Assessing the risk of money laundering in your business

If your business is regulated by the Money Laundering Regulations you must assess the risk that it could be used for money laundering, including terrorist financing. By using what's known as a 'risk-based' approach, you can decide which areas of your business are at risk and put in place measures to prevent money laundering occurring.

This guide gives an overview of the risk-based approach and helps you to carry out a risk assessment of your business. It also outlines your day-to-day responsibilities under the Money Laundering Regulations.

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The risk-based approach

Businesses that are covered by the Money Laundering Regulations have to use a risk-based approach to prevent money laundering. This involves following a number of steps.

You have to:

  • identify the money laundering risks that are relevant to your business
  • carry out a detailed risk assessment of your business, focusing on customer behaviour, delivery channels and so on
  • design and put in place controls to manage and reduce the impact of these risks
  • monitor the controls and improve their efficiency
  • keep records of what you did and why you did it

Advantages of the risk-based approach

By following the steps involved in the risk-based approach, you're able to decide on the most cost-effective way to control the risks of money laundering. This allows you to focus your efforts and resources where the risks are highest.

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How to carry out a risk assessment

You can decide for yourself how to carry out your risk assessment. It might be quite simple or very sophisticated depending on:

  • the size and structure of your business
  • the range of activities your business carries out and the nature of the products and services it supplies

When you assess the risks of money laundering that apply to your business you need to consider:

  • the types of customer you have
  • where you and your customers are based
  • your customers' behaviour
  • how customers come to your business
  • the products you sell or the services you offer
  • your delivery channels and payment processes, for example cash over the counter, cheques, electronic transfers or wire transfers
  • where your customers' funds come from or go to

What types of customers pose a risk?

Your business might be at risk of money laundering from:

  • new customers carrying out large, one-off transactions
  • a customer who's been introduced to you - because the person who introduced them to you may not have carried out 'due diligence' thoroughly
  • customers who aren't local to your business
  • customers involved in a business that handles large amounts of cash
  • businesses with a complicated ownership structure that could conceal underlying beneficiaries
  • a customer - or group of customers - who makes regular transactions with the same individual or group of individuals

What type of customer behaviour might suggest a risk?

Customer behaviour that may indicate a potential risk includes:

  • not wanting to give you identification, or giving you identification that isn't satisfactory
  • not wanting to reveal the name of a person they represent
  • agreeing to bear very high or uncommercial penalties or charges
  • entering into transactions that don't make commercial sense
  • being involved in transactions where you can't easily check where funds have come from

When to check source of funds in one-off transactions below 15,000 Euros

The way customers present themselves and the source of their funds are key indicators of potential risk.

Through your risk based approach you should be able to show that you have taken all reasonable steps to satisfy yourself that the transaction is not suspicious, including, where appropriate, identifying the source of funds.

This is best done through independent documents or data provided by the customer, for example, a payslip or bank statement. The documentation required and the level of checks will depend on the risks to your business.

Where a person is sending money for someone else and information such as a wage slip or bank statement is not available you should consider obtaining and keeping a signed certificate/declaration by the customer about the source of funds – checked against a proof of ID document, such as a passport.

Example 1 - if a customer claims he is transmitting money on behalf of a group of friends you should consider writing down details of the names and addresses of the friends and the amounts to be transmitted.

Where you have to accept a declaration it is sensible to include details of something that can itself be checked. This could be contact details for each person named in the declaration, but every case will be different.

Example 2 - the customer claims the cash is from the sale of a car. You should include details of the car, its registration number and the date of sale. This will provide you with protection, as you will be able to show that you have undertaken sufficient checks and will allow law enforcement agencies who can use such details to follow up on transactions after the event if they need to.

The essential point is that the customer has provided you with information that can be checked. Whether you do any additional checks on that information will depend on your view of the risk.

HMRC expects that businesses should have an operating risk based system in place, which is fully documented. However, if a business does not apply its own risk based approach to 'source of funds' checks, then HMRC will expect the business to use the following approach in deciding if a transaction needs additional verification:

On payments below 15,000 Euros you should seek evidence on the source of funds when:

  • the customer has presented cash in payment for the transaction, which is five times the size of an average transaction for your business
  • the customer has paid for the transaction by cheque or debit card, which is ten times the size of an average transaction

By average transaction we mean the total value divided by the number of transactions over a given period. For your business we mean calculated by each branch (where your business has more than one premises including the premises of any agents who act on your behalf).

Example 3 - if you have transmitted £100,000 over 100 transactions in the given period then the average value of your transactions is £1,000, so you should check the source of funds on any cash transaction for £5,000 or more and any non cash transaction for £10,000 or more.

The length of time you use to decide the size of an average transaction for your business is not fixed, although we recommend it should be at least one month. Ideally, the average transaction value will relate to a single set of premises. If you have more than one set of premises within your registration you may decide to fix the transaction level either by individual location or by reference to all the transactions across the whole of your business, being aware of the transaction levels between different locations.

Where the number of transactions to be checked exceeds 5% of your total transactions, you may limit the source of funds checks to the top 5% of transactions by value.

Where funds have come from a bank account, you can take some re-assurance that the customer’s identity and personal details may have been checked by another regulated business in the UK or another country which is prepared to provide the customer with account facilities. However, you should not be satisfied just because the money has come from the customer’s bank account that the source of funds is lawful.

You should take a risk based approach, so that you are content with and establish how the money got into the bank and where the money came from, for example wages, a cheque from a family member, payment from the sale of personal items, etc. An indication of higher risk might be if funds in the bank account had been paid in cash shortly before the transaction. Just because the funds have been through a bank does not mean that you can always assume that you do not need to check the source for them, especially if they seem unusual.

Where you have any suspicion that the transaction relates to money laundering and/or terrorist financing you must send a suspicious activity report (SAR) to the Serious Organised Crime Agency (SOCA) and get consent from them to continue with the transaction. If your suspicion is raised after the transaction is completed you must send a SAR at the earliest opportunity. Reporting before or reporting after the event, are not equal options which businesses can choose between.

What risks are associated with your products and services?

Depending on your business type there may be:

  • a risk that inappropriate assets could be placed in your business, or moved from or through it
  • a risk from a product or service which allows the ownership of assets to be disguised
  • a risk when you supply services without meeting your customer face to face

The types of risk you need to identify will depend on the nature of your business. For example, 'High Value Dealers' need to be aware of the risk associated with cash sales of high value goods that can be either:

  • resold through the black market - these are generally luxury items
  • returned to the retailer in exchange for a legitimate cheque from them

You can find more guidance on carrying out your risk assessment in the following HM Revenue & Customs leaflets.

Download Anti Money Laundering Guide for Money Service Businesses (PDF 521K)

Download Anti Money Laundering Guide for High Value Dealers (PDF 368K)

Download Anti Money Laundering Guide for Trust or Company Service Providers (PDF 421K)

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What to do when you've carried out your risk assessment

Once you've completed your risk assessment you need to:

  • put in place controls and systems to reduce any risks of money laundering that you identified
  • monitor your business on an ongoing basis to make sure your controls are effective
  • identify and report any suspicious transactions or activities

Your everyday responsibilities under Money Laundering Regulations

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