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Identifying Money Laundering Risk in the Supply Chain

Access to detailed information such as beneficial ownership and people with significant control (PSC) is vital to tackling money laundering and an enhanced level of scrutiny of all business relationships is essential to identify and mitigate any potential risks.

Posted: 16th April 2019 by Finance Monthly
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Chris Laws, Global Head of Product Development, Supply & Compliance Solutions at Dun & Bradstreet, explains why the EU blacklist is an important tool to combat financial crime and will be welcomed by those responsible for the fight against money laundering. 

The EU recently updated its anti-money laundering blacklist that names countries it considers to have deficiencies in tax rules that could favour tax evasion and anti-money laundering (AML) activities. The European Commission introduced the list at the end of 2017 and recently added ten new jurisdictions including United Arab Emirates, Oman and Barbados. The updated list has been rejected by governments within the EU, and now Brussels is being forced to review the list that was established to promote tax governance and prevent tax avoidance. The published objectives include ensuring transparency and fair tax contribution, and coupled with the 5th EU Money Laundering Directive, the list was viewed as a valuable tool in the fight against money laundering, helping to protect global organisations from the reputational and financial risk of illegal activity within their supply chains.

The recent debate comes after a year of high-profile scandals engulfed some of Europe’s biggest banks and Nienke Palstra, at campaign group Global Witness believes that “Europe has a major money-laundering problem”. While organisations such as the Financial Action Task Force – a group established 30 years ago by the G7 – were set up to combat fraud at an international level, previous list have excluded countries such as Panama, which recently hit the headlines relating to high-profile financial fiascos. With a rapidly changing landscape and increasingly sophisticated financial crime, having accurate information on country level risk essential to help businesses to identify potential illegal activity and take steps to mitigate exposure.

The Brexit effect

The UK’s National Crime Agency reported a 10% rise in ‘Suspicious Activity Reports’ (SARs) in 2018 compared to the year before, with specific money laundering reports increasing by 20%. The agency’s report came as London was accused of “acting as a global laundromat, washing hundreds of billions of pounds in dirty money from around the world” and the impending departure from the EU is likely to exacerbate concerns about illegal activity within the UK.

With continued uncertainty over trade arrangements post Brexit, UK-based companies looking at trading opportunities outside of the EU will need to evaluate the risk involved with working within other markets and complete comprehensive due diligence and take steps to ensure strict controls over transactions with countries flagged as posing increased risk. According to the NCA, Brexit will increase the number of opportunities for money laundering as foreign firms could potentially look to invest ‘dirty money’ in British businesses as EU AML agreements become increasingly uncertain.

Is technology the answer?

Despite the uncertainty, businesses can evaluate potential risks and limit exposure by implementing an efficient and clear risk management policy – and ensuring they have a transparent view of supplier and partner relationships. A robust compliance process is achieved through a combination of the right data and the right technology to support effective Know Your Customer (KYC) and Know Your Vendor (KYV) activities.  A PWC report in 2016 looked at the ‘future of onboarding’ and suggested that technology provides a solution to accurate identification and verification, using technologies such as biometrics, blockchain and digital identification. The utilisation of artificial intelligence (AI) is increasing and can be a valuable tool to support compliance processes.

AI can be used to develop an informed and accurate compliance model, untangle an overwhelming volume of data and identify (and therefore reduce) false information in monitoring systems. Traditional tools and technology are simply not able to manage the increasing amount of data sources and the speed of change that artificial intelligence can process. AI systems can reduce the time spent on manual processes, allowing compliance experts to devote attention to more in-depth analysis of suspicious activity.

The ongoing fight against money laundering

The ever-increasing sophistication of criminal organisations and their ability to mask illegal activities poses a genuine challenge for businesses operating in high risk jurisdictions. It’s more important than ever to know exactly who you are doing business with and having access to details such as beneficial ownership and ‘People with significant control’ (PSC). With a recent survey suggesting anti-money laundering compliance costs U.S. financial services firms $25.3bn a year, it’s an expensive and very real issue that businesses need to take seriously.

Tools such as the EU blacklist can play a crucial role in delivering increased transparency to deter and identify illegal activity and to ensure an enhanced level of scrutiny of business relationships to mitigate risk. Using third-party data to complement a company’s existing data set can improve due diligence, and having the latest technology in place to analyse huge volumes of data could be key to avoiding exposure to regulatory fines and reputational damage.

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