Karim Rajwani, Global AML Advisor, Quantexa
Money laundering is, by nature, an international problem. In most cases, the process involves moving the profits of crime around the globe in order to obfuscate the trail behind it and, therefore, turn it into ostensibly legitimate assets.
But, Anti-Money Laundering (AML) legislation is not consistent on an international scale. Over the past several years, the European Commission has taken several steps in an attempt to curb its growing money-laundering issue. Its latest development, known as the EU’S 5th Money Laundering Directive, introduces a range of new requirements that ought to be considered by US banks too.
One of the primary focuses of the EU’s 5th Money Laundering Directive is to encourage cooperation on an international level between its member states and their leading financial institutions. One way this is being encouraged is the creation of a centralised and public Ultimate Beneficial Owner (UBO) list. Essentially, this is a list of all the owners and beneficiaries of each company that the bank is involved with. The EU’s previous money laundering directive had required that each institution had its own UBO list, but these new regulations require that these lists are publicly available.
UBO lists reduce the ability of criminals to hide their identity behind corporate structures. Historically, someone looking to legitimise a sum of money could start a company that would act as a front for an illegal organisation so that, on paper, the money appeared to be coming from lawful business practices. The introduction of required UBO lists has reduced this by obliging institutions to look further into the people behind each company.
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Although the introduction of UBO lists has been successful, there are still ways that criminals have been able to work around it, by moving their money through countries and institutions where UBO background checks might be less likely to find them. The introduction of mandatory information sharing between nations and institutions will help to limit this. With a centralised register of UBO, it will be easier for any organisation to link potentially illicit businesses together via the same identified UBO. This is something that US banks must be looking to replicate.. At a national level, US states would benefit from the introduction of centralised UBO lists that compiles information from each federal government. Otherwise, the money that is being moved by money launderers is only moved in different patterns, through different states, rather than prevented altogether.
The EU’s 5th Money-Laundering Directive also calls for centralised and publicly accessible registers of Politically Exposed Persons (PEP Lists.) A PEP list is a list of positions (not actually the people themselves) who are politically exposed and therefore of greater significance in investigations regarding corruption. A cross-national PEP list is extremely valuable, because it will show connections between countries that might not have been visible beforehand. For example, two PEPs could be listed on their countries own lists and cleared of any illicit activity on a domestic scale, but a connection between them on an international scale, only made clear by a cross-national list, could expose an international involvement in money-laundering.
The concept of a PEP is not unfamiliar in the US – positions of similar significance are usually described as Senior Foreign Political Figures – but the entire process would become more effective if there was cooperation between governments and institutions in the USA and the EU. As processes for preventing money laundering continue to improve, the flow of illicit funds moves to places where it is less likely to be detected. International collaboration and the wider enforcement of AML policy that encourages means the options available to launderers will continue to narrow.
The EU has made sizeable headway with its money laundering problem. Perhaps due to the fact that Europe has itself been the place where the biggest and most shocking cases of laundering have occurred. Nevertheless, the European Commission’s commitment to eradicating the EU of such activity has been clearly evidenced by its latest AML directive. The USA must heed warning from the EU that international collaboration is the only way that nations will be able to tackle the problem properly, without just circumventing the flow of illicit funds away from its own domestic accounts. The creation of a global, public lists of Ultimate Beneficial Owners, and of all Politically Exposed Persons would have a profound impact on the efficacy with which criminal organisations are able to operate. As long as there are discrepancies in national policies, there will always be places for the profit of crimes to flow, and cooperation by the world’s leading nations is the only way to stop this from happening.