It is vital to protect your business from risk, which is why having in-depth information about other companies you are working with is so valuable. Money laundering legislation is regularly being updated (last update 2022) with harsh punishment for companies that do not follow regulations. Directors must have a good understand of money laundering legislation to avoid unnecessary risks.
In this article we investigate what money laundering is, steps to combat it, ultimate beneficiary owners, and what Red Flag Alert can do to help you.
What is Money Laundering?
Money laundering is a form of financial crime that enables criminals to disguise the source of their money. The process disguises funds that are generated from, or used to finance, illicit activities; the result being ‘dirty’ money appearing ‘clean’. The methods used make it very difficult for law enforcement agencies to track and bring criminals to justice.
Money laundering is a serious problem in the UK, and London is often called the money laundering capital of the world. Estimates from the UK’s National Crime Agency show that money laundering costs the country more than £100 billion every year.
In simple terms, the process entails accumulating money from a criminal activity, entering it into a financial system, passing it through a series of complex transactions and then filtering it back to its original owner. This means criminals can ‘cash out’ laundering money without the risk of being caught.
To go into more detail, here is the three-step money laundering process:
· Placement
o ‘Dirty’ money is placed into existing financial systems.
o Criminal money is moved away from the illegal activities from which it was sourced.
o This makes it appear as if it came from a legitimate source.
o An example of this could be placing funds into an offshore bank account.
o This is also known as ‘washing’ illegally acquired money.
· Layering
o Laundering money is pulled through a variety of legitimate financial systems.
o This complex web of financial transactions complicates the trail.
o Layering money through numerous transactions and bank accounts obscures the source.
o Money may then be staked at casinos/gambling before being used to purchase other assets and then financial products.
o Sometimes this involves shuffling money through different currencies multiple times, moving large sums of cash on an international level.
· Integration
o Funds are integrated into the economy.
o Money is extracted from the complex web of transactions during layering and used to make large-scale investments.
o Now the funds appear to come from legitimate sources allowing criminals to spend their money without raising the alarm.
o Often laundered money is used to purchase assets that make it seem even more legit.
o This can include property, shares, and luxury assets.
Steps to Combat Money Laundering
Money laundering is an extremely complex form of financial crime that can make it exceedingly difficult to prosecute criminals or reclaim their illegally sourced assets. The UK government is now taking tackling money laundering extremely seriously; this makes anti-money laundering (AML) checks a huge part of doing business today.
To protect the economy, consumers, and individual firms, authorities in the UK and EU require businesses to take various steps to find and report money laundering activities.
Three major pieces of legislation are:
· POCA
o Proceeds of Crime Act 2002. Defines what the proceeds of crime are and grants authorities the to investigate, freeze and seize criminal assets.
· MLR
o The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) regulations 2017. The second major piece of legislation relates to and governs AML activities. The MLR aims to stop professional services from being used to launder money, and to introduce the risk-based approach method companies in the regulated sector are required to take.
· CFA
o The Criminal Finances Act 2017. This affects all UK businesses and grants further powers to investigating authorities and expands the reach of existing money laundering legislation.
The measures prescribed by the relevant legislation create a body of anti-money laundering requirements that businesses in the regulated sector must follow. Although the exact compliance requirements imposed on businesses vary based on sector and several other factors, firms generally need to:
· perform customer due diligence checks.
o UK businesses and financial institutions are bound by law to conduct due diligence checks on certain customers, and to report their findings to regulators. The scope of the various anti-money laundering rules is broad, so following the law is no mean feat.
· create and support internal controls.
· devise governance and monitoring procedures
· to keep correct and complete records.
· draft and abide by a firm policy statement.
Although the rules may be somewhat restrictive, the need to be compliant should not be understated. If your business was used as part of a money-laundering scheme, you could suffer untold reputational damage on top of substantial fines and trading penalties.
In the most severe cases, the directors and employees of businesses who do not take the necessary actions to prevent financial crime may face criminal prosecution and even incarceration.
What is an Ultimate Beneficial Owner (UBO)?
An ultimate beneficial owner is the person or legal entity who directly or indirectly reaps the benefits of ownership of an asset or exercise ultimate effective control over it, even though that asset may be legally owned by a different party.
It’s vital to recognise the difference between UBO and legal ownership. Legal ownership refers to who owns the asset according to its paperwork e.g., the legal owner of a property is the person or entity named on its title deed. Usually legal and beneficial owners of an asset are the same person however in some cases, they can be different.
One example of why the UBO and legal owner of an asset or entity may be different is to hide links to money laundering. Assets earned via criminal activity and used in the process of money laundering are often registered under a different legal owner to obscure their links to the UBO or hide the UBO’s involvement in this process.
Other reasons could include:
· Concealing Assets
· Tax Evasion
· Trading
o Safety and convenience.
· Anonymity
o Privacy
How can Red Flag Alert Help?
Your company needs extensive financial data and powerful analytics to protect it from becoming involved in financial crime and meet your compliance requirements. Our data and AML compliance services help businesses across the UK to reliably vet their clients and make more effective decisions in their business relationships.
Make AML easy:
· A full range of risk level checking
· Unbeatable march rates
· ID verification
· Enhanced due diligence.
· Global PEPs and Sanctions with real-time screening
· Real-time monitoring alerts
· User friendly interface
· Secure audit trail.
Using Red Flag Alerts allows you to find ultimate beneficial owners, as well as improve your AML compliance program and safeguard your business from the risk of money laundering. Start a free trial today.
Money laundering can encourage illegal activities and must be stopped urgently.
Sentrient helps to identify and cease potential money laundering activities, ranging from suspicious customer behaviour, international transactions, larger than normal transactions and suspicious transactions.
