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Money laundering and terrorist financing are significant threats to the global financial community. To fight back, countries are continuously enhancing their anti-money laundering (AML) and counter-terrorist financing (CTF) laws. This type of legislation, in particular, provides a regulatory framework that businesses must operate within to conduct business safely.
However, there are no blanket AML/CTF regulations worldwide. Every country creates its own AML laws based on the recommendations of international watchdogs, such as the FATF. However, some countries have far more lenient standards than others. And that’s where it's normal to see higher levels of corruption and illegal activity.
Still, countries with low AML standards can have lucrative investment opportunities that attract businesses. To capitalize, companies must be able to detect money laundering and terrorist funding risks and protect their customers accordingly.
A few major indices compile lists of "high-risk" countries. These typically include countries that seriously disregard AML requirements and with substantial corruption and criminal activity measured by Transparency International.
The list that most businesses follow comes from the Financial Action Task Force (FATF). This is a comprehensive list of countries considered as having deficient AML/CFT regulations, which are updated three times per year. The FATF also works closely with high-risk countries to bolster their AML strategies and improve their risk rating.
In addition, the UK, US, and EU have separate high-risk country lists based on FATF standards. For these regions, there are four categories of risk:
The FATF further categorizes high-risk countries based on their willingness to resolve AML/CFT shortcomings. Those with no plans to comply are placed on the FATF “blacklist.”
Since 2020, Iran and North Korea have been the only two countries on the “blacklist.” Therefore, the FATF strongly recommends that other countries implement severe countermeasures when dealing with them. Businesses are therefore encouraged to implement enhanced due diligence (EDD) solutions to lower the risk of fraud or money laundering.
“Greylisted” countries are under close scrutiny by the FATF while demonstrating a willingness to resolve their AML/CFT deficiencies. The FATF frequently re-evaluates jurisdictions to gauge how their risk profile has changed, so countries are regularly added to and removed from the “greylist.”
Businesses can monitor risk ratings on the FATF website.
By conservative estimates, the total amount of money laundered annually is between 2-5 percent of global GDP (800 billion to 2 trillion USD). Therefore, it’s crucial for companies to be aware of money laundering risks and protect their business and customers.
The most obvious reason for implementing anti-money laundering protocols is to keep crime out of your business. However, there are other reasons your business should care about having strong AML/CTF standards:
A common AML obligation for businesses is to monitor and report suspicious activity. Enhanced due diligence (EDD) and Know Your Customer (KYC) protocols make compliance with this much simpler and smoother.
Building a trustworthy, responsible brand image takes time and effort. A strong stance against money laundering and terrorist financing makes customers feel more comfortable about doing business with you. It also increases the overall value of your company for shareholders.
It's true that implementing AML/CTF protocols often require a substantial upfront investment. However, these costs are worth it since your company saves money in the long run. Companies that fail to enact these standards lose revenue from customers and are subject to fines, legal costs, and significant risk exposure penalties.
Even if a country is deemed high-risk, it doesn't mean all of its people are automatically suspicious or involved in criminal activity. It simply means that your business should be prepared to take on additional risk and implement extra verification steps in place to ensure safety.
When entering a new region, your company should always take the appropriate steps to identify and assess the money laundering and terrorist financing risks present. This single proactive step can save you a lot of time, money, and headaches.
Implementing EDD procedures is often the best way to protect your business and your customers. This involves obtaining detailed information about a customer to create a risk profile. It also requires verification of their source of funds and the purpose of the intended transaction. If you choose to accept customers from high-risk countries, your company will have to apply EDD measures to all transactions originating from them on an ongoing basis.
Businesses can and should take many other EDD steps when entering into business relationships in high-risk or moderate-risk countries. For further reference, please visit https://sumsub.com/blog/enhanced-due-diligence/.
Ongoing sanctions monitoring is another important step, especially if you deal with high-risk countries. Otherwise, you might expose your business to companies or individuals under sanctions, leading to massive fines.
If your business is set to grow and expand internationally, you will inevitably face money laundering and terrorist financing risks. If you fail to react, the reputational hazards, losses, and regulatory penalties will stop you from reaching your business goals.
Even though AML compliance may seem like a complicated or costly process, the good news is that it can be automated with KYC- and EDD-focused software solutions. The best strategy would be to choose a trusted KYC/AML provider who will take care of all the compliance challenges your company may face, including those that arise when operating in high-risk countries. This means that with an initial investment of capital and research, your business can be fully protected in all the markets you’re aiming to win.
Written by Peter Sever, Co-founder and Chief Strategy Officer, Sumsub.