The announcement comes after a torrid few years for the Australian banking sector, with some of the country’s biggest financial institutions facing significant penalties for anti-money laundering (AML) violations. 

In 2018, Commonwealth Bank (CBA) agreed to pay $702.5m to settle breaches of the country’s AML/CFT Act, including inadequate monitoring of 778,370 accounts over a period of three years.

In 2020, Westpac paid $1.3bn – the largest fine in Australian corporate history – for “serious and systemic” breaches of AML regulations.

And in June 2021 it was announced that National Australia Bank (NAB) was under investigation for suspected serious and ongoing breaches of AML/CFT laws, including issues related to customer identification procedures and due diligence.

However, cultural changes within major banks have seen them become a “fantastic partner” for financial intelligence, according to AUSTRAC chief executive Nicole Rose.

“Now, for a range of reasons such as the enforcement action, a number of inquiries, and law enforcement prosecutions, people are getting it,” she told the Australian Financial Review.

“The information we get from bank staff now is quality because they are seeing the tangible outcomes of arrests and prosecutions.”

Rose indicated that work by NAB to fix its shortcomings may see it avoid the severe penalties imposed on Westpac and CBA. “Some of these legacy systems are taking a couple of years to fix which we get and are sympathetic to as long as we’re seeing the progress, and they’re sincere about it,” she said. 

Compliance teams should review AUSTRAC’s judgment in the NAB case when it is published to explore in more detail if and why the bank’s penalties are reduced, and what steps the bank has taken to modernize its AML technology infrastructure.  

Renewed focus on crypto

AUSTRAC’s gaze is now pivoting to high-risk sectors including the crypto where, despite being an early adopter of crypto regulations, AUSTRAC admits it has “blind spots”.

Rose has warned crypto users that while almost 400 local digital currency exchanges have registered with AUSTRAC, they have not been endorsed by the regulator as safe for retail investors, and registration alone should not give people a “false sense of security”.

AUSTRAC is working with its foreign counterparts to improve the international oversight of cryptocurrency firms, particularly in relation to the transfer of funds across international borders. 

In 2021, vulnerabilities in Australia’s search engine and cryptocurrency infrastructure were used by British criminals to cheat small investors out of millions of dollars.

AUSTRAC is focusing on the entry and exit points of the digital currency system where fiat currencies are converted into crypto. As such, the regulator’s new emphasis has implications for firms beyond the crypto space – such as banks – who may facilitate the conversion process. Firms involved in facilitating crypto transactions should, for example, ensure they are familiar with – and can screen for – the names of crypto exchange firms, in order to spot relevant transactions. 

Rose said technology businesses entering the market, such as crypto exchanges and buy now, pay later (BNPL) operators often did not understand their AML/CFT obligations, including the importance of thorough Anti-Money LaunderingKnow Your Customer (KYC) (AML) checks. AUSTRAC has issued a host of recent guidance for crypto exchanges, issuing new documentation in August 2020 and October 2020.

Spotlight on cash-intensive businesses

Casinos and other cash-intensive businesses are also likely to face additional scrutiny. There are ongoing investigations into both Crown Resorts and The Star Entertainment Group. From 2015-19, Star’sthe firm’s Sydney casino potentially breached AML/CFT regulations in its handling of customers judged to be high risk and those classed as politically exposed persons. Slot machines in pubs and clubs have also been used for money laundering and AUSTRAC has issued specific guidance on building an AML program in this sector. 

Finally, de-banking remains a serious problem in the Pacific region. In November, AUSTRAC issued new guidance around de-banking, urging the financial sector to take a risk-based, case by case approach to managing AML/CFT challenges, rather than simply closing accounts.

Rose raised concerns that such measures could increase the risk of money laundering, pushing criminals underground where AUSTRAC would have less visibility. “We’re helping banks manage the risk, so it’s not an AML issue they’re trying to avoid,” said Ms. Rose. 

“We’re doing capacity building with the Pacific nations on financial intelligence, so they can recognize the threats and risks, and share information with each other and us.”

Find out more about the state of financial crime in 2022 by pre-registering for this year’s report.

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The advance notice of proposed rulemaking (ANPRM) aims to help “enhance the transparency of the domestic real estate market on a nationwide basis and protect the US real estate market from exploitation by criminals and corrupt officials,” FinCEN said.

The sector in the US has relatively few reporting requirements, even though an estimated $2.3bn was laundered through real estate transactions between 2015 and 2020. 

More than half of those transactions involved politically exposed persons (PEPs), typically government officials, their relatives, or close associates, according to an analysis by think tank Global Financial Integrity.  

“FinCEN has long been concerned with the potential for corrupt officials and illicit actors to launder the proceeds of criminal activity through the purchase of real estate in the United States,” a FinCEN statement says.

“The US real estate market continues to be used as a vehicle for money laundering and can involve businesses and professions that facilitate (even if unwittingly) acquisitions of real estate in the money laundering process.”

There is currently little oversight of real estate transactions that do not require a mortgage, and FinCEN says all-cash deals make it “nearly impossible” to trace beneficial owners behind shell companies that are often used to purchase properties.

“As a result, corrupt officials and criminals engaging in illicit activity can exploit the US real estate sector to launder their ill-gotten wealth.”

While current rules require title-insurance companies to report all-cash residential real estate transactions valued at more than $300,000 in a dozen large US cities, they do not apply nationwide, or to commercial real estate, which FinCEN hopes to include in new measures.

The ANPRM aims to provide FinCEN with suggestions on how to develop a regulation that balances the need to address vulnerabilities in the real estate market while minimizing the burden imposed on the industry. Comments are invited up to February 7th, 2022.

The real estate ANPRM is part of a whole-government effort to fight corruption and prevent money laundering in the US. The newly released US Strategy on Countering Corruption spotlights the money laundering risks in the US real estate market, as well as the need to protect the sector from abuse by corrupt officials and other illicit actors.

FinCEN has also this month issued a proposed rule for beneficial ownership report, designed to counter illicit finance and increase transparency. This includes “unmasking” shell companies by better defining who has “substantial control” of an entity. 

“FinCEN is taking aggressive aim at those who would exploit anonymous shell corporations, front companies, and other loopholes to launder the proceeds of crimes, such as corruption, drug, and arms trafficking, or terrorist financing,” said Acting FinCEN Director Himamauli Das.

For compliance teams, the greater emphasis being placed on beneficial ownership by FinCEN highlights the importance of adverse media checks. News stories may indicate that customers are involved in UBO-related money laundering offenses before official sources. Shell companies are also often leveraged by individuals who are subject to international sanctions, making screening high-risk customers against relevant sanctions lists equally important. 

New regulations in Canada

The new measures in the US follow changes to anti-money laundering (AML) measures in Canada, aimed at the real estate market, that came into effect in June 2021. These new measures, built into a revision of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), include new and revised definitions. 

The definition of “business relationship” requires real estate developers, real estate brokers, and sales representatives to comply with client identification requirements under the PCMLTFA. The intent is to continue exempting low-risk accounts from the formation of a business relationship, and exceptions that were previously included in the definition of a business relationship have been restated for clarification.

Customer due diligence requirements and beneficial ownership requirements apply to all REs including accountants and accounting firms, British Columbia notaries, casinos, departments and agents or mandataries of Her Majesty, dealers in precious metals and stones, and real estate brokers, sales representatives, and developers.

Compliance teams may find further guidance from FINTRAC helpful: 

• New business relationship requirements
• Know-your-client requirements
• Screening for politically exposed persons and heads of international organizations
• New record-keeping requirements

Real estate brokers, developers, and sales reps must also submit reports to FINTRAC, including: Suspicious transaction reports, terrorist property reports, large case transaction reports, and large virtual currency transaction reports. There is also a 24-hour rule requirement for large cash transaction reports and large virtual currency reports.

There are also administrative penalties for real estate firms issued in Canada – see the ‘administrative monetary penalties’ section of our Canada guide. 

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Importance of the non-financial sector 

The perpetrators of these crimes know that they can bypass the banking sector and still effectively launder money. Cash-intensive businesses such as restaurants and betting shops, the purchase and export of luxury goods and the use of informal money mules are all common vehicles.

Money laundering at scale through financial institutions has been the primary focus of German legislators, with a view to preventing criminals from legalizing their illegitimate income, and assuming influential positions in the social and political life of Germany.

However, the importance of the non-financial sector for money laundering activities raises questions about the responsibilities of public authorities in this area and of the administrative structures in place outside the financial sector to combat money laundering. 

Allocation of responsibilities under section 50 of the Money Laundering Act

Section 50 of the Money Laundering Act sets out which firms are covered by the regulation based on whether they belong to a financial or non-financial sector of the German economy. 

However, these two categories are not defined in more detail in the Money Laundering Act. Instead, it is the responsibility of the Financial Intelligence Unit (FIU) set up at the border customs office to evaluate suspicious activity reports (SARs) and divide companies based on whether they belong to the financial or the non-financial sector.

Which firms are in the financial sector?

Accordingly, the entire banking industry, including financial services institutions and e-money companies, are classified as part of the financial sector. On the basis of the provisions set out in Section 50, money laundering supervision for the entire financial sector is in the hands of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). 

Which firms are in the non-financial sector? 

According to the classifications set by the FIU, the following companies subject to money laundering regulations (Section 2 AMLA) are to be assigned to the non-financial sector: 

• Insurance intermediaries
• Lawyers, tax consultants, auditors and notaries public
• Trustees
• Real estate agents
• Gaming operators
• Freight traders

The fact that these companies belong to the non-financial sector initially means that money laundering supervision by BaFin is out of the question. As there are no other assigned federal authorities, money laundering supervision of these companies falls within the administrative competence of the states (Länder).

The supervision of the non-financial sector

Non-financial sector organizations typically belong to a chamber of commerce or other form of professional organization who will supervise their activities alongside local authorities. 

As a general rule, this means the same authority that is responsible for ensuring compliance with hygiene regulations in the restaurant business or with food preservation regulations in  supermarkets is also responsible for monitoring jewellers and car dealers. 

The task of monitoring money laundering in the non-financial sector is therefore spread over hundreds of local authorities. Some of these may struggle with access to relevant expertise, staff and the wider industry awareness necessary to supervise firms effectively. 

One measure of the disparity between financial and non-financial businesses can be seen in SAR filings. In 2020 104,325 SARs were filed by the financial sector. Just 2,854 SARs were filed by non-financial companies in the same period. Of these limited SAR filings, only around 400 were filed by goods traders nationwide (source: Bafin Annual Report 2020, page 17). 

Focus on the banking sector

For years, the federal government has given high priority to the fight against money laundering. This has most recently been demonstrated by the tightening of Section 261 of the Criminal Code, which goes far beyond all European legal requirements in its definition of money laundering, including even petty offenses in the circle of predicate offences, as well as the increasingly far-reaching allocation of control tasks to banks. 

A look at the non-financial sector, however, makes it clear that administrative structures have so far not been able to keep pace with political objectives. It has been known for years that the non-financial sector accounts for a significant proportion of criminal money laundering offenses. In this area, administrative tasks aren’t centralized, and the inadequate staffing and technical resources of local authorities mean that effective monitoring of money laundering may not always be guaranteed. 

Further reading

Redefining money laundering in Germany: The Implications of Section 261

Raids Across Germany Target Network Suspected of 140m EUR Money Laundering

Anti-Money Laundering In Germany

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ROBOCASH Group, launched in 2017, provides financial services in eight countries in Europe and Asia. The company specializes in the field of consumer lending and marketplace funding by offering short-term loans and installment loans. The group has more than 10 million customers and has issued over 8 million loans.

Industry: Lending
Product: AML Screening and Monitoring

The Challenge

ROBOCASH Group, being an international corporate group, is required to comply with the anti-money laundering regulatory requirements of different global regions and countries. ROBOCASH needed to meet all those requirements in a way that was sustainable and made sense for the whole corporate group. The company was, therefore, looking to partner with an AML provider who could provide an easy and quick API integration and specialized AML tools that have global coverage.

The Outcome

ComplyAdvantage has provided ROBOCASH with secure access to complete, timely and up-to-date anti-money laundering data globally. In addition to this, the ability to configure the settings when screening and monitoring customers enabled a reduction in false positives. Thanks to the centralized platform, where all relevant information regarding an alert is consolidated, ROBOCASH’s compliance team has noticed a 50% reduction in time to manage alerts.

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Finiata is a fast-growing company offering an automated and flexible credit solution to small businesses in Europe. The company, which was founded in 2016, is funded by top European investors and is spread across three offices in Berlin, Warsaw, and Ukraine. Their vision is to provide every small business owner with simple tools to easily manage their company’s financial performance and act on the earliest of warning signs.

Industry: Lending
Product: Customer Screening

Using ComplyAdvantage as our AML data provider has enabled automation and significantly reduced manual workload and time spent managing alerts.

— Paulo Andrade, Senior Product Manager, Finiata

The Outcome

The speed and ease of integration allowed Finiata to start managing their risks more quickly and efficiently. The company operates in a space where a high degree of automation is necessary, not only to provide a superior user experience but also to further drive profitability where margins per customer are tight.

Finiata’s compliance team saw their manual workload reduced, which enabled them to focus their time and effort on other aspects of the business that ensure business continuity. In addition, a low rate of false positives means that Finiata can confidently mitigate risk, quickly identify potential fraudsters, and continue providing a seamless experience to their clients.

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Advances in fintech have allowed for the development and widespread uptake of a variety of online financial services, including peer-to-peer lending and crowdfunding, both of which have grown to represent multi-billion dollar markets. Peer-to-peer (P2P) lending (sometimes known as microlending) is the practice of lending money to other individuals or businesses via an online platform that matches lenders with borrowers for a faster and more efficient loan process. Similarly, crowdfunding is a way of raising funds online by bypassing traditional funding sources and instead putting the owners of businesses or projects directly in touch with potential investors who may choose to invest in return for profit or reward if financial goals are met.

Both services rely on the online transfer of funds between entities and individuals and exploit the speed and efficiency of digital technology to deliver their services for customers. However, the widespread use of peer-to-peer lending services and crowdfunding platforms has also attracted the interest of financial criminals seeking to use their AML vulnerabilities to launder money and finance terrorist activities via P2P money laundering.

Given the inherent money laundering risks, P2P lending and crowdfunding firms should ensure that they have an AML/CFT framework in place to deal with the criminal threats they face and should understand the compliance obligations of the jurisdictions in which they operate.

What Are The P2P Money Laundering Risks?

P2P money laundering risks derive primarily from the anonymity associated with online financial services and the lack of regulation in what are still relatively new types of financial service.

In more detail, crowdfunding and P2P money laundering risks involve:

Customer identities: By applying for loans or transferring funds to crowdfunding projects online, criminals may be able to conceal their identities and avoid triggering AML measures. Money launderers may be deceptive in their applications to use the services or arrange for proxies to use the services on their behalf.

Service legitimacy: Criminals may be able to use crowdfunding mechanisms to market securities for a seemingly legitimate company while distributing illegal products to investors on the side. Similarly, peer-to-peer loan platforms could allow money launderers to transfer illegal funds to recipients with minimal regulatory scrutiny.

Cross-border transfers: Both crowdfunding and peer-to-peer lending services often involve the transfer of funds across international borders. In this context, P2P money laundering may be able to exploit differences in regulatory standards, such as identity verification or suspicious activity reporting thresholds. The logistical challenge of tracking illegal funds across jurisdictions may also make it more difficult for financial authorities to carry out money laundering investigations.

Structuring potential: Peer-to-peer lending and crowdfunding mechanisms may be used to engage in “structured” transactions. Practically, this involves moving funds through multiple transactions across multiple platforms. The convenience and speed of crowdfunding and peer-to-peer lending allow criminals to engage in structured transactions more easily and deepen the legitimate appearance of illegal funds.

How to Comply with AML Regulations

Financial service providers must be able to comply with a range of AML/CFT regulations in order to detect P2P money laundering activities and report suspicious activity to the authorities. Under the recommendations of the Financial Action Task Force (FATF), member states must ensure that firms implement a risk-based approach to money laundering by conducting risk assessments of their customers and adjusting their AML/CFT response to match those risks.

Accordingly, anti-money laundering crowdfunding and peer-to-peer lending service providers should ensure that their compliance programs feature:

• Customer due diligence (CDD) measures to accurately verify the identities or beneficial ownership of loan customers or investors.
• Transaction monitoring in order to detect suspicious activity: this many include unusual transactions or transactions with high-risk countries. 
• Screening and monitoring for politically exposed persons (PEP), customers subject to international sanctions and customer involvement in adverse media stories. 

Under FATF recommendations, AML compliance for crowdfunding and peer-to-peer lending services should also involve the appointment of a compliance officer with sufficient authority and expertise to supervise the p2p money laundering prevention program. Similarly, firms should implement a training schedule for compliance employees in order to maintain ongoing compliance performance.

AML red flags: To better spot criminals using peer-to-peer lending or crowdfunding projects to launder money, firms should be vigilant for red-flag behaviors including:

• Loans or transfers above jurisdictional reporting thresholds.
• Loans or transfers involving PEPs, customers on sanctions lists or customers that are the subject of adverse media stories.
• Unusual patterns of loans or crowdfunding investments or transactions involving customers in high-risk jurisdictions.
• False representation or inadequate identity verification of loan recipients.
• Patterns of loan overpayment.
• Use of correspondent banking services with unclear ownership as part of money transfer structures.

P2P Money Laundering Data Solutions

In order to manage compliance obligations for peer-to-peer lending or crowdfunding, firms should seek to integrate a suitable AML software platform. Automated AML technology not only adds speed and efficiency to CDD and transaction data collection and analysis but helps to reduce the potential for human error. AML software solutions have the added advantage of being able to scale with a firm’s compliance needs, promising ongoing compliance in changing regulatory environments.

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As banks and non-bank financial institutions explore new, innovative methods with which to deliver financial services, digital lending has emerged as an opportunity for those organizations to loan money faster and more efficiently. Digital lending is essentially the use of digital platforms to handle the loan process online, from application through to disbursement of money. Driven by advances in technology and government initiatives, the digital loan sector is growing: between 2019 and 2025, the market is expected to reach $11.6 billion, growing at a rate of 20.3% during that period. 

However, the increased profile and sophistication of the digital lending market reflects an increased level of risk from criminals. The vulnerabilities of digital lending mean that firms must have effective AML lending processes in place to detect and remediate criminal threats appropriately and ensure that they are not exploited as a way to launder money or finance terrorist activities.

With that in mind, when it comes to AML lending, digital lenders must understand the risks they face and how to comply with the relevant AML/CFT regulations within their jurisdiction.

AML Lending Risks

The money laundering risks to digital lending service providers include those conventional risks inherent in the industry but also reflect the more sophisticated methodologies of criminals that exploit online anonymity and regulatory disparity to evade AML/CFT measures. With that in mind, the key AML lending risks include:

Customer identity: Conventional AML measures in banks and other brick-and-mortar lending businesses allow for the verification of customer identities in person via customer due diligence (CDD) checks. In a digital lending context, however, criminals are better able to conceal their identities when using online services or use proxies to apply for loans on their behalf. Online loan applications with insufficient identity verification may be used to thwart CDD checks and allow criminals to evade other CFT/AML lending safeguards.

Beneficial ownership: Customer due diligence is also important to establishing the beneficial ownership of entities that are applying for loans. Money launderers may seek to further exploit the anonymity associated with digital lending by applying for a loan through a firm that they control, concealing their ownership in order to avoid AML identity verification measures and the scrutiny of authorities.

Cross-border loans: Digital loans can facilitate the speedy transfer of money across borders and jurisdictions. With that in mind, digital lenders may find themselves dealing with customers in different jurisdictions with different regulatory standards for monitoring and reporting transactions. Criminals may be able to use the regulatory disparity between jurisdictions to avoid reporting thresholds for suspicious transactions, or they may seek to take advantage of poor communication and information sharing between international authorities. 

Structuring: Digital loan services can take place quickly and in greater frequency than in-person transactions at brick-and-mortar premises. Money launderers may seek to exploit this capability by applying for loans through a variety of digital lenders and carrying out multiple online transactions. Moving money through a variety of digital service providers deepens the appearance of legitimacy and may make it much harder for financial authorities to track the illegal money.

How to Comply with AML Lending Regulations

When it comes to AML, digital lenders must abide by a range of important rules and regulations designed to ensure that they spot suspicious activity and report to the authorities in a timely manner. The Financial Action Task Force (FATF), for example, and its regional bodies require member states to implement its AML recommendations via domestic legislation. In practice, this means that digital lenders and all financial institutions should implement AML lending programs with the following key features:

• Risk-based approach: The FATF requires that firms implement a risk based approach to AML. In practice, digital lenders must put AML/CFT measures in place that reflect their level of risk. Higher-risk customers should be subject to stricter AML measures, while lower-risk customers should be subject to simplified measures. 
• Customer due diligence: Digital lenders should ensure that they perform suitable customer due diligence on their customers in order to accurately verify their identities and establish beneficial ownership. Higher-risk customers should be subject to enhanced due diligence (EDD) measures.
• Transaction monitoring: In order to spot potential money laundering, digital lenders must monitor customer transactions for suspicious activity, which may include suspicious transaction patterns or transactions involving high-risk countries. 
• Screening: Digital lenders must screen and monitor their customers for politically exposed person (PEP) status, against sanctions lists and for involvement in adverse media stories. PEP-status customers should be considered high-risk and subject to EDD. 

In addition to active CDD, monitoring and screening measures, digital lenders should ensure that their AML program includes ongoing training for compliance teams. Additionally, digital lenders should appoint an AML compliance officer with the authority and expertise to oversee their compliance program. 

AML lending red flags: Certain “red flags” may indicate that customers of digital lending platforms are involved in money laundering. These red flags include:

• Transactions above reporting thresholds.
• Suspicious transactions patterns or transactions with high-risk countries.
• Customers making multiple online loan transactions in a manner that indicates structuring.
• Customers attempting to conceal their identity in online loan applications.
• Frequent overpayment of loan repayments.
• Transactions involving sanctioned customers, PEPs or customers that are the subject of adverse media.

AML Software for Digital Lenders

In order to satisfy AML/CFT compliance obligations and continue to provide the level of efficient service that customers expect, digital lenders should implement a suitable AML software platform to handle their regulatory needs. Automating AML via software is a way for digital lenders to manage their data collection and analysis obligations, delivering speed and efficiency during the compliance process and reducing human error. AML software also enables digital lending firms to better deliver ongoing compliance by adapting more quickly to changes in legislation and emergent criminal methodologies.

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Many uncertainties and misunderstandings surround politically exposed persons, or PEPs. Classifying a client as a PEP is not an aim in itself; rather, it forms part of the process that enables financial institutions and DNFBPs (Designated Non-Financial Businesses and Professions) to assess the higher risks related to PEPs. Of course, being a PEP does not in itself equate to being a criminal or suggest a link to abuse of the financial system. However, PEPs are higher-risk customers, because they have more opportunities than ordinary citizens to acquire assets through unlawful means like embezzlement and bribe-taking. Therefore financial institutions and DNFBPs must be familiar with thePEP red flags and indicators that can be used to detect such abuse. After determining that a customer is a PEP, financial institutions and DNFBPs are responsible for conducting ongoing customer due diligence specifically tailored to the client’s PEP status.

What Are PEP Red Flags?

The FATF has developed a list of PEP red flags / indicators that can assist in the detection of misuse of the financial system by PEPs during a customer relationship. This list of indicators is useful in detecting those PEPs that abuse the financial system and does not intend to stigmatise all PEPs. How to interpret these indicators depends heavily on context. Often, matching one or two of these indicators simply indicates a statistically-raised risk of doing business with a particular customer, and several indicators may need to be met before serious suspicion is warranted. However, in some cases—again, depending on specific circumstances—matching just one or more of these indicators could lead directly to suspicion of illegal activity, such as money laundering.

PEPs Attempting to Shield Their Identity

PEPs are aware that their status as a PEP may facilitate the detection of any illicit behaviour. This means that PEPs may attempt to shield their identity to prevent detection. Examples of ways in which this is done are:

• Use of corporate vehicles (legal entities and legal arrangements) to obscure the beneficial owner
• Use of corporate vehicles without valid business reason
• Use of intermediaries when this does not match with normal business practices or when this seems to be used to shield identity of a PEP
• Use of PEP relatives and close associates as legal owner

Behaviors that are PEP Red Flags:

Some PEP red flags include specific behaviors and characteristics that may raise risk levels or cause suspicion:

• Use of corporate vehicles (legal entities and legal arrangements) to obscure (i) ownership, (ii) involved industries, or (iii) countries
• The PEP makes inquiries about the institution’s AML policy or PEP policy
• The PEP seems generally uncomfortable to provide information about source of wealth or source of funds
• The information that is provided by the PEP is inconsistent with other (publicly available) information, such as asset declarations and published official salaries
• The PEP is unable or reluctant to explain the reason for doing business in the country of the financial institution or DNFBP (Designated Non-Financial Businesses and Professions).
• The PEP provides inaccurate or incomplete information
• The PEP seeks to make use of the services of a financial institution or DNFBP that would normally not cater to foreign or high value clients
• Funds are repeatedly moved to and from countries to which the PEP does not seem to have ties with.
• The PEP is or has been denied entry to the country (visa denial)
• The PEP is from a country that prohibits or restricts its/certain citizens to hold accounts or own certain property in a foreign country

The PEP’s Position or Involvement in Business

The position that a PEP holds and the manner in which the PEP presents his or her position are important factors to be taken into account.

Possible PEP red flags are:

• The PEP has substantial authority over or access to state assets and funds, policies and operations
• The PEP has control over regulatory approvals, including awarding licences and concessions
• The PEP has the formal or informal ability to control mechanisms established to prevent and detect ML/TF
• The PEP (actively) downplays importance of his/her public function, or the public function s/he is associated with
• The PEP does not reveal all positions (including those that are ex officio)
• The PEP has access to or control or influence over government or corporate accounts
• The PEP (partially) owns or controls financial institutions or DNFBPs, either privately or ex officio
• The PEP (partially) owns or controls the financial institution or DNFBP (either privately or ex officio) that is a counterpart or a correspondent in a transaction
• The PEP is a director or beneficial owner of a legal entity that is a client of a financial institution or a DNFBP

Industries & Sectors that are PEP Red Flags:

A connection with a high risk industry may raise the risk of doing business with a PEP. Under the FATF’s Recommendation 1, competent authorities, financial institutions and DNFBPs are required for determining which types of clients may be higher risk. For this, financial institutions and DNFBPs will also be guided by national guidance or risk assessments. Which industries are considered at risk depends on the risk assessments and other industry safeguards that are in place and varies from country to country.

Examples of higher risk industries that are PEP red flags include:

• Arms trade and defence industry
• Banking and finance
• Businesses active in government procurement (i.e., those whose business is selling to government or state agencies)
• Construction and (large) infrastructure
• Development and other types of assistance
• Human health activities
• Mining and extraction
• Privatisation
• Provision of public goods and utilities

Product, Service, Transaction or Delivery Channels

FATF recommendations also contain examples of product, industry, service, and transaction or delivery channel factors that suggest higher risk, irrespective of the type of customer.

These examples are:

• Private banking
• Anonymous transactions (including cash)
• Non-face-to-face business relationships or transactions
• Payments received from unknown or unassociated third parties

If these industries, products, services, or transaction or delivery channels are used by PEPs, then this adds an additional risk factor (depending on the nature of the PEP). In addition to the examples already listed in the FATF recommendations, there are other products, industries, services, and transaction or delivery channels that can become particularly vulnerable when used by PEPs.

Examples of these PEP red flags are:

• Businesses that cater mainly to (high value) foreign clients
• Trust and company service providers
• Wire transfers to and from a PEP account that cannot be economically explained or that lack relevant originator or beneficiary information
• Correspondent and concentration accounts
• Dealers in precious metals, precious stones, and other luxurious goods.
• Dealers in luxurious transport vehicles (such as cars, sports cars, ships, helicopters, and planes).
• High end real estate dealers

Country Specific PEP Red Flags and Indicators

The FATF recommendations contain examples of higher risk countries and other geographic risk factors that are irrespective of the type of customer. Additionally, the following red flags and indicators relating to countries can be taken into account when doing business with a PEP:

• The foreign or domestic PEP is from a higher risk country
• Additional risks occur if a foreign or domestic PEP from a higher risk country would in his/her position have control or influence over decisions that would effectively address identified shortcomings in the AML/CFT system
• Foreign or domestic PEPs from countries identified by credible sources as having a high risk of corruption
• Foreign or domestic PEPs from countries that have not signed or ratified relevant anti-corruption conventions (or otherwise have not or have only insufficiently implemented these conventions), such as the UNCAC and the OECD Anti-Bribery Convention.
• Foreign or domestic PEPs from countries with mono-economies (economic dependency on one or a few export products), especially if export control or licensing measures have been put in place

Source: FATF Guidance on Politically Exposed Persons (2013)

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