The importance of transaction monitoring in the fight against terrorism financing and money laundering
Past and current events show how significant transaction monitoring is when it comes to combating terrorism financing and money laundering. In 2017, FINMA noted in connection with 1MDB that one bank had failed to sufficiently clarify the circumstances behind unusually high, risky transactions even though the explanations provided were inconsistent and the documents submitted for plausibility checks were partially incorrect. And, in the case of a transaction linked to loan agreements, the bank was satisfied with the explanation that the same person was the beneficial owner of the companies involved in the transaction.
In an example as recent as February 2020, FINMA commented on a bank that had inadequately scrutinised and clarified the details of several transactions linked to financial scandals of global significance. One of these related to a pass-through transaction that was linked to a consulting service for which no further details were provided.
These cases show that consistent transaction monitoring is a key element in identifying and combating money laundering, particularly when it comes to transactions between domiciliary companies.
Expectations of FINMA – dos and don’ts
To avoid this type of scenario, a supervisory authority will expect a financial intermediary to do more than simply verify the identity of the counterparty or beneficial owner of a transaction. They now have to clarify the economic background and check that a transaction seems plausible in its overall context. A transaction should also fit with the client profile, and if it doesn’t, the KYC information should be updated.
These FINMA cases show that transactions linked to loan and consulting agreements require particular scrutiny.
Transactions for consulting services should be governed by a contract that clearly states the relationship between the transaction parties. This should answer the following questions: What service has the consultant rendered? If the contractual parties are domiciliary companies, who is the beneficial owner or counterparty? Any conflicts of interest with the consultant’s employer should also be clarified as well as whether the amount charged for the service corresponds to the market value for comparable services. Does the explanation seem plausible? What qualifies the consultant to render the service in question and what is the relationship between the domiciliary company and the beneficial owner?
Anyone conducting transactions linked to loan agreements needs to provide these agreements. As they are often loosely formulated, the following information should be checked: If the counterparty is a domiciliary company, who is the beneficial owner? What is the purpose of the loan? If the loan amount is ultimately intended not for the counterparty of the transaction but another company, why is the loan amount not being transferred directly to this company, i.e. why is the domiciliary company acting as an intermediary? Are the actions of the client plausible from an economic and fiscal standpoint? Further essential information includes the details of the agreement between the counterparty and the third-party company, the full name of the third-party company, the intended purpose of the loan offered by the third-party company and the appropriateness of the amount. Finally, all these details should be checked (e.g. using public sources or documents).
These examples show that assessing the plausibility of a transaction is a time-consuming task that requires expertise and knowledge of complex structures. It is always worth making this effort, however, as it is the only way of fulfilling the regulatory and supervisory requirements relating to transaction monitoring and the current client profile.