Corporate Shell Games and KYC Requirements
Anti-money laundering professionals are in for a rude awakening. Know Your Customer or KYC requirements are currently kicking up a notch, and will be even more dramatic when the new FinCEN beneficial ownership regulations become effective in 2018.
Financial regulators have become much more sophisticated since the financial crash, and the industry should expect even greater regulatory demands. As financial scandals continue to pop up around the globe, there is no question that financial regulators would rather impose more onerous requirements in the KYC area rather than experience further embarrassment or explanations for another scandal involving high-risk customers who evaded AML requirements.
We have seen how creative money launderers can be when it comes to disguising illegal proceeds under corporate secrecy. By using elaborate corporate shell companies and structures designed to evade detection, some of the more notorious corrupt government officials have been able to run circles around financial regulators.
In the real world, financial regulators will extend the impact of KYC requirements and impose, in practice, stringent due diligence guidelines. Even before the new beneficial ownership regulations kick in, financial regulators have been (and will continue) to increase questions surrounding higher-risk customers, demanding enhanced due diligence when beneficial ownership may be unclear, and to confirm such actions through careful review of documentation supporting a financial institution’s handling of a customer.
Financial institutions can expect greater scrutiny and review of their monitoring procedures to ensure that appropriate flags are raised when customer transaction patterns vary from a customer’s risk profile. As a consequence, financial institutions should expect enhanced review of such determinations and verification of such reviews by increased inspection of documentation of monitoring activities.
Financial regulators already have demonstrated that they intend to apply relevant regulations to non-traditional financial institutions such as casinos, paycheck services and other financial businesses. FinCEN has acted against these financial institutions and they should expect even greater scrutiny given the likely migration of criminal money launderers to new avenues to engage in illicit activities.
Drug and related money laundering has always found new paths to launder their proceeds, especially as one avenue is closed off by law enforcement, they will push their demand and illegal activities into new financial operations. For example, over the last decade, we have seen an explosion in trade-based money laundering, especially in territories where foreign financial regulators have imposed new restrictions on cash transactions. Second, we have seen how money launderers have increased their acquisition of real estate, especially in Canada and the United States as a strategy to convert cash to real estate assets.
Financial regulators have long pushed for beneficial ownership regulations as a means to uncover significant money laundering organizations. With the advent of beneficial ownership knowledge and expectations, financial regulators have been slowly imposing refreshed due diligence standards and more can be expected in this area.
Financial institutions can no longer ignore the legal and reputational risks to their businesses. The reality already has changed, and anyone sitting back and waiting for 2018 to hit with new beneficial ownership regulations is sure to fall victim to a government enforcement action. Banks and other financial institutions that have already imposed new KYC requirements to meet future standards are well ahead of the game and demonstrating responsible leadership and compliance planning.