Money Laundering and The Cost Of Non-Compliance

Money Laundering and The Cost Of Non-Compliance

February 25, 2021

The risk of money laundering is an issue that exists worldwide and institutions across the globe are scaling up their prevention mechanisms to detect and prevent the laundering of illegally obtained funds or property. AML professionals and money launderers are engaged in a constant “fight” – with AML professionals on the one hand building protection and prevention mechanisms to prevent money laundering and money launderers, on the other hand, searching for ways to avoid such mechanisms and exploit their weaknesses in an effort to conceal or disguise the illegal source of those funds or property in question and launder their money.

AML Compliance Officers – A hot commodity

The practice of AML compliance has received great attention over the past few years especially in sectors such as the administrative services and the financial industry. The comparison between the regulatory framework and industry practice on AML compliance between the beginning of the ’00s and today is remarkable. One of the events which accelerated this change is the 2008 financial crisis where countries across the world felt the deficiencies of the system and the importance of AML compliance in real terms. The role of compliance became more critical. Compliance officers are part of the senior management of companies and have an independent role and function which can sometimes override even the say of CEOs and managing directors when it comes to their AML obligations.

More and more companies are in need of AML Compliance Officers and are looking to bring them on board. You can read more about this topic in our previous article, The ever-growing need for Anti-Money Laundering Talent.

Why is Money Laundering Such a Big Issue?

From a societal standpoint, the biggest issue with money laundering is that it funds and enables organized crime. The funds which are laundered are often generated through drugs, tax evasion, illegal goods or human trafficking and are also used to support acts of terrorism. The United Nations Office on Drugs and Crime estimates that around 2-5% of the world’s current GDP (between $800 Billion – $2 Trillion) has entered the global banking system through money laundering which shows why money laundering constitutes a worldwide concern. To combat this problem, EU laws require financial service providers to carry out AML reviews on the people using their services in an effort to prevent money laundering.

What The Regulator is Looking For and Tips For On-Site Inspections

CySEC’s aim is not to impose fines but assist and work together with obliged entities and build strong AML compliance prevention mechanisms. Having said that, in case of non-compliance, CySEC will not hesitate to impose hefty fines.

CySEC issued a number of circulars, their main objective being to help firms get prepared for on-site inspections and the enforcement of best practices. The regulator is putting emphasis on proactively encouraging firms to ensure compliance with the AML and CFT Laws. In its onsite visits, CySEC places importance on the sufficiency and detail of the information maintained by regulated entities collected during the due diligence procedure. Furthermore, CySEC reviews the regulated entity’s processes such as the risk-based approach and the organisation of information held by regulated entities.

As a tip for onsite inspections, you need to show the effort and development of your AML compliance practice. During the inspection, the regulator wants to see if the regulated entities actually ‘Know’ their clients and can prove that they conducted and collected information on their clients in accordance with the latest laws and recommendations. The effectiveness of your practices, the organisation of the information and the completeness of your records are aspects that CySEC places great importance in the course of determining the outcome of the onsite inspection.

At CX Financia, we can help you with our hands-on experience by arranging an “onsite inspection” by our experts, simulating the onsite inspections conducted by the regulators. After the inspection, we will produce a report outlining our findings and analysing the deficiencies and areas that require improvement in your organisation’s AML compliance practice. We suggest that the “onsite inspection” is not communicated to your employees for better results and a real-life test simulating ‘surprise’ onsite inspection conducted by CySEC.

What Are the Consequences of Non-Compliance?

The main consequences of non-compliance are:

Liability for Those Who Know

The cost of compliance may have increased over the years, but everyone should keep in mind that the cost of non-compliance is always higher. Penalties for knowingly committing a Money Laundering offence may reach up to fourteen (14) imprisonment or a penalty of up to five hundred thousand euro (€500,000) or both penalties.

Example: A Compliance Officer accepts €100,000 from a government employee knowing that the aforementioned amount derived from the selling of illegal substances by the government employee. In this case, the compliance officer knows that the proceeds derived from illegal activities.

Liability for Those Who Ought to Have Known

Penalties do not affect only persons who have knowledge of committing a Money Laundering offence but also to those persons who ought to have known. Persons who ought to have known may end up being sentenced to up to five (5) years of imprisonment or a penalty of up to fifty thousand euro (€50,000) or both penalties.

Example: A compliance officer accepts €100,000 from a government employee after the employee disclosed to the compliance officer that he is being investigated for money laundering but assures the compliance officer that the amount of €100,000 does not derive from illegal activities. The investigation concluded that the amount of €100,000 derived from the selling of illegal substances by the government employee. In this case, the compliance officer ought to have known that the proceeds derived from illegal activities.

What Are the Fines Imposed by CySEC?

The supervisory authority has the power to penalise non-compliance with the AML law and impose up to one million euro (€1,000,000) or in the case where the offender has received a benefit from the infringement which exceeds the amount of the administrative fine imposed above, then an administrative fine of up to twice the amount that the offender received from the infringement. If the infringement continues, the supervisory authority can impose an additional fine of up to one thousand euro (€1,000) for each day of the continuation of the infringement.

The Tipping-Off Offence and The Fines Imposed for it

The tipping-off offence is the improper or illegal act of notifying a suspect that is the subject of a suspicious transaction reporting or is otherwise being investigated or pursued by the authorities. It is prohibited to notify the customer concerned or other third persons that information regarding suspicious transactions is being will be or has been transmitted to MOKAS concerning Money Laundering.

A person convicted under the tipping-off offence is subject to imprisonment not exceeding two (2) years or to a fine not exceeding fifty thousand euro (€50,00) or both these sentences.

Example: MOKAS (The unit for combating money laundering), contacts the compliance officer and informs him that one of the regulated entity’s clients is being investigated for money laundering and requests the compliance officer to provide all information the regulated entity has on the aforementioned person. The compliance officer provides the requested information to MOKAS but also privately informs the client that the aforesaid information was handed over to MOKAS following the relevant request. As a result, the client under investigation fled to an unknown location to avoid prosecution. In this case, the compliance officer committed the offence of “tipping-off” a person who was being investigated.

The Offence of Providing False or Misleading Information

A person that knowingly provides false or misleading evidence or information for the identity of the customer or of the ultimate beneficial owner or provides false or forged identification documents, is guilty of the offence and if convicted, faces imprisonment not exceeding two (2) years or a penalty of up to one hundred thousand euro (€100,000) or both penalties.

Name and Shame

Obliged entities and especially entities supervised by CySEC may also suffer reputational risk as CySEC’s practise is to publish the names of the person’s on which fines are imposed.

Personal Liability and The Fines Imposed For it

A person who knowingly provides false or misleading evidence or information for the identity of the customer or of the ultimate beneficial owner or provides false or forged identification documents is guilty of the offence and, in case of conviction, is subject to imprisonment not exceeding two (2) years or to a pecuniary penalty of up to hundred thousand euro (€100.000) or to both of these penalties. One of the main aspects of fined imposed under the AML regulatory framework is that they do not only affect legal entities as individuals, and usually directors and compliance officers, may be personally liable for infringements.

The Path Towards Modern AML Compliance

No entity or person wants to come across hefty fines which may impact reputational and financial damage. The need to create a culture of compliance amongst obliged entities seems to be the only way to go. The constant changes and updates of the regulatory framework require flexibility and experience. If you are concerned with the time and resources available to keep up with your AML compliance obligations, our team of experts can assist you through a wide range of Regulatory and AML compliance and support services including:

Our package solutions can include any combination of our services adapted to your request according to what best suits your organization.

Contact our team and find out more about our services. 

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