Every industry faces the threat of money laundering and terrorist financing, but certain industries are more vulnerable than others, hence making them a part of the ‘high-risk’ sector. Let’s look at what money laundering and terrorist financing are, as well as which activities and businesses are more vulnerable.
Money laundering is the illicit practice of making large sums of money obtained through criminal activities appear to have originated from a legitimate source. The proceeds of illicit activities are deemed “dirty,” thus the process “launders” them to make them appear clean.
Income generated through illicit acts such as extortion, insider trading, drug trafficking, and illegal gambling is “dirty” and must be “cleaned” in order for banks and other financial institutions to treat it without suspicion. Money can be laundered in a variety of ways, each with varying degrees of intricacy and sophistication.
Money laundering usually consists of three steps: first, introducing cash into the financial system through some means (“placement”); second, conducting complex financial transactions to conceal the unauthorized origin of the cash (“layering”); and third, acquiring money generated from the illegitimate funds’ transactions (“integration”).
Terrorist funding is the process of obtaining funds for terrorist activities. It can include money obtained from both legitimate and illicit sources, such as personal donations and revenues from companies and philanthropic groups, as well as the drug trade, arms smuggling, fraud, abduction, and extortion.
The purpose of terrorist financing is to conceal the nature of the actions that are being funded, not necessarily the source of the funds. Terrorists utilize money laundering strategies to avoid detection by authorities and to safeguard the identities of their supporters and the final beneficiaries of the funds.
How do High-Risk Industries involve in Money laundering and Terrorist Financing?
Money laundering is a threat that exists whenever money is transferred. However, the amount of risk from money being laundered and terrorist funding in high-risk businesses is significantly higher. This is because financial institutions such as banks, currency exchange houses, check cashing facilities, and payment processing organizations, as well as the gaming and gambling industries, as well as the adult industry, all deal with large sums of money and facilitate cash transactions.
The traits listed below are indicative of a high-risk industry.
- There is a higher danger of money laundering and terrorist financing when customers are unwilling to disclose information or construct needlessly complicated ownership arrangements involving nominee or bearer shares.
- Moreover, if an industry has clients that primarily pay with cash, it can be an indicator of illegal activities. Suppose real estate transactions that are paid up in cash and the source of that cash is vague.
- Thirdly, Politically Exposed Persons – dealing with PEP, also puts a merchant at higher risk for money laundering or terrorist financing. These people often hold high net worth and can influence the government easily and are able to manipulate public decisions.
- Lastly, if a client exhibits strange behaviour at the time of spending money and doesn’t want to disclose the source of income. There is mismatching between earning and spending behaviour of the client. So, there is a high probability that the client is involved in criminal activities.
- There is also a risk when customers are identified to have a criminal history or are connected to terrorist organizations.
High-risk products or services
Industries that deal with certain products or services might potentially increase the danger of terrorist funding or money laundering.
- Many electronic payments like ACH, wire transfers, remittances, and prepaid cards, in which there is no provision to verify the identities of the consumers, can be symbolic of illegal movements. There is also the possibility that several transactions are being processed and layering a big amount.
- When a business is involved in electronic banking services and permits for online account opening or remote mobile deposits, there is a high possibility that criminals will try to exploit them. These industries comprise investment businesses, Gaming, Gambling, Adult, Forex trust and company services, accounting services where books and records can be fabricated easily.
- Companies that sell automobiles, yachts, aircraft, real estate, and other real property, are at a higher risk, as buying expensive assets is a technique for money launderers to clean up illegal money.
High-Risk Delivery Channels
- Businesses that give virtual services to customers and never see them face to face are more likely to be exploited for money laundering and terrorist funding.
- Remote banking and payment services, as well as currency swaps and real estate transactions in which the buyer is not present, fall under this category.
High-Risk Geographic Locations
Countries that don’t have strong AML structures are susceptible to corruption. They are more prone to have companies that conduct illegal activities using their financial systems. Other places that are at higher risk like bank concealment shelters, a few emerging countries where there is a significant volume of illegal drug trafficking, in certain countries have an intrinsic risk of money laundering and terrorist financing. The Financial Action Task Force (FATF) or other international governing bodies identify such locations.
How are Efforts to Combat Money Laundering and Financing of Terrorism linked?
Money laundering and terrorism funding are both done using similar means. In both scenarios, the actor takes advantage of the financial system in an unethical manner. The methods used to launder money and finance terrorist activities/terrorism are quite similar, if not identical in many cases. An effective anti-money laundering/counter financing of terrorism framework must thus handle both risk issues: it must prevent, identify and penalize unlawful funds entering the financial system and the funding of terrorist persons, groups, and/or operations.
AML and CFT techniques also overlap; they both attempt to disrupt a criminal or terrorist organization’s financial activity and utilize the financial trail to track down the various elements of the criminal or terrorist network. This necessitates the implementation of technologies for reading all financial transactions and detecting illicit money transfers.
How Paypound responds to Money Laundering and Terrorist Financing
The primary purpose of Paypound’s AML & KYC policy is to establish the general framework to fight against money laundering (ML) and terrorist financing (TF). Paypound has robust measures to control and limit ML/TF risk, including dedicating the appropriate means.
Paypound values are committed to high anti-money laundering / countering terrorism (AML/CFT) compliance and require all the employees, management, and subsidiaries to adhere to these standards to combat money laundering or terrorism financing.
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