20.1 THE IDENTIFICATION OF UNUSUAL TRANSACTIONS

Regulations make it clear that staff will be held accountable if they fail to recognise an unusual transaction or arrangement where they have reasonable grounds to know or suspect money-laundering activity. This means that there will always need to be clarity and training for staff to enable them both to understand their obligations and also to make sure that they conduct the procedures expected of them in an appropriate way.

Each firm will need to provide clear guidance to all of its employees to enable them to detect those unusual transactions which they are required to identify, or which pose a reputational risk to the firm. Again, it is important to recognise that the identification of an unusual transaction will not, in itself, necessarily mean that money laundering or terrorist financing has actually been detected. There may, indeed, be an innocent explanation for the activity. The identification of an unusual transaction should, however, alert the employee to the need to conduct some form of additional procedure, potentially leading to the identification and reporting of an actual suspicion.

The investigation procedures to be adopted are discussed in the next chapter, but these can only follow from alert monitoring, whether conducted by using software solutions or through attentive employee engagement. In this chapter we focus on the role of the employee in identification of suspicions.

To ensure that employees are fully aware of what actually represents unusual activity, a clear series of policies needs to be developed, supported by appropriate procedures and systems. Training needs to be implemented which enables employees to appreciate what might be the type of unusual transaction that they are most likely to encounter in the ordinary course of their business. This training needs to be as relevant as possible to the nature of the business that the employee actually undertakes. The employee needs to be able to receive information from a customer without reacting in such a way that the customer would immediately recognise that they were being considered a money launderer or terrorist financer. This needs real training, including role plays, to provide the employee with the experience that they require. More on this later.

20.2 THE DEVELOPMENT OF POLICY

The unusual transaction policy will need to be easily understood by all employees, so it needs to be written in a language that they are able to relate to. Jargon must be avoided at all costs and the policy needs to be relevant as well as being consistent with the requirements of relevant authorities.

The policy will also need to include sufficient information to make it clear to the employee exactly what the requirements that are to be complied with consist of. The following is what you might expect to find in a typical example of a relatively short, high-level money-laundering-deterrence policy:

• Local compliance or the respective country AML officers, where applicable, should ensure that ongoing account and transaction monitoring is conducted to detect unusual or suspicious activities.
• Each business line should be responsible for monitoring all its customers and their financial behaviour. The business lines' management therefore should be aware of significant transactions and any increased activity in the accounts of their customers. Irregular behaviour (especially unusual or suspicious activities) by a customer should be recognised immediately by the relevant business line. In order to increase the efficiency of customer monitoring, all legal means available to the business unit should be utilised, where possible.
• An unusual or a suspicious activity is defined as a transaction which cannot be explained in any logical way (whether objectively or by the customer). Unusual or suspicious activities may include:
  • undertaking account transactions or other activities which are not consistent with the profile of the customer or its group members;
  • conducting transactions over a certain specified amount, as set out in business unit processes and procedures;
  • evidence of breaking up amounts before transfer or receipt without a logical explanation or clear business purpose;
  • the transfer of company funds to private accounts or vice versa;
  • the offering or acceptance of irregular transaction conditions; and
  • the occurrence of any prevailing indicators of unusual or suspicious activities which have been set out by the home or host country authorities.

What this simplified policy combines is the obligations that exist on specific employees, together with information that they may require to enable them to know precisely what this means. We would expect this to be supplemented by a series of real-life examples which highlight the specific actions that a particular firm should be required to take. This should be sufficient to enable the employee to judge whether additional investigation is actually required in the circumstances envisaged.

20.3 MONEY-LAUNDERING CONTROL

Most institutions also have a public statement that they make to highlight the importance they place on financial crime deterrence and to show that they wholeheartedly support international measures to deter financial crime. A typical statement would appear as follows:

“Legislation across the group pertaining to money-laundering and terrorist-financing control imposes significant requirements in terms of customer identification, record-keeping and training, as well as obligations to detect, prevent and report money laundering and terrorist financing. The group is committed to continually improving its control measures. The group's money-laundering and terrorist-financing control policy is being amended to accommodate Financial Action Task Force and other best practice requirements.

Global financial crime remains a concern for financial regulators and the bank will continue to update and amend its financial crime deterrence processes and procedures to ensure that they sit at the forefront of international best practice in this regard.”

20.4 COMPLIANCE RISK MANAGEMENT TRAINING

Most firms also make a public statement regarding the importance that they place on training their staff to understand both the importance of imposing appropriate systems of control to deter financial crime and being able to identify transactions which might require further investigation. Such a statement might appear as follows:

“Through ongoing training and internal publications, staff are made aware of their responsibilities in terms of legislative and regulatory requirements and developments. These cover topics as diverse as treating customers fairly, money laundering and terrorist financing, market conduct and health and safety requirements, among others.”

The issues to be addressed here are the same for firms in all countries. No financial institution will wish to be involved directly in assisting money laundering or terrorist financing. The investigation costs that can result as a consequence of regulatory action, together with the loss of reputation, all serve to raise the importance of the issue of suspicion identification.

Staff will need to know how to deal with difficult customers or transactions and often how to buy themselves the time that they require to obtain such information as is needed. If a customer laughs when asked a question and says “Why are you asking me such a question – do you think I am a money launderer?” the employee must know the response to be provided. Generally, such a response will state that this is a procedure that is carried out by the firm in respect of all customers and that there is nothing that the customer should take from the question being asked. Standard policies and procedures are the key items that will assist the employee in such cases.

If the customer makes a statement which is clearly incorrect, then the employee must not react. They should record the information, only checking that the customer has not made a mistake by repeating the information back to them. Employees need to be able to remain straight-faced and, again, this requires training.

20.5 THE TYPES OF EVENTS THAT MIGHT CAUSE SUSPICION

There is no definitive list of all the types of transaction that could represent an “unusual transaction”. The following is based upon a list prepared for the UK market by the Joint Money Laundering Steering Group but cannot be considered exhaustive. It does, however, provide an analysis of matters that should be considered and potentially included within the guidance provided to employees of a financial institution.

The type of things to look out for which may be unusual or could potentially give rise to knowledge or suspicion could include the following:

• Transactions which have no apparent purpose, or which make no obvious economic sense, including where a person makes a loss against tax.
• Transactions which appear to be unnecessarily complex given what is intended.
• The use of non-resident accounts, companies or structures in circumstances where the customer's needs do not appear to support such economic requirements.
• Where the transaction being requested by the customer, or the size or pattern of the transaction, is, without reasonable explanation, out of the ordinary range of services normally requested or is inconsistent with the experience of the firm in relation to the particular customer.
• Where the business unit is dealing with customers that would not normally be expected in that part of the business, either due to location or the nature of the activity conducted.
• Transfers to and from high-risk jurisdictions, without reasonable explanation, which are not consistent with the customer's known foreign business dealings or interests.
• Where a series of transactions appears to be structured just below a regulatory threshold with the intention of avoiding internal or regulatory reporting requirements.
• Where a customer who has entered into a business relationship with the firm only uses the relationship for a single transaction, or uses the facilities for only a very short period of time.
• The routing of funds through third party accounts without any obvious legitimate economic purpose.
• The customer undertaking unusual investment transactions without an apparently discernible profitable motive.

Of course, it will always be necessary to make these examples relevant to the reader of the policy, aligning the specific risk to the nature of the business activity undertaken. These examples could either be incorporated into the policy manual or the information could be provided through the medium of a tailored workshop. Without such tailoring, the employee will have little understanding of the relevance of the issue to the business that they are undertaking, with a consequence that the necessary monitoring will not be undertaken and the inappropriate activity will not be identified promptly, as required.

20.6 THE PROBLEMS OF CUSTOMER IDENTIFICATION

Employees must also be vigilant when looking at customer identification, as there are various scenarios which may highlight unusual behaviour and possible money-laundering activity. The customer identification process may raise specific concerns, and the type of things employees should consider will include the following:

• Has the customer refused, or appeared particularly reluctant, to provide the information requested without reasonable explanation?
• Do you understand the legal and corporate structure of the client entity, and its ownership and control, and does the structure appear to make sense?
• Are staff members aware of any inconsistencies between locations and other information provided?
• Is the area of residence given with other profile details, such as employment?
• Does an address appear vague or unusual – e.g. an accommodation agency, a professional registered office or a trading address?
• Does it make sense for the customer to be opening the account or relationship in the jurisdiction he is asking for?
• Is the information that the customer has provided consistent with the banking or other services or facilities that he is seeking?
• Does the supporting documentation add validity to the other information provided by the customer?
• Does the customer have other banking or financial relationships with the firm? Does the collected information on all these relationships appear consistent?
• Does the client want to conclude arrangements unusually urgently, against a promise to provide information at a later stage, which is not satisfactorily explained?
• Has the customer suggested changes to a proposed arrangement in order to avoid providing certain information?

Employees maintaining natural scepticism is key to a successful money-laundering-deterrence programme being effective. The type of customer that is likely to be a money launderer or involved with terrorist financing could easily be one of the best or most profitable customers that the business has. They could be using all of the services that the firm provides and not seem particularly concerned about the price. They are also likely to have perfect documents, indeed documents that might be considered as too perfect. So, it is not just the unusual that is an issue, the employee needs to have an awareness that there could be problems hidden inside even well-documented accounts.

The type of customer that does not have great documents is probably someone just like you. Someone that does not prepare for the meeting with the bank properly or did not have the time to find the right document, thinking that something that was to hand might just do.

20.7 WHAT MIGHT HIGHLIGHT TERRORIST ACTIVITY?

As we have seen, money laundering and terrorist financing are closely connected. Accordingly, staff must also be given guidance and examples of activities which suggest potential terrorist-financing activity, which might include the following:

• The presence of round sum deposits, followed by the same amount being transferred away as a wire transfer;
• Frequent international ATM activity;
• The absence of any known source of income;
• The use of wire transfers and the internet to move funds to and from high-risk countries and geographic locations;
• Frequent address changes;
• Purchases of military items or technology;
• Media reports on suspected, arrested terrorists or groups.

Of course, no such list can, in itself, ever be complete and address all issues. What is needed is for the MLRO, or another suitably experienced and independent unit, to look closely at the processes and procedures that are maintained by the firm to identify those areas of activity which are most susceptible to inappropriate activity. The attention of employees needs to be directed towards such areas which are inherently, therefore, more risky for the bank.

Whilst software solutions may enable a firm to identify the transactions that could potentially relate to money laundering or terrorist financing once they have been undertaken, the objective is, where possible, to avoid the firm undertaking such transactions. Accordingly, the first line of defence is the front-of-house staff of the firm, and therefore vigilance and training are always paramount.

Once a case is actually prosecuted and the name of the bank is included in reporting, there is rarely a caveat highlighting that the firm reported the transaction in accordance with the rules of the country. We know this as a firm from experience. I know it is not fair that when a firm undertakes all of the procedures that it should have conducted, that it is still included in an article including the name of the criminal, but that is, with regret, just life. That the firm undertook the required procedures is hardly newsworthy, while that it actually assisted the money launderer is. Accordingly, it is always better to avoid such relationships if that is possible.