AML planning — Time to overhaul outdated procedures

In the second in our series of guest blogs on the subject of anti-money laundering (AML), RiskScreen - one of TrustQuay's ecosystem partners - sets out the challenges, approaches and next steps to consider.

Industry bodies have repeatedly highlighted that many TCSPs are failing to manage the increasing risk of money laundering. As a result, calls are growing for a fundamental overhaul of the sector's anti-money laundering (AML) procedures.

Trust and corporate service providers (TCSPs) are currently facing increased pressure due to tough new sanctions laws.

Since May 10 of this year, the EU has prohibited TCSPs from servicing trusts and similar structures that are connected with sanctioned Russian individuals or entities. These sanctions have the potential to affect TCSPs worldwide, as they not only apply to non-EU providers that conduct business in the EU, but also if they have an EU person working for them.

Russia sanctions present a tough challenge for TCSPs due to a continually expanding list together with the nuanced differences across the sanction’s regimes of the EU, US, and UK. As a direct result, lawyers and consultants are now advocating enhanced due diligence to ensure TCSPs aren’t knowingly acting on behalf of sanctioned individuals or entities.

Breaking sanctions laws aren’t the only challenge that TCSPs face

There is clear evidence that TCSPs are increasingly under threat from the ever-growing threat of money laundering.

While AML and sanctions regulations are subject to separate sets of laws and requirements, they share three key requirements in order to ensure that a TCSP isn’t unwittingly being used to circumvent sanctions or to facilitate money laundering.

- Robust and ongoing risk assessments
- Know your customer (KYC) processes and procedures
- Ongoing and auditable screening for risk

Addressing TCSP vulnerabilities

The role of the TCSP covers many activities including: acting as director or secretary of a company or similar position; providing a registered office or business address for a company; and acting as trustees of express trusts.

Financial criminals may attempt to use these services in order to disguise the true origin and ownership of illicit money, such as creating shell companies or trusts.

In 2021, a landmark paper from Nottingham Trent University suggested a comprehensive overhaul of how such ‘off-the-shelf’ businesses are created.

Furthermore, in 2019 the Financial Action Task Force (FATF) identified TCSPs as being particularly vulnerable to money laundering and published guidance for the sector. The global financial watchdog singled out the UK sector as particularly exposed to exploitation, with corporate structures and trusts employed in almost every high-end money laundering case.

Professional bodies are alerting the sector to the risks

In 2021, the UK’s Solicitors Regulatory Authority (SRA) acknowledged that TCSPs are high risk and highlighted the danger of criminals using entities for purposes of money laundering without the TCSP’s knowledge. It proceeded to warn that anyone forming companies as a service must actively monitor them to guard against this possibility.

The SRA also noted that despite the high risks, very low numbers of suspicious activity reports (SARs) have been submitted to the National Crime Agency (NCA), which suggests widespread underestimation of the problem.

If anyone doubts the implications of submitted low numbers of SARs, take a look at what happened to Robeco. The international asset management company was fined €2m by Dutch regulators for failing to comply with anti-money laundering regulations. What raised suspicions was the fact that Robeco reported far fewer suspect client transactions than similar companies.

To help counter the underestimation of risk, the SRA highlighted several red flags that can help identify potential money laundering in TCSPs:

- Clients seeking to involve an existing entity without an adequate explanation
- Using entities located in jurisdictions or types of entities known to facilitate anonymity or opacity
- The involvement of multiple countries seemingly unconnected to the client
- Actions that might attempt to disguise or separate the actual controlling party
- Using bearer shares whereby the legal owner is whoever ‘bears’ the documentation
- Loans that are repaid earlier than anticipated

In 2021, the Institute of Chartered Accountants in England and Wales (ICAEW) reviewed its members and unearthed multiple deficiencies in TCSP AML processes. Consequently, the institute which is the AML supervisor of no less than 11,000 firms. recommended multiple improvements:

- Ensuring registered addresses haven’t been hijacked
- Questioning the requirement for multiple nominee shareholdings or directorships, and requesting additional details when asked to act as a nominee shareholder or director
- The requirement to carry out firm-wide AML risk assessments
- Improve the training of staff about red flags, risks, and customer-enhanced due diligence
- Better onboarding procedures in order to better recognise risks

ICAEW also stressed the need for firms to ensure staff understand how and when to make a SAR, and what a defence against money laundering is and how to request one.

Attitudes are rapidly changing

Some in the TCSP sector believe that their AML and sanctions risk profile is much lower than other financial institutions due to their limited financial exposures.

But the hard truth is that the underlying AML risk could be inherently higher. A client could be just one layer sitting among multiple corporate entities that conceal ultimate ownership, which is why robust, risk-based AML programmes are particularly crucial for TCSPs.

Another challenge for TCSPs is that providers depend on third-party service providers to execute trust and agency activities, highlighting the importance of know your vendor (KYC) due diligence. This has become increasingly important as many Western countries are now intent on prosecuting violators to the full, regardless of how unwitting a party they may be.

This zero-tolerance approach is resulting in even greater scrutiny of compliance cultures and TCSPs will now find themselves among those on the front line.

How RiskScreen can help TCSPs to overcome these challenges

The mounting pressures on TCSPs and their compliance departments mean that it is now crucial that they take a far more proactive, risk-based approach to combatting money laundering.

The problem for many TCSPs is that they are under-resourced and often rely on outdated manual money-laundering processes that are no longer fit for purpose.

Yet evolving technologies now exist that offer flexible, scalable, and auditable solutions to ensure compliance officers consistently maintain an effective and efficient AML process, all while keeping abreast of an ever-changing regulatory environment.

The RiskScreen AML platform has been designed to help you achieve these goals, by providing a complete end-to-end solution designed to meet both existing and future challenges.

This intelligent solution offers a range of modules that cover key areas such as screening, onboarding, in-life monitoring, and adverse media. With flexibility in mind, you can choose individual modules to cover specific areas as your business requires or install the complete package for a fully integrated solution.

Whatever your requirements, you can rest assured that your anti-money laundering (AML) and know your customer (KYC) processes will be immediately transformed, with full scalability in order to future-proof your compliance functions.