AML: The Organizational Impact of Fraud, Corruption & Money Laundering

Guest Post by Bates Expert M. Ali Ansari

Money laundering refers to the process of concealing the source of illegally obtained money, while anti-money laundering (AML) refers to the legal controls that require financial institutions and other regulated entities to detect, deter, prevent, and report money laundering activities. The methods by which money may be laundered are varied and can range in sophistication.

Typically, money laundering involves three steps: placement, layering and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Second, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the "dirty money" appears "clean."

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Some of the types of red flags that may mask a potential problem related to fraud, corruption or money laundering and result in a reputational risk as well as expose an association to civil and criminal charges have origins in these types of transactions:  

• Commissions and/or fees greater than the industry norm, especially outside of the US;
• Unnecessary or unusual middlemen;
• ‘Special’ invoices or invoices with no discernible service being provided;
• Contributions to/from suspect individuals or organizations;
• Excessive travel and entertainment expenses;
• Lack of due diligence, two signature rule, segregation of duties, etc.;
• Transparency, especially with international meetings, contacts, transactions, etc.;
• Unusual donations and/or expenses, especially to sources outside of the US;
• Payments transmitted and subsequent request of refunds for the same;
• Excessive transactions with countries identified for heightened risk for bribery;
• Lack of review for transactions with embargoed entities, countries or jurisdictions;
• Willful blindness will automatically result in a liability.

Before 9/11, laws and regulations were focused on the impact of drug money seeping back into the economy, but all of that changed when authorities discovered that the 9/11 perpetrators used financial institutions to fund their activities.  The United Nations Office on Drugs and Crimes estimates that between $800 billion to $2 trillion is laundered each year, posing a significant policy concern for governments worldwide. As a result, governments, international bodies and financial institutions have undertaken significant efforts to deter, prevent and apprehend money launderers.

The best way to avoid these issues is to conduct a risk assessment of your organization and subsequently implement a robust program of internal controls and compliance. The program should be based on your organization’s size, number of employees, types of activity, funding sources, disbursements, and vulnerability to fraud and money laundering and may include the following elements: 

• Implementation of a fraud, corruption and AML program;
• Development of policies to ensure compliance;
• Establishment of a board/executive-level position(s) responsible for ongoing monitoring;
• On-call counsel in case of a claim, whistleblower complaint, or regulatory inquiry;
• Guidance on internal policies, controls and regulatory requirements;
• A risk assessment review of business and operational procedures;
• Review of new products and services for potential risk;
• Subscription to and review of regulatory advice to your organization;
• Leadership and fraud awareness training of staff and executives.
• Review of accountability, penalties and reward structure for potential vulnerabilities, including internal and external red flags, employee segregation of duties, etc.;
• Independent periodic assessments of the adequacy and effectiveness of internal controls.

In order to minimize the risk to you and your organization, it is vital to conduct regular risk assessments of your business and have strong policies in place to prevent fraud, corruption and money laundering within your organization.

Please feel free to contact us at Bates Group if you have concerns about your organization’s vulnerability.

To learn more about Bates Group’s AML services, please visit Bates Compliance Solutions online.