vital strength of the newly proposed Money Laundering, Terrorist Financing, and Transfer of Funds Regulations of 2017 (MLR 2017) is that it takes a “risk-based approach.” The approach aims to show your firm is actively working to prevent and detect money laundering. A uniform AML risk assessment document is required.  

Also outlined in the MLR 2017 is which companies the regulations apply to. A broad number of firms are required to complete an AML risk assessment regularly as part of these regulations. The firms are all tied in some way to financial access. These include any companies which: 

• Buy and sell real estate property
• Manage client money, securities, or assets
• Open or manage a bank, savings, or securities accounts
• Organise contributions necessary for creating, operating, or managing companies
• Developing, running, or managing trusts, companies, foundations, or smaller structures 

An AML risk assessment can identify a risk range from low, medium, to high. An alternative range is to use a five-level rating of very low, low, medium, high, and very high. Falling in each of these ranges involves ratings on several factors, including: 

• Nature
• Size
• Complexity
• Products and services provided
• Customers
• Method of delivery
• Geography

AML risk assessments are now almost exclusively done online. You can reach out to a specialised solicitor to provide your firm information and get a comprehensive report. Alternatively, you can find numerous businesses online which are accredited to give an AML assessment. One can be found here. 

What to do to minimise AML risk  

So what daily concrete steps should smaller firms in these domains do to make sure they are not falling victim to illegal schemes? Taking care of a few simple steps can drastically reduce the dangers of getting entangled in money laundering or other non-compliance issues:  

1. No matter the size of the firm, a dedicated compliance team should be established. Having a clear team will save time and headache on the back end if things are ever to take a turn towards non-compliance. 
2. Compliance should be a part of the firm’s culture and work ethic from the very beginning. Precautionary measures should be taken across the firm in the form of annual or bi-annual compliance training. In particular, specialised training for new or young associates can be beneficial. These efforts target those who might be particularly keen to bring in business but lack the experience to sense illegitimacy.
3. Always be sure to rely on legitimate sources of information. Always look up the Standards and Regulations or Anti-money Laundering Directive, or other government-backed documents for reference on proper compliance. 

Concluding Thoughts

Regardless of the firm’s size, there are severe consequences in getting wrapped up in a financial problem of this magnitude. Detrimental outcomes can include damage to reputation, cost of insurance, penalties from federal organisations, or even sanctions, including prison sentences if negligence can be proven. A complete account of the latest information regarding the UK’s national risk assessment can be found here. If you are worried about money laundering within your firm or want to begin the process of setting up a specialised compliance team, reach out to a criminal law solicitor today.