Prevent and Detect: How Companies Can Spot Money Laundering Before the Fine

Companies are receiving ever larger fines for allegedly breaching anti-money laundering regulations–in fact, the total fines issued globally in 2022 was 50% higher than in 2021. As well as the financial hit, compliance breaches inflict significant legal, reputational and strategic damage on companies. It is therefore critical that banks and other firms can spot suspicious financial activity before it becomes a regulatory issue. In the latest blog in our AML series, we look at eight ways for companies to improve their detection of money laundering risk.

1. Monitor your own data

“Follow the money” is a common refrain in any investigation, and it is particularly true in the AML sphere. Financial services institutions have access to extensive data on their customers’ transactions. Experienced compliance personnel can sift through this data to detect patterns in customer behaviour which resemble previous examples of money laundering. These patterns might warrant further investigation.

What should firms look out for? The OECD identifies possible indicators of money laundering by customers, including:

• Unusual income levels by an account holder.
• An unexplained rise in net worth.
• Unusual levels of debt.
• Unusual destination of money transfers, and abnormally high spending levels.

2. Bring in external data

Companies can shed light on individuals or entities who might be involved in money laundering by using wider sources of contextual data. For example:

• News data can indicate if a prospective third party or client has a previous reputation for money laundering allegations or compliance deficiencies.
• Legal records show if an entity has historically been implicated in money laundering or other financial crimes.
• Company records may reveal that a third party is or uses a shell company, or another opaque corporate structure. While this does not necessarily mean money laundering is present, it can indicate a higher risk which deserves further investigation.
• Financial data can suggest a company’s solvency or an individual’s source of wealth, which can be matched against transaction data.

3. Understand money laundering risks in your industry

The sector your company operates in can raise or lower the risk of money laundering. Financial services and banking carry a higher inherent risk due to high volumes of money flows across borders, for example. While bad actors have historically used the precious metals and fine art sectors to launder money through high value assets and trades. When doing business with firms in these sectors, companies should consider a higher standard of due diligence than for a consumer goods or retail firm.

4. Understand risks in your jurisdiction

Similarly, certain countries have a greater reputation for money laundering than others. For example, Transparency International’s Corruption Perceptions Index scores countries by perceived expectations of financial crime. International sanctions regimes also point to countries which require extra screening.

Firms should use this information to decide how extensively they need to scrutinise third parties and clients for money laundering risk. An entity operating locally in a country like Norway, which has a strong reputation for AML and anti-corruption efforts, will typically carry less risk than an entity operating in countries facing international sanctions, like Russia and Iran.

5. Use technology to automate investigations

Technology can assist companies to carry out the three steps above more effectively and efficiently. For example, AI and Machine Learning are used by many banks to automatically crawl their transaction data and flag any irregularities or patterns which resemble money laundering activity. While technology platforms such as Nexis Solutions® can support firms’ due diligence processes by bringing together large numbers of relevant datasets and flagging third party risks for further investigation.

6. Follow money laundering trends

Criminals are constantly finding new and more sophisticated ways to evade regulators, investigators and compliance teams. Companies should follow these trends to guide their AML strategy. For example, criminals used technology to launder money following the rise in remote working and digital banking during the COVID-19 pandemic. Likewise, companies should follow trends in regulations to guide where best to focus their AML efforts to identify money laundering before they are in breach.

7. Monitor for AML on an ongoing basis

Money laundering risks are forever changing, so firms should seek to identify suspected illicit activity on an ongoing basis. Regular scrutiny of customer data means that a bank can quickly spot and block a suspicious before it is completed–and before the bank becomes liable for a money laundering breach. While third parties and customers should be screened against the latest legal and sanctions data to detect any changes which might raise their risk of money laundering. This is not just good advice, but increasingly an expectation of many global regulators.

8. Don’t go it alone

Banks can gain intelligence about suspected money laundering by sharing information with regulators and each other, whether about general trends they have spotted or irregularities in individual accounts. The latter is not always possible due to data protection regulations, but some regulators have recently set up facilities to formally allow and encourage information-sharing between banks and government agencies–most notably in the Netherlands and Singapore.

9.Train staff and communicate clearly about AML expectations

AML policies should be clearly communicated as a priority from the top of the organization, and all staff dealing with transactions must be trained to spot signs of potentially suspicious activity, as well as how and when to report suspicious to the board and the regulators. The OECD advises that, if financial institutions have identified unusual activity in an account, they should carry out further investigation or ask the customer to explain the origins of the funds and purpose of a transaction, and assess the explanation given.