Founded in 2021, DolarApp is a dollar USDc account for Mexico and Argentina. We met with co-founder and COO Álvaro Correa Gallardo to find out more.

Introducing DolarApp

Backed by investors such as Y Combinator and Kaszek, DolarApp was created to help solve the problem Latin American citizens face when trying to access banking in US dollars.

“After living and working across Latin America, from Panama to Mexico to Colombia, my co-founders and I realized the big existing problems people faced when trying to dollarize their finances, with some people ultimately traveling to the USA frequently just to be banked in dollars. People’s motives for wanting to dollarize their finances vary; some want to protect their savings in a more stable currency, some travel often to the US and need to pay in dollars frequently, while others work for companies in the US and receive a salary in USD. Until now, the only solutions for these problems were credit cards that might charge up to 3% foreign transaction fees, or remittance providers who charge around 5% transaction fees when making or receiving USD transfers. Ultimately this leads to a poor financial experience for people in LatAm just because of where they happen to be born”, said Correa.

While working at Revolut, Correa and his co-founders, Fernando Terrés and Zach Garman, began thinking about how to provide people in LatAm the ability to manage their everyday finances in USDc, achieving financial stability while avoiding these high fees.

From Peso to USDc and Back Again

“With DolarApp, users can get account details in Mexico and USA, allowing them to go from peso to USDc and back in a matter of seconds,” explained Correa. “Users can also invest in digital dollars, earning 3% annually, and pay with an international Mastercard with up to 4% cashback.”

Additionally, users can send and receive payments in the US for a flat fee of $3 versus the $3 fee plus a 2% charge that other money transfer companies charge. DolarApp supports this by offering both USA and México account details in the same app, which removes the need for remittances across the US-LatAm corridor.

DolarApp’s Social Impact

“The thing I love most about building DolarApp is that we’re solving a massive problem that drastically improves the lives of millions of people. Since we first launched our beta in June, we’ve seen massive interest in the product, which reinforces the demand is there and people love the initial offerings. I also haven’t seen other products available in the region that offer the kind of rewards and cashback that DolarApp does!”

What’s next for DolarApp?

DolarApp is currently working on improving their account details in the US for people in Latam by offering direct debit payments, expanding their product to more countries such as Argentina and enabling Apple Pay and Google Pay.

Are you an early stage FinTech and need a KYC and AML solution?

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Follow DolarApp:

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Connect with Álvaro Correa Gallardo
Connect with Fernando Terrés
Connect with Zach Garman

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On a mission to do just this, pawaBank is a new solution for the Ghanaian diaspora that provides comprehensive management and oversight of all payments, savings, and investments for its users. As of February 2022 the company is in its pre-launch phase, so we caught up with pawaBank Compliance Officer, Ama Otoo, to learn more.

Introducing pawaBank

“PawaBank is an African facing FinTech startup with a primary focus on Ghana,” says Otoo. “And our mission is to put an end to the workarounds, family favors, and hacks that the African community have to partake in whenever they try to send money back home, or invest, or do whatever they need to do when it comes to sending cross-border payments.”

Founded in 2021 by Kresten Buch and Oluwatosin Ajibade, aka Mr Eazi, pawaBank was built on the conviction that something needed to be done for the “ people who want to send, spend, or invest their own hard-earned money” in an environment often viewed by compliance teams as high risk. 

“Because diaspora communities are not properly understood or looked into enough” continues Otoo, “their transactions are always highly scrutinized […] resulting in high volumes of payments getting declined or blocked. […] At pawaBank, we’re on a mission to guide the diaspora and create a smoother financial journey for them.”

Breaking the cycle

As more payments get declined or blocked, a cycle begins where “law abiding citizens have to use a workaround that, by proxy, gets them into trouble and makes it even more likely for their payments to get declined or blocked next time around.”

By mitigating the need for workarounds, pawaBank hopes to remove friction from the transaction process. But, in order to break this cycle, trust and understanding around specific cultural practices need to be introduced into the system.

“Strong compliance and better insight on our customers and their extended networks will enable us to do this,” says Otoo. “This way, we’ll have a well rounded view of who these people are and why they transact the way they do, which will ultimately allow them to have an easier, more efficient financial journey when transferring funds.”

Understanding cultural differences 

“Since the banking system is formulated around the spending patterns of Europeans, compliance teams have a good understanding of what’s considered ‘normal’, but when it comes to the African diaspora, they have no clue. They know we send money back home, but that’s not all we do.

“A prime example of this came up in my own personal life recently, where a friend of mine was having her wedding in Ghana but had her account frozen because of the large sum of money she was trying to send back home to cover the weddings costs. Weddings cost a huge amount of money but my friend was made to feel like a criminal under the intense scrutiny she received because she was sending money to Africa.

“This is what pawaBank wants to change and we want the diaspora to understand that we understand you, we hear you, we see you, we know you. And we’re going to help you make things more compliant.”

Serving an interesting niche.

“The reason I love pawaBank is because of what it wants to do and the problem it wants to solve,” says Otoo. “Due to COVID and a rise in remote working, there has been a large influx of diasporans working back home over the last couple of years. During this time we have seen a lot of these payment issues come further into the light because the diaspora don’t have proper visibility of their UK account when they are away, making some transactions very difficult and very expensive. 

“Again, this leads to workarounds where diasporans need to send their money to someone for them to withdraw and hand back to them, which of course is very high risk and requires a lot of trust. 

“Having control over your finances is something we are very passionate about. Diasporan communities should be able to move freely and spend, send, and invest wherever they go whilst also being compliant as the law-abiding citizens that they are.

“That’s why I love pawaBank, because we are serving a unique group of people.” 

What’s next for pawaBank? 

PawaBank is currently in its beta testing mode for the next year or two. “We’re currently trying to involve as many beta testers as possible and listen to their feedback so that we can make something that they can get really excited about!”

“When you get used to hustles, you can sometimes forget that it’s a hustle in the first place. So, we’re really excited to be making something that will benefit and change the lives of so many people and improve cross-border relations.”

Are you an early stage FinTech and need a KYC and AML solution?

Ready your start-up for scale with free access to our transaction monitoring and customer screening tools through ComplyLaunch.

Register for ComplyLaunch today

Follow pawaBank:

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LinkedIn
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Connect with Ama Otoo
Connect with Kresten Buch 

The post ComplyLaunch Customer Spotlight: pawaBank appeared first on ComplyAdvantage.

The guide, Preventing misuse and criminal communication through payment text fields, aims to raise awareness of how criminals are using payment text to communicate with each other – or to harass, stalk or threaten victims – rather than for the purpose of transferring funds.

The growth of digital-first fintechs, alongside an increasing amount of data and number of payment platforms, has enabled larger character limits to be applied to payment text fields, and criminals are making use of this facility to carry out illegal activities. 

Common themes within payment text fields identified by AUSTRAC include:

• Technology-facilitated abuse
• Threats or extortion attempts
• Criminal communication
• Threats of suicide and self-harm

Additionally, communications involving child abuse, illicit drugs, firearms, ideologically-motivated extremism and outlaw motorcycle gang activity have been spotted. 

Westpac bank research shows that more than half (51%) of Australians have received some form of online abuse, including via email, mobile and social media channels. One in four (26%) admit to having used some form of inappropriate language in payment transactions.

The guide, created in collaboration with public-private partnership the Fintel Alliance, provides financial service providers with insight and examples to help them target, detect and disrupt this practice.

“Financial service providers should use indicators in this report and their own business knowledge to conduct further monitoring and identify if a suspicious matter report (SMR) needs to be submitted to AUSTRAC,” the guide states.

Guidance on identifying the misuse of payment text fields includes how to determine if text is a threat or a joke, the use of abbreviations and slang to hide meanings, references to self-harm and suicide, how emojis can be used to convey threatening or abusive messages, and how criminals can refer to a shipment of illicit goods or planned event in their messaging. 

Potential red flags to look out for include payments below $10, high frequency payments and relationship patterns, along with incorrect spellings and the use of slang. 

A real-world example describes how a 23-year-old man was identified by a financial services provider after sending 10 payments of less than $5 to a female victim. Messages within the payment text field asked the victim to contact him and threats to take his own life. After a report to AUSTRAC, police arrested and charged the man for breaching a Protection Order.

Key Takeaways

This guide highlights the importance of agility in transaction monitoring, which can be challenging for firms – what counts as suspicious activity for one customer may be normal business for another. 

With constantly changing typologies and global regulatory expectations, false positives can be common and the risk of missing illegal behavior increases. For example, slang words and emojis are not fields a firm would traditionally expect to have to screen for, and context can be a challenge. Managing high volumes of false positives and unfamiliar alerts can also impact a firm’s wider operational efficiency.

It also underlines some of the changing demands on transaction monitoring systems. Firms need to  weigh up whether building a transaction monitoring solution in-house is right for them, or whether buying a solution that will push through updates automatically to cover emerging anti-money laundering (AML) risks would be more cost effective and efficient in the long-run.

At 13-pages, the guide provides a quick and easily digestible format for compliance teams and is well worth a read. It should be assessed in the context of the firm’s own business/industry, as part of a wider risk-based approach.

The post AUSTRAC guidance tackles misuse of payment text fields appeared first on ComplyAdvantage.

With the EU’s 6th Anti-Money Laundering Directive in effect, the money remittance industry must adapt to new compliance challenges.The European Union’s 6th Anti-Money Laundering Directive (6AMLD) was implemented across all member states on June 3rd 2021. One of the key highlights of the directive is the harmonization of money laundering as an offence in the domestic legislation of all EU member states. In order to achieve that harmonization, 6AMLD set out a list of 22 money laundering predicate offenses, including 2 new offenses: cyber-crime and environmental crime.Beyond the harmonization of predicate offenses, 6AMLD also:

• Expands the definition of money laundering to include aiding and abetting.
• Extends criminal liability from individuals to include legal persons such as companies.
• Increases the minimum prison sentence for money laundering to 4 years. 
• Introduces information sharing requirements between jurisdictions.

Under 6AMLD, banks and other financial service providers must consider their risk exposure carefully, especially given the prospect of extended liability for crimes that occur within their companies. Following regulatory changes introduced by 5AMLD, the compliance challenge that 6AMLD entails may be more acute for financial services providers that operate in certain industries, and in particular the money remittance industry. 

Given the potential financial penalties, it is important that remittance firms understand the effects of 6AMLD on the industry, and how it will affect their ongoing AML/CFT efforts.

Remittance and 5AMLD

6AMLD was preceded by the 5th Anti-Money Laundering Directive, which was implemented across the EU on 10 January 2020. 5AMLD introduced several innovative AML/CFT measures, including regulations for cryptocurrency services, reporting requirements for the purchase of high-value goods, registers for beneficial ownership, enhanced due diligence for high-risk countries and public lists of politically exposed persons (PEPs). 

Each of 5AMLD’s AML requirements represented compliance challenges for remittance businesses, particularly in contexts involving the transfer of money across international borders. 5AMLD also brought regulatory clarity for remittance businesses: the high-value goods requirement, for example, involved the introduction of a €10,000 transaction reporting threshold, an unambiguous standard by which to gauge compliance. 

6AMLD, by contrast, focuses less on the enforcement of compliance standards than the practice of compliance, and specifically the need for financial services firms to understand AML/CFT regulations and adjust their risk-based responses accordingly. For remittance firms, this means rethinking their approach to AML/CFT to ensure that compliance is delivered on an ongoing basis.

6AMLD Remittance Challenges

In 2020, the global remittance industry handled around $702 billion in transfers – down from 2019’s $719 billion but showing surprising resilience to the economic effects of the Covid-19 pandemic, especially in low and middle-income countries. The global remittance industry is expected to return to growth with 2.1% growth in 2021, and 2.2% in 2022. By 2028, the global remittance industry is expected to be worth around $42.46 billion with a CAGR of 13.3%. 

The value of the remittance industry means that remittance services will continue to be a target for international money launderers and means that 6AMLD compliance will be scrutinized closely by authorities seeking to combat global financial crime. Accordingly, remittance firms should consider the following specific 6AMLD challenges:Identifying cross-border crimes: Money remittance services primarily involve the transfer of funds across international borders, which means firms are particularly vulnerable to certain money laundering predicate offenses. Examining the list of predicate offenses set out by 6AMLD, it’s clear that some, such as “murder and grievous bodily harm” or “robbery and theft,” are far less likely to include a cross-border component and therefore less likely to be relevant to a remittance service providers’ risk-based AML/CFT program. However, other predicate offenses on the list, such as sexual exploitation, drug trafficking and smuggling are more likely to involve a cross-border component and therefore pose a greater risk to remittance service providers. The two new predicate offenses added in 6AMLD — environmental crime and cyber-crime — are extremely likely to involve a cross-border component.

With this in mind, remittance firms will have to consider their risk assessments more carefully to ensure that, while they are able to detect high-risk cross-border customer activities, they do not neglect risks associated with the other predicate offenses included on the 6AMLD list. Practically, this will mean redirecting AML/CFT resources to handle the expanded compliance burden and meet all necessary monitoring obligations. 

Distinguishing offenses: Remittance firms must be able to distinguish between the various money laundering predicate offenses outlined by 6AMLD. While they may be discrete in a legal sense, many of the predicate offences are similar, both in terms of methodology and effect. Participation in organized crime, for example, exists on the criminal spectrum in proximity to drug trafficking, trafficking in stolen goods, and theft — to name just a few methodologically similar offenses. 

The challenge for remittance businesses lies in distinguishing between these offenses in the development and implementation of their AML/CFT program, especially when some offenses are part of, or committed concurrently with, others. Devising a risk response for every predicate crime on the 6AMLD list may be unfeasible and onerous but, alternatively, legislating for only a small number of offenses that a given remittance firm deems “relevant” to its operational scope may result in compliance blindspots. 

Environmental crimes: The new category of predicate offense, environmental crime, is particularly relevant to the remittance industry. Environmental crimes tend to involve the exploitation of natural resources or exotic animal species, often in countries with a low standard of domestic regulation. Examples of environmental crimes might include illegal logging in the Amazon rainforest, or the illegal hunting of elephants for the ivory trade in Africa. The products of those crimes are often transported for buyers around the world or involve foreign criminal elements as part of a distribution network, with illegal profits transferred via remittance. 

Given the risk of remittance firms becoming involved in environmental crime-related laundering, compliance teams must ensure that they prioritize the relevant criminal methodologies within their AML monitoring framework. Certain environmental crimes may be associated with countries or regions: in order to manage risk, firms should learn to spot red-flag indicators that customers are engaged in an environmental crime and are attempting to launder illegal proceeds. 

Adverse media: In order to manage an expanded risk landscape and fulfill their compliance obligations under 6AMLD, remittance firms should ensure that their AML programs are set up to screen for and capture adverse media that involves their customers and clients. 

The scope of potential offenses that now potentially involve remittance services means that firms must seek to capture adverse media from across the world. This means that remittance firms should implement adverse media monitoring measures to capture a variety of stories, including those from televised and online news outlets. Monitoring must be based on robust customer due diligence in order to ensure customer identities are verified accurately, and to ensure any associates, close family members, or beneficial ownership risk concerns are also taken into account. 

Conclusion: An Expanded Risk Landscape

At a glance, remittance service providers face significant compliance challenges under 6AMLD. The increased regulatory focus on accountability and penalties indicates that the EU wants firms to take on more AML/CFT responsibility, with less discretion for dismissing risks that were previously considered out of a compliance program’s scope.  

The 22 predicate offenses set out and harmonized by 6AMLD are relatively prescriptive. Given the difficulty involved in distinguishing between some of those offenses, remittance firms may struggle to implement AML measures for those that don’t present a realistic threat, no matter how capable or robust their compliance program. The philosophy behind risk-based AML suggests that firms adjust their response commensurate with the level of risk that they face: under the requirements of 6AMLD, however, most (if not all) remittance firms will be forced to cast a broad net to ensure they are able to respond to a wide range of scenarios.

Practically, the 6AMLD compliance burden may force some remittance firms to change the way they conduct their AML risk assessments. This may mean that firms must broaden the scope of their screening and monitoring measures, seeking to capture information relevant to the wider risk landscape. Screening, for example, may have to be account-focused rather than payment focused, and performed on a regular schedule rather than when a payment event occurs.

Regulatory Guidance

The costs of 6AMLD compliance may be onerous if not prohibitive to the budgets and business models of many remittance firms, and regulatory guidance, particularly at a local level, is crucial. 

Guidance from local regulators, in conversation with the EU’s AML legislators, may be a source of clarity for remittance firms seeking to prioritize and manage their compliance obligations, but the certainty that those regulators are able to provide will vary depending on the way that the directive has been interpreted by the relevant jurisdiction. 

As different member-states adjust to the directive, interpretations from financial regulators may ultimately prove counterproductive, and have the unintended effect of working against 6AMLD’s original harmonization objectives. With each country deploying its own framework to implement 6AMLD, and with remittance firms adapting their AML programs, legislative divergence has become likely. The situation is more complex still for international remittance firms which may find their competitiveness degraded depending on the jurisdiction in which they operate. 

Remittance firms must be involved in any ongoing dialogue between national regulators and the EU in order to manage the potentially onerous compliance burden of 6AMLD. As they continue to adjust to the new regulatory landscape, remittance firms should be ready to divert more resources towards compliance to ensure that they are ready for emergent challenges.

How Will 6AMLD Change Your Business?

Download our 6AMLD report here to learn more about what you can expect from 6AMLD.

Learn More

The post 6AMLD Challenges: Remittance appeared first on ComplyAdvantage.

Advances in technology have made moving funds to different parts of the world easier than ever and contributed to the growth in money remittance and foreign exchange service providers. The World Bank reports that, between 2008 and 2018, the amount of money moving through remittance services rose from $43.5 billion to $689 billion: that figure is suspected to have grown by 3.5% in 2019. Unfortunately, money laundering through foreign exchange and remittance is attractive for money launderers, as they use the relative anonymity and cash-intensive format of the services to clean their illegal funds and make it difficult for global financial authorities to track them. 

Given those vulnerabilities, service providers should make compliance with anti-money laundering remittance and FX regulations a top priority.

Money Laundering Through Foreign Exchange: Risks

FATF has identified a range of money laundering vulnerabilities in the remittance and FX industries. The growing volume of remittance and FX providers, and their worldwide accessibility to customers, allows criminal elements, including drug dealers and human traffickers, to employ a variety of methodologies to launder money. Accordingly, to detect and prevent money laundering through foreign exchange and remittance, firms should be aware of the key AML/CFT vulnerabilities associated with the services they provide.

Anonymity: Remittance and foreign exchange services may offer money launderers a degree of anonymity that other financial services do not. Using cash transfers under local reporting thresholds, criminals may be able to use FX and remittance services without triggering customer due diligence (CDD) measures designed to verify their identities, and send money to accomplices or bank accounts in other lower-regulation countries. Similarly, criminals may employ “money mules” to conduct transactions on their behalf or simply use forged identity documents in order to thwart any CDD checks that are conducted by the service provider. 

Money Laundering through foreign exchange occurs as many remittance and FX firms operate exclusively online, without physical premises. Online remittance and FX firms are not only harder to physically police but allow money launderers to operate with a further level of anonymity while evading the AML/CFT requirements of their jurisdiction. 

Structuring: The complexity of AML remittance and FX regulations in different international jurisdictions may also help criminals to launder money through foreign exchange and remittance. The disparity between AML/CFT regulations leaves remittance and FX firms vulnerable to structuring: the practice of disguising the source of illegal funds once they have entered the legitimate financial system, making them harder for authorities to track. 

Structuring, in the context of money laundering through foreign exchange, might involve the use of multiple individuals making multiple remittances or exchanges, in multiple currencies, through a number of firms. Ultimately, laundered funds are returned to the originators after passing through the legitimate financial mechanisms several times. Remittance and FX transactions may also be structured to take place just below regulatory thresholds to avoid reporting in the jurisdictions in which they take place.  

Disparity between jurisdictions: AML remittance and FX efforts may also be undermined by the disparity between regulatory standards in different jurisdictions. Since both types of financial service are likely to involve international money transfers, differences in AML/CFT regulations and a lack of communication between international financial authorities may be relatively easy for money launderers to exploit. A transaction threshold in an originating country, for example, may not match the threshold in a receiver country. Similarly, suspicious activity reporting requirements may diverge between jurisdictions  

Ownership: Thanks to the increasing proliferation of remittance and foreign exchange services, criminals may be able to gain ownership of such a business, either online or as a physical premises, and begin using it to launder money as part of the wider money transfer network. 

In this context, criminals may own the business directly (or through a sub-agent relationship) or leverage the original owners to launder money for them. Once the business is acquired, however, it may be particularly difficult for authorities to detect money laundering activities, since specific AML/CFT mechanisms depend on the application of appropriate CDD/KYC checks, which the criminals may seek to avoid or manipulate.

How to Comply with AML Regulations for Remittance and Foreign Exchange

Money laundering through foreign exchange and remittance service providers is a significant risk, so firms should ensure that their AML/CFT response is robust enough to detect criminal activity and satisfy their compliance obligations. On an administrative level, firms should ensure that they satisfy any licensing or registration requirements imposed in their jurisdiction and develop an understanding of the sector, services and transaction channels that they will be dealing with on an ongoing basis. 

Under FATF guidelines, firms must take a risk-based approach to AML/CFT, which means implementing an AML/CFT program that is capable of assessing the level of money laundering risk that each customer poses and adjusting its AML/CFT response accordingly. Those risks should be assessed on an ongoing basis in order to ensure that AML/CFT measures are up-to-date and effective.  

AML remittance and FX red flags: Following FATF recommendations, AML compliance for remittance and FX firms should involve the implementation of suitable CDD mechanisms to accurately establish the identities of customers, and the implementation of transaction monitoring and screening measures. Those measures should be focused on identifying high-risk customers and transactions, characterized by “red flag” behaviors and activities. 

In more detail, those money laundering through foreign exchange red flags include:

• Suspicious transactions patterns (high frequencies or large volumes of money transfers) or transactions taking place in unusual circumstances.
• Customers using non-face-to-face remittance or FX services (over the internet, for example).
• Customers who send agents or mules to conduct transactions on their behalf. Examples might include customers who seem to know little, or are reluctant to disclose details, about the payee.
• Customers who falsify or conceal their identities. 
• Structured transactions involving multiple connected transfers in different currencies or into and out of different countries.
• Transactions involving transfers to high-risk countries or to online gambling sites. 
• Transactions with charities or similar non-profit organizations that are not subject to the same monitoring regulations as other financial services firms.
• Customers who are politically exposed persons (PEPs), are the subject of adverse media stories or who are on sanctions lists. 
• Customers who are, or have been, the subject of a law enforcement investigation.

Ongoing Compliance

To prevent money laundering through foreign exchange, in addition to CDD and transaction monitoring and screening measures, AML for remittance and FX services should meet the additional requirements of risk-based AML/CFT that are set out by FATF. These include implementing an appropriate ongoing training schedule for employees and appointing an AML officer to oversee the firm’s AML program. 

AML for FX and remittance services requires the collection and analysis of large amounts of data. In order to avoid the inefficiencies and potential human errors inherent in manual analysis of that data, firms should seek to implement suitable AML/CFT software to manage their data analysis needs and help them deliver regulatory compliance on an ongoing basis.

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What is De-risking?

The FATF defines “de-risking” as situations in which financial institutions terminate or restrict business relationships with entire countries or classes of customer in order to avoid risk. The rapidly changing Anti-Money Laundering and Counter Terror Financing (AML/CTF) regulatory landscape is commonly attributed as the main driver of de-risking. As the cost of complying with these regulations for banks will often outweigh the low return on investment of doing business with those operating in high risk countries.

High-risk nations however, are not the only ones to suffer from the implications of de-risking. Many argue that de-risking is in fact counterproductive for the integrity of the global financial system. When not able to use formal channels, those who wish to transfer funds are forced to do so by using alternative and usually illegitimate methods. Not only are these less reliable but they are also completely unregulated, meaning that they are highly vulnerable to being used for terrorist financing and money laundering.

What does De-risking mean for Remittance Companies?

Money Service Businesses (MSBs) such as remittance companies are vulnerable to de-risking because they rely on partnerships with the banking community to operate. But they typically service countries which are underdeveloped and so may suffer from problems such as high levels of corruption, organized crime or terrorism. All of which makes them more likely to trigger AML/CTF red flags. Ultimately, this could lead to their banking partners terminating their relationship –  being de-risked – and unable to conduct transfers. In practice it means that whole countries can lose out on money they desperately need for development.

Somalia is one such country, with 23% of its GDP coming from remittances, it is essential that correspondent banks don’t cut services with the nation’s remittance providers. However, the general lawlessness in the majority of the country and its connection to the Al Shabaab terrorist group means that it is especially vulnerable to de-risking. The extent of the problem in Somalia was highlighted when the Somali Money Services Association struggled to get a bank account. Despite only being an association that represents remittance providers and not actually having anything to do with the transfer of money themselves.

Somalia is not the only victim of de-risking. Companies operating in Iran, Cuba and more recently Syria all suffer from this problem and of not knowing if the banking relationship they rely on will be terminated.

What can be done?

For remittance companies to avoid being de-risked they must comply with the same high AML/CTF standards as banks. But they must do so on considerably smaller budgets and, due to the nature of their business, usually in near real-time. Two simple ways for remittance services to avoid being de-risked is by increasing transparency with better audits and by automating their AML/CTF compliance procedures.

1. It is important for remittance providers to show and communicate to correspondent banking partners that they fully understand the risks of their business. Unsurprisingly, this starts with producing and regularly updating their risk assessment. But more can be done, by having a completely transparent and available audit trail, banks can see that remittance providers have nothing to hide. Using a system that can show stage by stage how suspicious behavior was dealt with and appropriately reported will put remittance providers in good stead with their correspondent bank.
2. To avoid de-risking remittance companies have to instill confidence in their banking partners that they are constantly monitoring their AML/CTF risk exposure. By automating their AML/CTF compliance obligations remittance companies can ensure total regulatory coverage without draining their resources. Intuitive screening systems can be used to automatically identify and alert providers when high risk individuals or politically exposed persons (PEPs) are trying to use their services. Additionally, by automating transaction monitoring companies can be confident they can rapidly respond to suspect behavior and make sure nothing falls through the cracks. At ComplyAdvantage we have also found that using additional tools such as advanced adverse media scanning, powered by artificial intelligence, has given remittance companies the assurance they need to maintain their correspondent banking relationships.

What’s Next?

The topic of de-risking is quite rightly receiving more and more attention from regulators and governments. In October 2016, the FATF produced new guidance for correspondent banks, which encouraged big banks to work with, and not against, remittance providers. Both the FCA and the Basel Committee on Banking Supervision have endorsed these guidelines. Hopefully, this attention will mean we see less de-risking and more financial inclusion in the future.

The post Remittance Firms – How Not to Fall Foul of De-risking appeared first on ComplyAdvantage.

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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