The A-Z of AML/CFT

AssessmentsYour guidance manual

for developing an

AML/CFT business risk

assessment.

You want to be  compliant but have limited resources?

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If your business is small or medium sized,you are likely to be concerned that anti-money laundering compliance requires adedicated AML Compliance Officer - aresource that you are struggling to meet. You therefore need to find new ways tomanage business so that you can keep ontop of compliance without draining yourhuman resourcing capacity.

NOTE: Automation is the answer toreducing costs and streamliningprocesses.

At AML360 we like to keep things simple.We also keep costs low and provide bestpractice strategies that will satisfy auditorsand AML supervisors. To get you started, we provide thebusiness risk assessment for FREE.

Not only do we provide a free business riskassessment but our packages are pricedso you can access our professionalservices for just NZD $99 per month. Inthe professional package you receive anonline business risk register, customerprofiling and transaction profiling. Beforedeciding which package is right for you,continue reading this manual and find outmore about your regulatory obligations. So let's get started.

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The online AML360 risk assessment is as easy as 123. 

The risk assessment identifies the presence of known vulnerabilitiesThe first step in developing an AML/CFTcompliance framework is to identify to whatextent your business is exposed to thelikelihood of facilitating ML/FT. Globally, governments recognise certainareas within a business increase the risk ofML/FT occurring. These areas include the(a) nature, size and complexity of thebusiness, (b) the types of clients orcustomers that the business deals with, (c)the products or services that the businessprovides, (d) the methods used to deliverthe products or services, (e) thegeographies dealt with and (f) the types ofrelationships that exist with otherbusinesses.

Any one of these areas can expose abusiness to unwittingly facilitating ML/FT.When two or more of these areas arefound to have higher risk, the riskcompounds, increasing the probability ofML/FT occurring. Let's look at each of these areas and thevariables that, if present, increases therisk.

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01NATURE, SIZE

& COMPLEXITY

The greater the number of subsidiaries orbranches, the greater the level of controlsrequired to ensure your business policy isapplied consistently. AML/CFT risks: Those seeking toundertake money laundering or thefinancing of terrorism will targetbusinesses with more than one branch ifthey are able to identify weaknesses inAML/CFT compliance controls. This willallow the launderer to facilitate theplacement and/or layering stages.

Structure

Annual TurnoverThe annual turnover of a business assiststo determine the size of businessoperations. AML/CFT risks: The exploitation of abusiness for money laundering or thefinancing of terrorism is increased if thebusiness has a large turnover - thusreducing the opportunity for moneylaundering or the financing of terrorismtransactions to be identified.

Management Operations

avenue through which to exploit practicesand procedures directly for the purposesof money laundering and the financing ofterrorism.

NOTE: Get your AML360 riskassessment for FREE or upgradeto an online register for NZD $49per month. An online registerprovides easy ongoingmaintenance and instant updates.

Size of Client BaseThe greater the number of clients thegreater the exposure to ML FT. Yourbusiness should operate with client riskprofiling systems so you know whichclients present the highest risk. AML/CFT risks: The ability to hideamongst other clients is a crucial factor forthose seeking to undertake moneylaundering or the financing of terrorism.

Product or Service DiversityThe greater the number of products orservices provided, the greater theopportunity for a launderer to use abusiness to layer their dirty funds andintegrate with cleansed funds. AML/CFT risks: Each product and servicemust be risk profiled against vulnerabilityfor ML/FT. This will allow your business tomore readily identify account activity thatis posing a higher risk.

Matters that increase ML/FT risk undernature, size and complexity of a businessinclude -

Having all management onshore assiststo reduce risks due to easiercommunicating channels. AML/CFT risks: Poor oversight ofbusiness operations can provide an

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AML/CFT risks: Placing geographicaldistance between the client and theclient's funds reduces the risk of detection.Many activities are undertaken by peoplein or through countries with weak or failedAML/CFT controls.

Geographic Spread

Volume of TransactionsThe greater the number of transactionswithin a business, the greater therequirement to adequately managetransaction monitoring. Knowing eachcustomers expected volume oftransactions assists to detect unusualactivity. AML/CFT risks: The ability to hideamongst other transactions and conductfrequent transactions is a key factor forthose seeking to undertake moneylaundering or the financing of terrorism.

Value of TransactionsKnowing each customers expected valueof transactions assists to detect unusualactivity. Your monitoring shouldincorporate high value transactions. AML/CFT risks: The ability to hideamongst other transactions and conducthigh value transactions is a key factor forthose seeking to undertake moneylaundering or the financing of terrorism.The opportunity lowers the risk ofdetection if they remain within theparameters set by legitimate customersand normal business behaviours. Thoseseeking to undertake money launderingmay complete one or more high valuetransactions.

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It takes time for a new staff member tolearn policies, procedures and controls.High staff turnover increases compliancerisk due to loss of knowledge and mayalso indicate problematic areas withinsenior management. AML/CFT risks: Inexperienced staffwithout sufficient knowledge of AML/CFTrequirements can support thoseundertaking money laundering and thefinancing of terrorism by providing theopportunity to successfully exploit theservices and products provided by abusiness with weak detection capability.

Staff TurnoverAverage Transaction Value

Staff Numbers

NOTE: Employees with roles inAML CFT require adequatescreening and compliance training.

Intermediary RepresentationIntermediaries can offer ownershipobscurity. Your business should determineif the intermediary is regulated underAML/CFT laws. AML/CFT risks: The use of a professionalprovides a veneer of legitimacy to criminalactivity and a buffer between criminals andtheir financial activities and assets.

Business ClientsFront companies, shell companies, trustsand company structures establisheddomestically or offshore are used tolaunder money. At time of clientonboarding your procedures shouldadequately identify the nature andpurpose of each business relationship. AML/CFT risks: Businesses are commonlyused to mix illegitimate funds with legalfunds.

If your average value transaction is largevalue, your business is at greater risk ofattracting criminals. Knowing youraverage value transaction allows you toset rules for high value transactions oractivity. This measurement should beapplied to each individual product orservice. AML/CFT risks: The ability to conductlarge value transactions is key for thoseseeking to undertake money launderingand the financing of terrorism. This isbecause large value transactions reducesthe number of transactions required.

The greater the number of employees thegreater the need to adequately managecommunication of the programme andtraining. AML/CFT risks: The less staff understandcompliance obligations and associatedrisks - the less likelihood of suspiciousactivities being identified. It also meansyour business is more likely to be targetedby criminals. For every transaction that acriminal undertakes with your business,the greater the likelihood of regulatorypenalty and reputational harm to yourbrand.

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Cash Propensity TechnologyThe greater the proportion that yourbusiness deals in cash, the greater thelikelihood that money laundering willoccur. Clients that are cash intensive,such as restaurants, entertainmentvenues, casinos, etc, should beconsidered a higher risk. AML/CFT risks: Cash is used in the firststage of money laundering known as theplacement stage.

New and developing technologies andproducts can present unknown ML/FTrisks and vulnerabilities. Your programmeshould detail the procedures, policies andcontrols that you will implement for thistype of customer and technology.

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02PRODUCTS &

SERVICES

Individual products and services require risk evaluation.

Anonymity or Opaque ownership Products offering anonymity or opaqueownership are attractive to launderers andrequire enhanced monitoring. This isbecause these products concealownership or wealth. AML/CFT risks: Opaque ownershipprovides those seeking to undertakemoney laundering with an ability to remainunknown to authorities. This providesoptions for laundering large amounts,sometimes on behalf of others - making ita valuable avenue for ongoing abuse.

Cash Exposure Your business should measure theproportion of transactions that are linkedto physical cash. AML/CFT risks: Cash products havegreater vulnerability and exposure to thefirst stage of the money laundering cycle.

Offshore Links Accessibility from offshore increases MLrisk. This is because money launderingtypically involves sending assets or fundsoffshore for the purpose of distancing thelaunderer from the value.

AML/CFT risks: The ability to complete afinancial transaction from offshore is animportant consideration for those seekingto undertake money laundering. Dealingwith clients who are located offshorebrings challenges in identifying thepersons involved and the source of fundsor wealth. You should also be aware ofcountry ML/FT risk.

3rd Party Payments The ability to move funds or receive fundsto 3rd parties assists in the layering cycle.Ensure to understand the nature andpurpose of 3rd party payments. AML/CFT risks: Moving funds to thirdparties is used in the layering cycle. The3rd party may be a cover to make thetransaction appear legitimate. Recentprosecutions have shown false invoicingand false loans being used to transactillicit funds between 3rd parties.

High Velocity When a product can be accessed orliquified within 48 hours, this increasesexposure to ML/FT. Ensure customerverification is complete before distribution.If it is a high value product, considerverifying source of wealth or funds.

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High Value High value products or services increasethe risk of money laundering occurring.Enhanced due diligence should beconsidered for high value products byverifying the source of funds or wealth ofthe customer. AML/CFT risks: High value products orservices offer those seeking to undertakemoney laundering and the financing ofterrorism the opportunity to move illicitfunds in large amounts with limitedexposure.

High Volume Know your products or services that maybe low value but high frequency. AML/CFT risks: The ability to hideamongst other transactions and conductfrequent transactions is a key factor forthose seeking to undertake moneylaundering or the financing of terrorism.

Ensure all staff in AML/CFT relatedroles understand the risks that yourproducts and services present. Thisincludes senior managers andBoard members.

Products and/or services on a commissionbasis can lead to conflicts of interest withAML CFT compliance. AML/CFT risks: If staff or 3rd partiesreceive commission bonus for sale ofproducts or services, this may lead toturning a blind eye to AML/CFTcompliance.

Commission Basis

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03CUSTOMERS & INSTITUTIONS

B2B AND B2C

It is essential to profile client relationshipsBusiness to Business When considering the businesses that youhave a business relationship with, youshould include banking relationships andother 3rd party arrangements that areproviding a service. Whether they areregulated under AML/CFT laws is relevantto your risk exposure. For clients thatoperate a business, you need tounderstand their nature and purpose ofaccount activity. You should also have anunderstanding of your customer'scustomers. Therefore for businesses youshould understand their products/servicesand customer types. Applying profiling will allow you to identifyyour higher risk clients. If your higher riskclients also access higher riskproducts/services, the risk compounds.These clients should therefore receiveenhanced ongoing due diligence. AML/CFT risks: Opportunities tocomplicate processes as well as exploitservices are known practices. You should

Private Individuals Private individuals will generally be usingtheir account for day-to-day livingexpenses. This presents less risk toML/FT. Systems should be able to detectwhen account activity for privateindividuals appear business based orunusual. If it is being used for business,you are required to identify and verify thebusiness and understand the nature andpurpose of the business activity. AML/CFT risks: Launderers attempt tohide amongst other transactions whereverviable. This approach reduces the risks ofbeing red flagged by AML/CFT systemsand controls.

Domestic Businesses Aspects of a business that creates greaterrisk includes the products and servicesthat are traded, their geographic reachand their underlying customer types.

carry out adverse media checks fromtrusted sources on all client relationships. and private Individuals

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AML/CFT risks: Those seeking toundertake money laundering and thefinancing of terrorism will form businessentities to allow transactions to appearbusiness related. This approach reducesthe risks of being identified by AML/CFTsystems and controls.

Offshore Businesses Offshore transactions increase ML risk.The product and customer types of anoffshore business increase ML FT risk.Geography risk for place of incorporationand operations should also be examined. AML/CFT risks: Those seeking toundertake money laundering and thefinancing of terrorism can form offshorebusiness entities to allow transactions toappear business related. This approachreduces the risks of being identified byAML/CFT systems and controls and limitsthe ability to fully establish legitimacy ofthe business.

Trusts Trusts are a common typology fordisguising ultimate beneficiaries and/orhiding assets Trustees, Settlors andBeneficiaries should be verified. AML/CFT risks: Trusts provide a solutionto those seeking to undertake moneylaundering and the financing of terrorismas they can facilitate the creation of falsepaper trails, hide transactions andmaintain secrecy of beneficial ownership.

Cash Intensive Businesses Cash intensive businesses are exposed totransactions in physical cash increasingthe exposure to the placement stage ofmoney laundering. Confirm entity islicensed, regulated for AML/CFT andobtain the AML program to assessadequacy of controls. AML/CFT risks: Money laundering and thefinancing of terrorism through cashintensive operations provides an efficientmethod of disguising the true origin of illicitfunds and their integration into the legalfinancial sector.

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Charities are a common typology forenabling terrorism financing as they assistto move funds into war-torn and higherrisk countries. AML/CFT risks: Charities provide asolution to those seeking to undertakemoney laundering and the financing ofterrorism as there are multiple ways inwhich non-profit entities may be misused.For example, misuse through: assets,funding and name, and status.

Charities

Politically Exposed Persons PEPs have greater exposure to acts ofcorruption, especially from countries withhigh levels of corruption. Confirm sourceof funds, maintain a PEP register andincrease transaction monitoring.

3rd Party Agents 3rd party agents are a common typologyand are known as gatekeepers for thosethat wish to have obscurity to accountownership. Verify the identity of 3rd partyagents and the underlying customer(s).

High Net Worth Clients High net worth customers pose a higherrisk due to the larger amounts they haveavailable to deposit or invest and the easeof fund movement through private bankingtype facilities. AML/CFT risks: The ability to deposit andinvest large sums provides a viable optionto those seeking to undertake moneylaundering and the financing of terrorismunder the disguise of a high net worthindividual.

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 04DELIVERY

How your business delivers products orservices is a key component to measuringrisk. This includes not only at time ofclient onboarding but also throughout theclient's relationship with your business. Should a client use your service for theplacement stage of the laundering cycle,without detection, it becomes a lot harderto detect the ongoing activity as unusualor suspicious. This is why it is important tohave very good controls for client identityand verification, as well as understandingthe nature and purpose of the client'srelationship with your business.

Controls during onboarding are key to detecting ML/FT

Non face-to-faceNon face-to-face delivery increases therisk that the customer is not who they saythey are. Non face-to-face requires greateridentity verification controls. AML/CFT risks: Maintaining anonymity iscrucial for those involved in moneylaundering and the financing of terrorism.Having the ability to conduct transactionsthrough a non face-to-face scenarioincreases the secrecy of the transaction.

Once your clients are on-boarded there should becontrols in placeto ensure thecustomer who was verifiedcontinues to operate theaccount.

Ongoing face-to-face

Reliance on IntermediariesThe use of intermediariesmay result in the client’sidentity, beneficial owner oreffective controller not beingtransparent to your business.Ensure you have writtenagreements in place clearlydescribing each party'sresponsibilities. Haveprocedures in place tomonitor level of complianceof the intermediary.

Method of DeliveryUnderstand the communicationchannels that present higherrisk. A verified landline is lessrisk than communicationsthrough the internet.

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 05GEOGRAPHY

Your business must have knowledge of country risks.

Your business is exposed to country riskthrough a variety of ways including whereyour clients are domiciled or holdcitizenship, where your transactions oractivities are originating from or being sentto and for clients that operate asbusinesses, where their businessoperations stretch and/or jurisdictionsrepresenting their customer base. There are many reputable country riskindexes available that provide informationon the risks that a country presents. These include Basel, KnowYourCountry,Transparency International and theFinancial Secrecy Index. Though the Financial Action Task Forcedoes not provide an overall risk countryscore, it does provide valuable informationon the strengths and weaknesses of acountry's implementation of ML/FT lawsand government oversight.

Risks that a country presents can arisefrom various circumstances including (a)high corruption, (b) lack of law and order,(c) lack of adequate ML/FT legislation,(d) insufficient government oversight ofAML laws, (e) countries known toharbour terrorists, (f) countries known forproducing narcotics and/or distributionand/or trans-shipment, (g) provision offinancial secrecy. Your AML compliance officer must haveknowledge of those countries that yourbusiness has direct or indirectrelationships with and ensure thatsystems are in place so that front officestaff can detect when a situationpresents a higher risk.

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Money laundering typologies typicallymove funds offshore at some stage of thecycle. The greater the number of countriesof trade, the greater the risk. Haveknowledge of countries with highercorruption and lack of AML CFT controls. AML/CFT risks: If a country is known tohave weak or non-existent laws to preventML/FT and/or a country is known toharbour terrorists, any transaction oractivity with those countries must betreated with caution. The preference is forsenior managers and/or the AMLcompliance officer to provide authorisationfor such transactions or activity toproceed.

SanctionsSanctions can apply against a privateindividual, business, company or country. It is important that your business hasknowledge of sanctions when dealing withinternational trade. Sanctions also apply when dealing withcurrency alone. Therefore if yourbusiness provide currency exchange, youmust comply with the sanctions distributedby the country in which the currencyoriginates. For the USD the sanctions areknown as OFAC. For all countries that are part of the EU,the EU sanctions apply and for allcountries that are part of the UnitedNations, the UN Sanctions apply. Breaching sanctions can result in veryhigh financial penalties.

Number of International Countries

The greater the volume of Internationaltransactions the greater the exposure toML FT occurring. AML/CFT risks: International transactionsprovide those seeking to undertake moneylaundering and the financing of terrorismwith opportunities to move illicit funds intosafer jurisdictions making it harder torecover and associate with the predicateoffence. International transactions arealso used to distance the launderer fromthe proximity of their illicit funds.

International Transactions

Primary Countries of TradeYour business should know the top threecountries of trade in volume and value oftransactions. Knowledge of the risks those countriespresent should be outlined in yourAML/CFT policy with relevant proceduresand controls to mitigate, monitor andmanage such risks.

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