Money laundering through foreign exchange providers

Advances in technology have made moving funds to different parts of the world easier than ever and contributed to the growth in money remittance and foreign exchange service providers. The World Bank reports that, between 2008 and 2018, the amount of money moving through remittance services rose from $43.5 billion to $689 billion: that figure is suspected to have grown by 3.5% in 2019. Unfortunately, money laundering through foreign exchange and remittance is attractive for money launderers, as they use the relative anonymity and cash-intensive format of the services to clean their illegal funds and make it difficult for global financial authorities to track them. 

Given those vulnerabilities, service providers should make compliance with anti-money laundering remittance and FX regulations a top priority.

Money laundering through foreign exchange: risks

FATF has identified a range of money laundering vulnerabilities in the remittance and FX industries. The growing volume of remittance and FX providers, and their worldwide accessibility to customers, allows criminal elements, including drug dealers and human traffickers, to employ a variety of methodologies to launder money. Accordingly, to detect and prevent money laundering through foreign exchange and remittance, firms should be aware of the key AML/CFT vulnerabilities associated with the services they provide.

Anonymity: Remittance and foreign exchange services may offer money launderers a degree of anonymity that other financial services do not. Using cash transfers under local reporting thresholds, criminals may be able to use FX and remittance services without triggering customer due diligence (CDD) measures designed to verify their identities, and send money to accomplices or bank accounts in other lower-regulation countries. Similarly, criminals may employ “money mules” to conduct transactions on their behalf or simply use forged identity documents in order to thwart any CDD checks that are conducted by the service provider. 

Money Laundering through foreign exchange occurs as many remittance and FX firms operate exclusively online, without physical premises. Online remittance and FX firms are not only harder to physically police but allow money launderers to operate with a further level of anonymity while evading the AML/CFT requirements of their jurisdiction. 

Structuring: The complexity of AML remittance and FX regulations in different international jurisdictions may also help criminals to launder money through foreign exchange and remittance. The disparity between AML/CFT regulations leaves remittance and FX firms vulnerable to structuring: the practice of disguising the source of illegal funds once they have entered the legitimate financial system, making them harder for authorities to track. 

Structuring, in the context of money laundering through foreign exchange, might involve the use of multiple individuals making multiple remittances or exchanges, in multiple currencies, through a number of firms. Ultimately, laundered funds are returned to the originators after passing through the legitimate financial mechanisms several times. Remittance and FX transactions may also be structured to take place just below regulatory thresholds to avoid reporting in the jurisdictions in which they take place.  

Disparity between jurisdictions: AML remittance and FX efforts may also be undermined by the disparity between regulatory standards in different jurisdictions. Since both types of financial service are likely to involve international money transfers, differences in AML/CFT regulations and a lack of communication between international financial authorities may be relatively easy for money launderers to exploit. A transaction threshold in an originating country, for example, may not match the threshold in a receiver country. Similarly, suspicious activity reporting requirements may diverge between jurisdictions  

Ownership: Thanks to the increasing proliferation of remittance and foreign exchange services, criminals may be able to gain ownership of such a business, either online or as a physical premises, and begin using it to launder money as part of the wider money transfer network. 

In this context, criminals may own the business directly (or through a sub-agent relationship) or leverage the original owners to launder money for them. Once the business is acquired, however, it may be particularly difficult for authorities to detect money laundering activities, since specific AML/CFT mechanisms depend on the application of appropriate CDD/KYC checks, which the criminals may seek to avoid or manipulate.

How to comply with AML regulations for remittance and foreign exchange

Money laundering through foreign exchange and remittance service providers is a significant risk, so firms should ensure that their AML/CFT response is robust enough to detect criminal activity and satisfy their compliance obligations. On an administrative level, firms should ensure that they satisfy any licensing or registration requirements imposed in their jurisdiction and develop an understanding of the sector, services and transaction channels that they will be dealing with on an ongoing basis. 

Under FATF guidelines, firms must take a risk-based approach to AML/CFT, which means implementing an AML/CFT program that is capable of assessing the level of money laundering risk that each customer poses and adjusting its AML/CFT response accordingly. Those risks should be assessed on an ongoing basis in order to ensure that AML/CFT measures are up-to-date and effective.  

AML remittance and FX red flags: Following FATF recommendations, AML compliance for remittance and FX firms should involve the implementation of suitable CDD mechanisms to accurately establish the identities of customers, and the implementation of transaction monitoring and screening measures. Those measures should be focused on identifying high-risk customers and transactions, characterized by “red flag” behaviors and activities. 

In more detail, those money laundering through foreign exchange red flags include:

• Suspicious transactions patterns (high frequencies or large volumes of money transfers) or transactions taking place in unusual circumstances.
• Customers using non-face-to-face remittance or FX services (over the internet, for example).
• Customers who send agents or mules to conduct transactions on their behalf. Examples might include customers who seem to know little, or are reluctant to disclose details, about the payee.
• Customers who falsify or conceal their identities. 
• Structured transactions involving multiple connected transfers in different currencies or into and out of different countries.
• Transactions involving transfers to high-risk countries or to online gambling sites. 
• Transactions with charities or similar non-profit organizations that are not subject to the same monitoring regulations as other financial services firms.
• Customers who are politically exposed persons (PEPs), are the subject of adverse media stories or who are on sanctions lists. 
• Customers who are, or have been, the subject of a law enforcement investigation.

Ongoing compliance

To prevent money laundering through foreign exchange, in addition to CDD and transaction monitoring and screening measures, AML for remittance and FX services should meet the additional requirements of risk-based AML/CFT that are set out by FATF. These include implementing an appropriate ongoing training schedule for employees and appointing an AML officer to oversee the firm’s AML program. 

AML for FX and remittance services requires the collection and analysis of large amounts of data. In order to avoid the inefficiencies and potential human errors inherent in manual analysis of that data, firms should seek to implement suitable AML/CFT software to manage their data analysis needs and help them deliver regulatory compliance on an ongoing basis.