Anti-money laundering laws require forex brokerages to have in place adequate internal systems for spotting suspicious activities and reporting it to appropriate authorities. Suitable due diligence process implemented with a risk-based approach is a critical component of an effective compliance program which guard companies against being used by criminals for money laundering purposes and other types of financial crime.
Risk Based Approach
Most obligations concerning prevention and detection of money laundering derive from the FATF Recommendations. In their first Recommendation the FATF stress the importance of risk assessment by both public authorities as well as private sector firms. While public authorities identify the threats at the national level, the private sector firms identify the vulnerabilities, which are specific to them (such as certain products or services they offer that are attractive to money launderers). According to the FATF this so-called risk-based approach (RBA) is an effective way to combat money laundering. Its promise is national authorities and private sector firms will take appropriate measures which are proportionate to the risk identified. It means enhanced measures should be taken where there are higher risks. Although conducting risk assessment can be challenging, costly and time-consuming, it offers potential benefits as well. With the RBA, firms are able to better manage their risk and cost- benefits as well as focus on real and identified threads.
Customer Due Diligence (CDD)
Forex brokerages covered by the FATF obligations are also required to have certain policies and procedures. Most importantly they need to be able to verify the identity of their customers ( so called Know Your Customer (KYC)). There is a high emphasis on the importance of identifying the risk associated with a particular customer, referred to as Customer Due Diligence (CDD).
Essentially, CDD is based upon the institution identifying their customers and verifying their identity. They should use information that is obtained from a reliable independent source, such as passports, national identity cards and utility bills. A company is also required to take adequate steps to establish the identity of the ultimate beneficial owner, in cases when that person is different from the customer.
Institutions should also obtain information about the nature and purpose of the business carried by their customers. Understanding the business of the customers is essential for forex brokerages to be aware of the expected account activity and normal business related transactions. Essentially CDD allows financial institutions to detect some of those customers who are using false identities or have no legitimate purposes.
At the customer take- on stage, CDD is essential to detect and prevent money laundering. However, it should be recognized that criminals will always find ways to carry their illegitimate activities and for this reason other defenses also should be used.
In order to detect money laundering, forex brokerages should also implement an account and transaction monitoring program. Such monitoring is conducted based to the RBA. According to it, low-risk customers are being monitored less rigorously than those who pose higher risks. CDD is essential to identify the risks posed by particular customers and categorize them according to their intensity. Such monitoring will be able to identify the placement as well as the layering stage of money laundering.
Lastly, in their twentieth Recommendation the FATF stress the importance of reporting of suspicious transaction. Hence, institutions covered by the provisions of the FATF when having spotted an activity or a transaction that is outside the norm, should decide if it is truly suspicious and should be reported. Reports should be made promptly to the national Financial Intelligence Unit (FIU) when there is actual suspicion or reasonable grounds for suspicion of money laundering. In the UK, for example, a duty is placed on employees in business in a regulated sector to make reports where it is known or suspected that someone is engaged is money laundering.
The above ways and means of identifying and preventing money laundering is only a guide for forex brokerages and other institutions vulnerable to money laundering. Each firm should be aware of the laws and regulations they are subject to and operate their business in line with them. Depending on the size and nature of the business , a corporate compliance function might be of particular importance in developing an appropriate approach to prevention of money laundering. (for more information on the importance of corporate compliance click here)