Anti-Money Laundering Issues and Solutions

1)   How much Enhanced Due Diligence (EDD) is sufficient?

Determining the sufficiency of Enhanced Due Diligence depends on a risk-based approach. The objective is to gain high confidence that the customer or transaction poses minimal financial crime risk. For high-risk customers, this confidence can be achieved by increasing monitoring frequency or enhancing verification quality, such as requesting proof of source of funds or wealth.

2)   How much to rely on Third Parties?

Under AML regulations, firms may rely on third parties for Customer Due Diligence (CDD), but they remain fully accountable for compliance failures. Therefore, firms must periodically review the third party’s AML processes to ensure they meet required standards. For instance, the third party must operate under the UK Money Laundering Regulations 2017 (MLRs) or within a jurisdiction adhering to equivalent standards.

 3)  Frequency of Ongoing Monitoring

The frequency of ongoing monitoring should be based on a customer’s or transaction’s risk profile. Higher-risk customers or transactions may require more frequent monitoring and periodic in-depth reviews. Additionally, care must be given in ensuring regular screening of customer databases against sanctions lists, watchlists and updates to customer circumstances or regulatory changes. These factors may lead to adjustments in monitoring frequency and prompt further risk assessments.

4)   Dealing with Foreign Documents

To manage foreign documents effectively, first understand the purpose of the documents requested to help assess if alternatives might serve the same purpose. Next, it is vital to ensure their authenticity and check that they meet both local and international standards. Lastly, obtain certified translations from qualified translators or services attests to confirm their accuracy and completeness.

5)   Deal Complexity

Especially in private equity transactions, multiple parties, jurisdictions, and complex structures introduce varying levels of risk. A robust financial crime framework is essential to assess these risks and should include tools like a "deal checklist" to cover all aspects. For example, evaluating jurisdictional risk may reveal involvement with countries on FATF's black or grey lists, indicating higher financial crime exposure.

6)   Internal Pressure

Internal pressure challenges arise when there is pressure from within the organisation to expedite transactions. To manage this, it is crucial to take a proactive approach to AML compliance, identify potential risks early and communicate them to relevant teams. Building strong relationships with these teams helps explain the long-term risks of rushing deals, making it easier to push back against pressure.

7)   Sectoral Considerations for Portfolio Companies

Different industries present distinct challenges, so the sector of a portfolio company’s operations should be factored into the AML risk appetite. Managing these risks requires attention at both pre- and post-acquisition stages. Before acquiring a company, it is crucial to assess the financial crime risks specific to the sector. After the deal closes, the focus should shift to implementing financial crime measures, such as updating policies and procedures to address identified risks.

8)   How to use technology effectively in AML compliance

Business needs can sometimes drive the adoption of technology that may not be suitable for managing financial crime risks. When selecting technology, ensure it addresses both customer-facing and internal compliance requirements and integrates seamlessly into the firm's processes. Lastly, ensure that technology supports your internal controls and systems rather than shifting compliance responsibility externally.

9)   Keeping effective Records

Effective record-keeping is crucial for demonstrating compliance with AML regulations. Crucially, it goes beyond just storing ID records to include internal governance measures and risk assessments. Additionally, choosing the right storage method, such as a database instead of basic Microsoft tools, ensures scalable management. Well-organised records also enable tracking critical data, such as ID expiry dates and periodic monitoring schedules based on customer risk.

10)  Dealing with Start-Ups and Founders of Portfolio Companies

When working with start-ups, especially in seed or Series A rounds, AML challenges arise as they often lack formal financial crime controls. This creates a risk of them onboarding investors with high financial crime exposure. Thorough checks should be conducted on both investors and founders before investing, as any adverse findings can impact the start-up’s future saleability or exit potential.

About Khepri

With over a decade of experience and a strong focus on private markets, private equity, venture capital, and real estate, Khepri provides tailored compliance solutions, appointed representative, fund administration, host fund management, and corporate services to help your business thrive.

Our team works closely with each client to create bespoke plans, offering the support and expertise you need to grow your business.

Further Reading

Explore more useful guides:

Contact us at info@khepri.com to learn how we can assist you.