Financial Watchdogs: The Role of Gatekeepers in Combatting Financial Crimes
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Financial Watchdogs: The Role of Gatekeepers in Combatting Financial Crimes
Gatekeepers are coveted professions, often considered as ‘entry points’ to the legitimate financial system. Due to this uniquely positioned role, Gatekeepers act as financial watchdogs by detecting, preventing, and mitigating financial crimes. In this blog, we will discuss the role of Gatekeepers in combating financial crimes such as Money Laundering (ML), Terrorism Financing (TF), and Proliferation Financing (PF).
Let us first discuss the professions that comprise Gatekeepers.
Who Are the Gatekeepers?
Gatekeepers are those professions that act as an entry point or a gateway to the legitimate financial system. Due to this placement, Gatekeepers are uniquely situated to prevent the infiltration of illicit funds into the formal financial system.
Gatekeepers include the following professions:
- Lawyers, notaries, and other legal professionals and practitioners
- Auditors and accountants
- Trust and Company Service Providers (TCSPs)
- Real estate agents and brokers.
These professions are at high risk of being unknowingly or unwittingly misused as conduits to commit financial crimes by criminal actors. Therefore, they are regulated under UAE’s Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT), and Counter Proliferation Financing (CPF) regulatory regime, to protect them and the larger financial system from the menace of ML/TF and PF.
Let us now understand why financial criminals seek to exploit Gatekeepers to conduct ML/TF and PF.
Why Do Gatekeepers Appeal to Financial Criminals?
Financial criminals seek to misuse Gatekeepers due to several reasons highlighted below:
- Access to Financial Systems: Gatekeepers are considered ‘entry points’ to the financial system due to the nature of their services. Financial criminals seek to use their services to gain access to the legitimate economy.
- Skills and Expertise: Gatekeepers possess specialised knowledge in creating and managing corporate structures such as shell corporations, facilitating real estate transactions, managing funds, etc. Financial criminals seek this expertise to undertake ML/TF and PF, especially to obscure the origin of illicit funds.
- Perception of Legitimacy: Engaging reputable professionals such as Gatekeepers lends an appearance or veneer of legitimacy to financial transactions. This perceived credibility is sought by financial criminals to deter scrutiny from regulatory bodies, allowing illicit activities to go unnoticed.
Therefore, due to the potential misuse by financial criminals, gatekeepers are regulated under UAE’s AML/CFT/CPF regulatory regime and required to comply with certain obligations. Let us understand these obligations.
AML/CFT/CPF Regulatory Obligations of Gatekeepers in UAE
The following are the AML/CFT/CPF regulatory obligations of Gatekeeper professionals in UAE, such as Lawyers, notaries, other legal professionals and practitioners, Auditors and accountants, Trust and Company Service Providers (TCSPs) and Real estate agents and brokers are as follows:
1. Appointing AML/CFT/CPF Compliance Officer:
To oversee the gatekeeper’s entire AML/CFT/CPF compliance processes, an AML/CFT/CPF Compliance Officer must possess relevant qualifications and expertise and should be a fit and proper person.
2. Conducting Enterprise-Wide Risk Assessment
To identify and assess its ML/TF and PF risk exposure and adopt risk control measures accordingly. This helps the gatekeeper professional to identify the types of risks they are exposed to and tailor adequate and appropriate risk mitigation measures. Some of the examples of such risks include geographic risks, customer risks, transaction risks, etc. Gatekeeper professionals can make use of this checklist to assess or evaluate the efficacy of their risk management measures and take adequate measures to fortify them.
3. Establishing AML/CFT/CPF Policies, Procedures, and Controls:
To effectively comply with AML/CFT/CPF obligations.
4. Establishing Customer Due Diligence Procedures:
To understand the identity of customers and the degree of ML/TF and PF risks they pose to the gatekeeper professional, and adopt risk-based ML/TF and PF risk management measures.
5. Putting in Place Indicators to Detect ML/TF and PF Risks:
This facilitates swift identification of suspicious transactions and suspicious activities indicating ML/TF and PF risks. Some of the literature that can assist gatekeeper professionals in identifying ML/TF and PF indicators, commonly known as red flags effectively are listed hereunder:
6. Organising Awareness and Training Program for Staff
To ensure that the AML/CFT rules and regulations and the policies and procedures adopted by the company are consistently followed across the company and potential ML/TF/PF concerns are identified and suitably reported.
7. Establishing Systems for Regulatory Reporting:
To ensure internal reporting and investigation of suspicious activities and transactions, as well as its reporting through the filing of
- Suspicious Activity Report (SAR) or
- Suspicious Transaction Report (STR)
- High-Risk Country Transaction Report (HRC) or High-Risk Country Activity Report (HRCA)
Through the goAML portal.
8. Complying with Targeted Financial Sanctions (TFS) Requirements:
To comply with TFS obligations and conduct sanctions screening and promptly report any client sanctioned under the UNSC Consolidated List or UAE Local Terrorist List through the Fund Freeze Report, Partial Name Match Report, etc.
9. Ensuring Record-Keeping:
To maintain detailed records of information related to CDD measures, transaction records, AML/CFT/CPF compliance for at least 5 years in mainland UAE.
10. Following Specific Requirements:
For example, Real Estate Activity Report (REAR) for Real Estate Agents.
Let us now discuss the important role Gatekeepers play as financial watchdogs in combating ML/TF and PF.
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Role of Gatekeepers in Combating Financial Crimes
Let us discuss the role of each Gatekeeper in combating financial crimes by understanding how Gatekeepers can detect and combat financial crimes through insightful examples.
Lawyers, Notaries, and Other Legal Professionals and Practitioners
Consider the case of a legal professional in the UAE. A client approaches the legal professional for the management of their funds. During such management, the legal professional notices that the funds involved have their source of origin from third parties. However, the third party has no apparent connection with the client. Further, the funds are then transferred to a foreign jurisdiction that is a high-risk country due to being Blacklisted by FATF.
In this case the following ML/TF and PF red flags are detected:
- The money being transacted has been funded by a third-party with no apparent connection, or any legitimate explanation
- The funds received by the client are transferred to a FATF Blacklisted country, which is considered a high-risk country.
Actions that can be taken by the legal professional to prevent ML/TF and PF:
- The legal professional should file the High-Risk Country Report because the transaction involves a high-risk country
- The legal professional should reconduct the Customer Risk Assessment (CRA) and categorise the client as high-risk due to the red flags detected
- The legal professional should verify the Source of Funds and Source of Wealth of the client and ask for further details as part of the Enhanced Due Diligence (EDD) process. If ML/TF and PF risks are detected, the same should be reported through the STR.
Auditors and Accountants
Consider the example of an auditor in the UAE. The auditor is approached by a client to conduct an audit of their business. However, the client is reluctant to provide information and other relevant information required for the audit process. Further, the client makes a request for the auditor to expedite the process and complete the audit process quickly. When the auditor makes further requests for data, the auditor comes to know that the client is unable to provide evidence for real activity, such as business operations. The auditor is unable to get further relevant information due to the client’s hesitancy.
In this case, the following ML/TF and PF red flags are detected:
- Hesitation of the client to provide the relevant information required for the audit process, which is a behavioral red-flag
- The client has made an unusual request for the auditor by asking the auditor to complete the audit process quickly
- The client is unable to adequately demonstrate the history of real activity, such as business operations.
Actions that can be taken by the auditor to prevent ML/TF and PF:
- Since various red flags are detected, and the auditor is unable to investigate further due to lack of information, the auditor can deboard the client to derisk itself, which is one of the risk treatment strategies
- Since the red flags detected by the auditor are common typologies used to conduct financial crimes, the auditor should report the same through SAR if funds have not been transferred or STR if money has exchanged hands.
Trust and Company Service Provider
Consider the case of a TCSP in the UAE. It is approached by an agent of a client to establish a company in UAE, as well as provide nominee services. The client preferred not to communicate with the TCSP directly. While conducting Know Your Customer (KYC) procedures, TCSP finds that the client’s Ultimate Beneficial Owner (UBO) has several companies in many jurisdictions worldwide, which appear to be shell companies due to a lack of business operations.
In this case, the following ML/TF and PF red flags can be detected:
- The client refused to communicate with the TCSP directly
- The client was a UBO of many shell companies around the world. Misusing shell companies is a common typology used by financial criminals.
Actions that can be taken by the TCSP to prevent ML/TF and PF:
- Categorise client as ‘high-risk’ during the Customer Risk Assessment (CRA) process
- Conduct Enhanced Due Diligence (EDD) for the client, and understand their nature and purpose of establishing the company
- If the occurrence of financial crimes is detected, report the same through SAR or STR.
Real Estate Agents and Brokers
Consider the example of a Real Estate Agent in the UAE. A trustee of a trust established in an offshore jurisdiction approaches the Real Estate Agent to purchase luxury property. The trust was established in a known tax haven company, and the trustee insisted on paying for the real estate property upfront. Upon inquiry, the Real Estate Agent finds that the ownership structure of the trust is complex and difficult to ascertain.
In this situation, the following red flags can be detected:
- The trust is registered in a known tax haven
- The ownership structure of the trust is complex, and may be so to obscure the identities of Ultimate Beneficial Owners
- The trustee is ready to pay for a luxury property upfront
Actions that can be taken by the Real Estate Agent to prevent ML/TF and PF:
- Conduct Enhanced Due Diligence (EDD) for the trustee and the trust and ascertain the Source of Funds and Source of Wealth
- Ask for additional information to ascertain the identity of the UBOs
- Investigate suspicions of ML/TF and PF and report the same through STR or SAR.
Now, let us discuss the best practices that can be adopted by the Gatekeepers to enhance their efforts in combating financial crimes.
Detected Suspicious Activities or Transactions?
AML UAE assists Gatekeepers in filing STR and SAR through its expert AML Regulatory Reporting services
Best Practices for Gatekeepers to Combat Financial Crimes
Gatekeeper professionals such as Lawyers, notaries, other legal professionals and practitioners, Auditors and accountants, Trust and Company Service Providers (TCSPs) and Real estate agents and brokers must adopt the following best practices to safeguard their business against ML/FT and PF by:
Developing and Implementing Effective AML/CFT/CPF Program
Gatekeeper professionals should make, establish, and implement a clear and concise AML/CFT/CPF Program. The AML/CFT/CPF Program includes policies, procedures, controls, governance structures, and other components that help Gatekeepers meet their AML/CFT/CPF compliance obligations and promptly detect, manage, and mitigate ML/TF and PF risks.
Ensuring Thorough Customer Due Diligence
Customer Due Diligence (CDD) is a Gatekeeper’s weapon against illicit actors that seek to misuse the Gatekeeper to commit financial crimes. A new age CDD process must make use of Video-KYC and Perpetual KYC tools. CDD facilitates the Gatekeeper professional to understand the identity of their customers, the ML/TF and PF risks the customer poses to the Gatekeeper.
It enables the Gatekeeper to adopt risk mitigation measures proportionate to the degree of ML/TF and PF risks posed by the customer.
Establishing Systems to Proactively Detect and Mitigate ML/TF and PF Risk
Gatekeepers should establish strong monitoring systems to proactively detect potential ML/TF and PF activities by installing transaction monitoring systems.
Gatekeepers can leverage technologies such as advanced data analytics, Artificial Intelligence, Machine Learning, etc. Gatekeepers should also ensure that they understand the red flags and common typologies of ML/TF and PF, and the same is part of the AML/CFT/CPF Training for their employees.
Establishing a Culture of AML/CFT/CPF Compliance, Integrity, Accountability and Transparency
Gatekeepers should inculcate a culture of AML/CFT/CPF compliance and values such as integrity, accountability, and transparency throughout their organisational structure. Such a culture plays a key role in shaping the actions of the various stakeholders, ensuring that they act ethically in all their functions. Senior management should take the initiative to set the tone of compliance and ethical values from the top, and make sure that the same permeates at every level of the organisational structure.
Regularly Conducting AML/CFT/CPF Training
Gatekeepers should conduct regular AML/CFT/CPF training for employees to enable them to effectively perform their role in the AML/CFT/CFP compliance process of the Gatekeeper. Training should cover key topics such as recognising ML/TF and PF red flags and typologies, Gatekeeper’s AML/CFT/CPF compliance obligations, reporting suspicious activities and transactions, etc.
Encouraging Open and Transparent Communication
Gatekeepers should encourage open communication and promote a ‘speaking up’ culture. Doing so would ensure that any stakeholder who comes across a suspicious activity or transaction that indicates financial crime risks would promptly report the same internally.
Gatekeepers should also establish a clear process for internal reporting. It should also implement whistleblower policies to ensure their anonymity and protection. The UAE government has become proactive in developing laws requiring various reporting entities and professions to draw up whistleblower policies to ensure regulatory compliance.
Engaging in Cross-Industry and Cross-Sector Collaboration
Gatekeepers should proactively engage with a broad network of organisations across industries and sectors to share useful information, best practices, red flags, etc., that detect and combat financial crimes.
Some organisations have immense experience in detecting ML/TF and PF typologies, while others may be experts at technological solutions to tackle financial crimes. Sharing information ensures that all participants learn from each other’s strengths while addressing their own vulnerabilities. Through this, gatekeepers can strengthen market integrity through collaborative efforts in mitigating ML/TF and PF.
The Role of Gatekeepers in Combatting Financial Crimes: Final Thoughts
Gatekeeper professions, therefore, are responsible for maintaining the financial system’s integrity by detecting and preventing financial crimes. By adhering to AML/CFT/CPF regulatory requirements and implementing the best practices discussed above, these Gatekeepers can effectively mitigate financial crime risks and contribute to a safer financial environment.
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About the Author
Jyoti Maheshwari
CAMS, ACA
Jyoti has over 11 years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.
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