What is trade-based money laundering?

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Trade-based money laundering is one of the most common forms of money laundering. It is an easy way exploited by criminals to launder money between different countries, wherein they misrepresent the quality, value, or amount of goods traded through various channels.

Trade financing processes are misused to facilitate the flow of illicit funds. Trade is conducted across different jurisdictions subject to different regulations, making detecting suspicious transactions difficult. Also, the complexity of trade transactions and the volume of goods traded are the loopholes these launderers exploit to their advantage.

Let’s understand trade-based money laundering, related red flags, and how businesses can mitigate the risk arising from trade-based money laundering.

What is trade-based money laundering?

Trade-based money laundering (TBML) cleans dirty money through trade transactions and activities. The trade transactions are exploited to transfer and convert illicit money into legitimate cash or commodity, avoiding the suspicion from regulatory authorities disguising the process as legitimate trade.

For example, importing and exporting goods is just a cover for the movement of illegal funds, making the trade transaction appear legal between two countries.

It is also a way to evade taxes. Companies show different amounts in invoices, thereby reporting reduced profits and taxes decrease. Alternatively, they show multiple payments for only one set of goods received from the exporter, increasing their procurement expenses.

Why do criminals engage in trade-based money laundering?

Lack of regulations

There are no standard regulations for trading transactions. Import and export of goods are regulated by the agreement between a buyer and seller and the respective countries’ regulations. No global regulator controls these transactions; the two parties entering the contract govern the trade terms.

A rise in the amount and volume of trade

Globalization has resulted in increased trade activities across the world. Countries engage in multiple import and export transactions with several countries. These transactions have increased in number and value over the years. It allows criminals to bypass commercial rules during these humongous trade transactions, avoiding the attention of the authorities.

Increase in free trade zones

Businesses are attracted to free trade zones for their ease of conducting business, as there are fewer regulatory constraints in these zones. The absence of rules is better than circumventing rules. The number of TBML transactions has also increased with a rise in free trade zones.

Use of open account payment method

Open account transactions are the ones where payment is due after a specified time of the occurrence of the trading activity, i.e., the goods are delivered to the party, and the payment is made after 30/90 days. This time gap minimizes the connection between the actual trade and the related payment. These transactions are subject to less oversight from financial institutions; hence, criminals increasingly use these methods.

How is trade-based money laundering conducted?

Understanding the standard techniques of conducting trade-based money laundering is essential to combat the same. The following are the most used TBML techniques:

Over-invoicing of goods

The exporter inflates the price of the goods in the invoice compared to their market value. In this case, exporters receive higher payments from the importer, allowing the importer to launder money and convert/transfer through import/export transactions.

Under-invoicing of goods

The exporter prepares the invoice for the goods at a price lower than the fair market value. Importers get goods at a lower value, resulting in the evasion of import duties.

Multi-invoicing

Exporters create multiple invoices for the same set of goods to be shipped. They can receive multiple payments for the same shipment, using different payment methods adding layers of complexity. Thus, launderers legitimize their illicit money through multiple invoicing.

Changing the quantity of goods

Launderers can also change the quantity or weight of goods being traded. They may report the quantity as more than the actual or less than the actual. In the case of over-quantity, they receive illicit money as payment and convert it to legitimate money. While in the case of under-quantity, they launder money by avoiding the payment of actual import duties.

Alternatively, they might report a specific quantity of goods while there is no shipment done. It is called phantom shipping or ghost shipping. Importers and exporters collaborate to create false invoices and other documentation without the actual shipping of goods. The illicit money is moved from the importer to the exporter without actual trade transactions.

Misrepresentation of goods

The exporters may represent the goods as expensive, though in reality, the goods are cheap. Thus, the invoice and customs documents show a high price while the actual value is less.

It is common in the gems and jewellery sector, where the invoice says raw diamonds and the shipment is of polished diamonds or artificial ones.

Non-documentary trade

For some trading transactions, there are no documents available for investigation. It is not that no documents are prepared for the transaction, but these are not accessible. The regulators have access to only the name, account number, and address of the buyer and seller.

In non-documentary trade transactions, regulators are unaware of the underlying flow of goods and trade activities. It is difficult for them to validate transactions. The absence of due diligence on the volume, type, quantity, and value of goods makes it easier for launderers to launder money.

What are the red flag indicators of trade-based money laundering?

The best option for individuals, companies, and countries is to observe the red flags of trading transactions. With the identification of suspicious transactions, you can investigate them further. Following is an illustrative list of TBML indicators:

Differences in the descriptions of items to be traded in the invoice and the shipping bill.
Differences in the market value of the items and the value mentioned on the invoice.
Involvement of trading entities with registered addresses in residential buildings.
The shipment size does not match the customer’s profile and regular business activities.
Trading of an item from one jurisdiction to another or from one subsidiary to another, whose business activities are in no way related to each other or without logical economic reason.
Involvement of trading entities with no physical presence or an online presence that does not align with its business activities.
The type of goods traded does not align with the regular shipment of customers or the client’s profile and business activities.
Trading transactions involving a third party with no relation to the transaction (either receiving cash payments or managing documents); offshore front companies or shell companies may be involved in such transactions.
Trade deals involve complex trade routes that do not make geographical sense.
Goods are exported from or imported into high-risk jurisdictions or countries with poor AML regulations.
Missing trade documents or false documents.
A sudden increase in trade transactions from or to a company that was dormant for a long time.
Sudden high volumes or value of trade from an entirely new company.

What is the way out for businesses from trade-based money laundering?

Know Your Customer (KYC) and customer due diligence (CDD) are the best solutions for reducing trade-based money laundering. Businesses must implement policies to collect details on all their customers and transactions. Further, ongoing monitoring of the customer’s profile and the transaction is necessary to identify any unusual patterns. If they see any red flag, deeper scrutiny is essential to identify money laundering risks.

Using advanced technology systems or artificial intelligence is also an excellent solution to reduce money laundering risks. These systems can help businesses identify money laundering threats and send alerts. It allows the entities to report the TBML activities to the authorities promptly.

How AML UAE can help

Associating with AML consultants, like AML UAE, can help you understand the red flags better to identify suspicious transactions and take necessary actions to combat the same.

AML UAE also helps clients form an AML compliance department and conduct employee training. Our AML consultants aid in developing relevant AML policies, selecting appropriate AML software, and managing the reporting requirements. We ensure you comply with applicable AML regulations and stay safe from money laundering threats.

AML UAE helps you safeguard your business from money
laundering threats.

Get in touch to know the best preventive and corrective actions.

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About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is an ACAMS-certified AML consultant specialising in governance, risk, and compliance for regulated entities in the UAE. He brings over 28 years of experience, with 1,000+ hours of AML training and 200+ advisory engagements across DNFBPs, VASPs, and FIs. He supports businesses in aligning with AML/CFT requirements from the CBUAE, DFSA, MoET, MoJ, VARA, CMA, FSRA, and FATF. Known for translating complex regulations into audit-ready procedures, Pathik enables operational clarity and compliance readiness.

Reach Out to Pathik

AML Business Risk Assessment Template for DNFBPs in UAE

Without assessing the inherent ML/FT risk your business is exposed to, it is challenging to deploy the necessary controls to mitigate the money laundering and terrorism financing risk.

To assist you in assessing your business’s exposure to ML risk, we present the AML Business Risk Assessment template, capturing the critical parameters on which such assessment should be based and the recommended methodology. AML Business Risk Assessment is also called Anti-Money Laundering Entity-wide Risk Assessment or Enterprise-wide Risk Assessment.

AML Business Risk Assessment Process

Download Excel-based Entity-wide Risk Assessment Template

AML UAE is committed to helping the designated entities comply with AML regulations and implement the robust AML compliance framework to mitigate the financial crime risk effectively. As the first step to this journey, we help companies in Entity-wide Risk Assessment, design the appropriate control measures to mitigate Enterprise-wide risk, and customize AML policies.

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High-Risk Country Reporting: HRC and HRCA

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High-Risk Country Reporting – HRC and HRCA

With increased monitoring emphasized on transactions with persons or entities hailing from high-risk countries, the Ministry of Economy provides for filing of a separate report capturing details about such transactions. These reports are:

High-Risk Country Report or High-Risk Country Transaction Report (HRC)
High-Risk Country Activity Report (HRCA)

The reports mentioned above are to be filed by both – Financial Institutions and Designated Non-Financial Businesses and Professions (DNFBPs).

When is HRC/HRCA to be filed?

High-Risk Country Transaction Report: If at the time of establishing or in the course of the customer relationship or when conducting transactions on behalf of a customer, a reporting entity observes transactions related to high-risk countries subject to a Call for Action (access the list of jurisdictions here), then the entity is required to submit an HRC.

High-Risk Country Activity Report: If during the establishment or course of the customer relationship or when conducting an activity on behalf of a customer, a reporting entity identifies activities related to high-risk countries subject to a Call for Action (access the list of jurisdictions here), then the entity should submit an HRCA.

What activities or transactions are to be reported in HRC/HRCA?

Any cross-border transaction involving the transfer of funds through a banking channel or any remittances, either originating from, destined to, or passing through a high-risk country, would be subject to reporting in HRC/HRCA.

It does not necessarily require the physical presence of the person (transferor or transferee of funds) in the high-risk country at the time of remittance or receipt of funds. Instead, association by nationality or place of residence in high-risk countries would also be considered in the case of a natural person. While in the case of a corporate entity, the company’s place of incorporation or operation, as well as the association of the UBOs or authorized signatory or senior management with high-risk jurisdictions, must be considered.

Accordingly, any transaction or activity about transferring funds into or from high-risk countries would be subject to reporting to FIU. Please note that such reporting is irrespective of the amount involved or the currency.

How and to whom is HRC/HRCA to be filed?

As the Financial Intelligence Unit (FIU) is the reporting authority for all AML matters in the UAE, the HRC and HRCA must also be filed with FIU.

Like all other AML reports (such as STR, SAR, DPMSR), HRC and HRCA are also reported through the goAML Portal. While submitting the reports on goAML, the appropriate report type must be selected by the reporting entity. FIU does not accept any report either through physical mode, via email, or as a message on the Message Board available on the goAML Portal.

In the case of a transaction with a person from a high-risk country, if the reporting entity does not have the necessary details related to the transactional attributes mandatory to be captured on goAML, then the reporting entity may choose to file an HRCA. Here, the reporting entity must ensure that all the adequate details of parties, value involved, etc., are adequately captured.

What is the Financial Institution’s and DNFBP’s obligation post-filing HRC/HRCA?

Once HRC or HRCA has been filed with FIU, reporting entity must withhold the execution of the transaction for three (3) days from the date of reporting to FIU, as the FIU is expected to respond to such HRC/HRCA during these days. If, during these three (3) days, FIU does not object to or respond to filed HRC/HRCA, then reporting entity can conduct the transaction basis the due diligence performed for the subject party and the transaction. Such transaction execution will be at the judgment of the reporting entity only.

If the FIU issues any instructions concerning filed HRC/HRCA within the prescribed time, the same needs to be adhered to by the reporting entity.

Transactions and the parties reported in HRC/HRCA should be subject to frequent ongoing monitoring by the reporting entity

Is there any exemption from filing HRC/HRCA?

HRC/HRCA reporting requirement is applicable only in cases of cross-border transfers.

Accordingly, transactions like domestic cheques, payment of domestic utility bills using a card issued in UAE or cash by a person hailing from a high-risk country, etc. are exempted from HRC/HRCA reporting requirements, as no banking or remittance channels have been used for the international transfer of funds.

Illustration:

A. Assume you are a TCSP and a corporate entity with a place of incorporation in the high-risk jurisdiction approaches you for assistance in setting up a branch in UAE. For such a transaction, the person has traveled to UAE from another country. The payment for the said services would be remitted to your account from the company’s account with a bank in another high-risk country.

Since there is cross-border movement of funds by bank transfer, the proposed transaction must be reported in HRC/HRCA. Here, DNFBP shall ensure that the reported transaction shall only be executed if the FIU does not object to the transaction and after three working days after filing an HRC.

B. An individual from high-risk jurisdiction has visited a non-banking financial institution in UAE to get the US Dollars converted to AED. Here, the currency exchange transaction occurs in UAE without any funds transferred through banks. Accordingly, the financial institution would be exempt from reporting this transaction with FIU.

AML UAE

With every increasing reporting requirement and risk of money laundering to businesses, it is always good to have a team of professionals at your resort to safeguard your business from being vulnerable in the hands of launderers and stay compliant with regulatory requirements. If you are looking for such assistance, AML UAE is there for you – your trusted partner for AML Compliance.

FAQs About High-Risk Country Reporting

Yes, DNFBPs and Financial Institutions are required to file HRC with FIU.

The DNFBPs and the Financial Institutions must file HRC or HRCA using their goAML registration credentials. Third parties can assist you in filing these reports with FIU, using the reporting entity’s credentials for the goAML portal.

While establishing business relationships or conducting business activities, if you identify any activity or transaction with a person or entity having an association with high-risk countries, then as DNFBP, you are required to submit the HRC or HRCA with FIU UAE via the goAML Portal.

HRC or HRCA reporting requirement is for high-risk countries classified as “High-risk jurisdictions subject to a Call for Action” by FATF.

FATF has classified the below-mentioned countries as high-risk jurisdictions subject to a “call for action”:

Democratic People’s Republic of Korea (DPRK)
Iran

There is no threshold amount prescribed for filing HRC and HRCA. Every transaction involving high-risk countries must be reported in HRC and HRCA, irrespective of the transaction value.

Transactions not involving any cross-border transfer of funds to or from the high-risk countries are exempted from HRC/HRCA reporting requirements, like domestic cheques, payment of domestic utility bills using a card issued in UAE, cash by a person from a high-risk country, etc.

Once an HRC or HRCA has been filed with FIU, the reporting entity shall keep the execution of the subject transaction on hold for three days from the date of submission of HRC/HRCA.

No, domestic transactions which do not involve any international transfer of funds to high-risk countries are not required to be reported.

The transactions related to trading shares/stocks, forex, crypto assets, bonds, mutual funds, commodities, etc., would also be subject to HRC/HRCA if these transactions are cross-border.

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About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is an ACAMS-certified AML consultant specialising in governance, risk, and compliance for regulated entities in the UAE. He brings over 28 years of experience, with 1,000+ hours of AML training and 200+ advisory engagements across DNFBPs, VASPs, and FIs. He supports businesses in aligning with AML/CFT requirements from the CBUAE, DFSA, MoET, MoJ, VARA, CMA, FSRA, and FATF. Known for translating complex regulations into audit-ready procedures, Pathik enables operational clarity and compliance readiness.

Reach Out to Pathik

Risk indicators for DPMS – Strategic Analysis by UAE FIU

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Why did UAE FIU perform the strategic analysis of DPMS?

Given the fact that precious metals and stones are being highly exploited by criminals to launder money given their size and high liquidity, and the fact that UAE is one of the biggest marketplaces for precious metals and stones trading, the UAE Financial Intelligence Unit (UAE FIU) has recently conducted a strategic analysis of data about Dealers in Precious Metals and Stones (DPMS).

The Strategic Analysis Report lays down the UAE FIU’s objective for conducting this analysis of the DPMS sector as under:

To enhance the understanding of ML/FT vulnerabilities associated with precious metals and stones,
Developing ML/FT trends, typologies, and red flags indicating exploitation of precious metals and stones and the DPMS sector.

The methodology adopted by the UAE FIU for the strategic analysis of the DPMS sector

The UAE FIU’s strategic analysis is conducted based on the information gathered from the reporting entities operating as DPMS and other relevant stakeholders for January 2021 to June 2022.

The UAE FIU reviewed the below-mentioned data to analyze the ML/FT trends prevalent in the DPMS sector:

Dealers in Precious Metals and Stones Report (DPMSR) filed on the goAML portal indicating cash and wire transfer transactions above the prescribed threshold,
Suspicious Transaction/Activity Report (STR/SAR), filed either by the DPMS entities or with a “Reason for Reporting” indicating the abuse of precious metals and stones,
Information exchanged between UAE FIU and counterparty FIUs around gold smuggling, illegal mining of precious metals, gold theft, etc.),
Information received from domestic authorities – Public Prosecutions, Police Departments, and the Ministry of Interior (MOI) related to an investigation of money laundering and terrorism financing offenses,
Ministry of Economy’s (MOE) information about DPMS registered in the UAE and MOE imposed sanctions, fines, and warnings to DPMS entities,
Information received from the Federal Customs Authority around ‘Cash declarations’ wherein the purpose mentioned is related to precious metals and stones.

Conclusions of the UAE FIU’s strategic analysis of the DPMS sector

The Strategic Analysis Report addresses the ML/FT typologies and red flags associated with the DPMS sector in the UAE. As per the UAE FIU’s analysis, the following are the major ML/FT typologies or patterns abused to launder money through the DPMS sector:

Trade-based money laundering

Using DPMS entities as “front” to launder the illegal money using trade-based money laundering methods like incorrect invoicing, phantom shipment, or fictitious supply transactions.
Use of multiple DPMS entities as a ‘Corporate Vehicle’ to disguise the source of funds by creating multiple layers by way of transferring a large sum of money amongst the entities without any business rationale.

The trade-based money laundering is widely used in the DPMS sector to launder money, wherein the transaction is manipulated to transfer the funds from one person to another and from one country to another.

Other widely exploited trade-based money laundering techniques are:

To move a large sum of illicit funds from one country (importer) to another (exporter) by over-pricing the commodity supplied compared to its market value.
Raising multiple invoices on the importer for the same set of products and receiving the payment using different methods to avoid the attention of the authorities.
Representing the duplicate or fake stones as original and precious stones to bag transfer of large amount from buyer to seller.
Trade-based money laundering often involves tax evasion, either by short declaring the import quantities or under-pricing the imported goods to avoid paying a large sum of taxes on the import of precious metals.

Money laundering through “foreign currency exchange”

Indulging employees or third parties into the conversion of foreign currency exchanges without getting the name of the DPMS entity involved anywhere. Here, multiple individuals are involved to avoid reporting threshold and justify the source of funds and purpose as under:
Source of funds used for currency conversion: salary income or savings
Purpose of currency conversion: travel or family upkeep
DPMS is undertaking many foreign currency transactions, mainly in cash, without any logical business transaction or for a quoted reason like foreign suppliers only accepting cash, etc.

Generally, it has been seen that one currency can be converted into another currency without any involvement of a regulatory authority. Moreover, the conversion of cash currency legitimizes the source of such converted currency, as generally, the party offers receipt of such conversion.

Moreover, with the increased volume of global trades, the cross-border movement of funds has also risen, leading to increased cases of terrorism financing and laundering funds to invest in unregulated financial centers.

Gold/cash smuggling

Smuggling gold or illegally transferring the gold from the conflict-affected or high-risk jurisdiction. This smuggled gold or illegally transported gold is sold in smaller quantities to local DPMS entities against cash or is processed and re-exported illegally to different countries,
Sourcing of gold from miners without adequate due diligence of the miner,
Individuals smuggle cash (importing and exporting) on behalf of DPMS entities.

Using the network of people, gold and other precious metals are increasingly smuggled from illegal miners, wherein quantities of gold are distributed amongst many individuals to avoid the attention of and reporting threshold before the Customs Authority.

ML/FT risk indicators for DPMS sector suggested in the Strategic Analysis Report

The risk indicators or the ML/FT red flags captured in this report can be used by the DPMS and financial institutions to identify and report any suspicious activities involving precious metals and stones. The following is an illustrative list of ML/FT risk indicators captured in the report involving the abuse of precious metals and stones:

DPMS entities with complex legal structures, created either to hide the UBO or disguise the transfer of funds,
DPMS entity formed as a front company to mix the legally obtained funds with the illicit funds,
Unreasonable behavior of or large complex transactions by newly formed DPMS entities,
DPMS entities extensively transact in cash,
Irregular shipping methods inconsistent with the standard business practice of DPMS,
Inconsistent documentation or forged documents to disguise the transaction,
DPMS frequently enters into transactions of an abnormally large amount,
DPMS having multiple bank accounts without any business sense or DPMS entities operating bank accounts in the employee’s name,
Adverse news about the DPMS’ UBO or senior management,
DPMS or its UBO or management having close association with high-risk countries,
Receipt or payment of money to third parties having no connection with the sanctions,
Transaction structuring into smaller value deposits to avoid reporting threshold,
DPMS entities extensively involved in cross-border cash movement,
Frequent deposit of cash amounts into banks or exchange of foreign currencies by DPMS,
DPMS entities importing precious metals from conflict-affected jurisdictions, or the volume of import is inconsistent with the country of import (having limited mining capacity or no mines),
Failure to furnish ‘Customs Declaration’ concerning cash deposit related to precious metals/stones transaction,
DPMS transacting in gold instead of cash/bank transfer,
Transfer of funds amongst unrelated companies, having no business nexus,
DPMS or its employees engaging in frequent foreign currency conversions without any business logic,
Frequent travel to high-risk areas or illegal mining jurisdictions,
DPMS operates on loans and credit facilities, generally settled before due dates through cash.

The primary reason for exploiting the DPMS sector

Given the peculiar nature of precious metals and stones, the same is most vulnerable in the hands of money laundering, using various methods. We have tried to map the main reason for exploitation against the money laundering technique as under:

Characteristic of precious metals and stones	Money laundering method
Global currency – Precious metals and stones are widely accepted as a medium of exchange across the globe	Gold smuggling, wherein gold from illegal mines is smuggled or illegally transferred to other countries to supply it in the local market against cash Trade-based money laundering, wherein gold is imported and exported at a manipulated price
High liquidity – Precious metals and stones can easily be converted into cash	DPMS entities purchase smuggled gold without any adequate KYC and due diligence process Terrorists convert their illegal funds into gold, which can be easily transported and encashed in the country of operations
Over-the-Counter – Precious metals and stones trading in not regulated over an exchange platform	Smuggled gold is sold to the DPMS entities without any adequate KYC and due diligence process Inadequate documentation of the precious metal and stone transaction
Easy transportation – Compact size makes its movement easy	Easy movement of gold without much hassle makes it lucrative for terrorism financing and money laundering Terrorists store their illegal funds in gold and transport the same to the country of operations

How AML UAE can help

AML UAE can help you understand the risk indicators and ML/FT red flags specific to the DPMS sector to identify suspicious transactions and take necessary actions to combat the same (i.e., timely reporting to the FIU).

AML UAE also helps DPMS entities (including other DNFPBs) set up an in-house AML compliance department and impart AML training to the employees. We are committed to ensuring your compliance with applicable AML regulations and safeguarding DPMS entities against money laundering and terrorism financing threats.

AML UAE helps you safeguard your DPMS business from ML/FT threats.

Get in touch to know the best preventive and corrective actions.

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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.

Reach Out to Jyoti

Decentralized Finance (DeFi) and AML implications in UAE

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Decentralized Finance (DeFi) and AML implications in UAE

The scope of Decentralised Finance is growing rapidly as the concept of virtual assets is being widely accepted across the globe. Decentralized finance, popularly known as DeFi, is an emerging finance domain that operates very distinctly from the traditional centralized financial system regulated and controlled by a country’s government.

With anonymity and lack of centralized governing authority, the money laundering risk around the same is also very grave. In this context, let us understand what DeFi is and what AML implications are around DeFi.

What is DeFi?

DeFi is a blockchain technology-based borderless and independent financial network.

Unlike a centralized financial system, there is no central authority governing DeFi, but it is owned by the users who operate and build it. DeFi is an independent system that works autonomously. People trade on the virtual platform, using technology to borrow, lend, invest, or trade without any central authority/intermediary regulating their finances.

DeFi works on blockchain technology in which the financial services are distributed in a series over the blockchain structure. It is monitored using smart contract programs without the involvement of any intermediary. Protocols are created using open-source software managed by a community of developers of DeFi.

With DeFi, financial transactions such as lending or borrowing can be done from any place with internet connectivity. A distributed financial database collates and aggregates data from all users and verifies the same using a consensus mechanism (a mechanism used to obtain agreement, trust, and security over a single value or parameter across a decentralized network).

DeFi is all about peer-to-peer transactions, where two parties come together to exchange cryptocurrency against any supply of goods or services without the involvement of any third parties like banks. Let’s take an example of a loan, where generally you would go to a bank or lending institution and get the money on interest. In the case of DeFi, once you input your loan requirement into the DeFi systems, an algorithm will run to find you a match. Of all the potential peer matches shown, you would agree to the lending terms of one of the peers and get the money on loan. This lending transaction is then recorded in the blockchain. Everything happens at a click of a mouse, and that too in a few seconds.

What are the benefits of DeFi?

It reduces the cost of financial services, which generally the banks and other financial institutions levy for obtaining their services.
Eliminates the intermediaries and establishes direct connections between the parties.
The money is kept in a digital wallet rather than placing it in a bank account.
Transferring funds becomes easy and quick.

What is Virtual Asset Service Provider?

Here, reference should be made to the definition of VASP as given by FATF, which is as under:

"A business which conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

an exchange between virtual assets and fiat currencies,
exchange between one or more forms of virtual assets,
transfer of virtual assets; (transfer means to conduct a transaction on behalf of another natural or legal person that moves a virtual asset from one virtual asset address or account to another),
safekeeping and administration of virtual assets or instruments, enabling control over virtual assets,
participating in and provision of financial services related to an issuer’s offer or sale of a virtual asset.

Can DeFi be construed as VASP or the person controlling it?

As apparent from the definition above and in the context of DeFi, the DeFi arrangement may fit in the definition of VASP as this technology-based network enables the users to enter if smart contract related to financial services using virtual assets. Thus, DeFi provides a platform to transfer virtual assets between parties by way of a transaction executed between the involved parties.

As mentioned above, though DeFi qualifies for VASP per se, it cannot be subjected to AML regulations as it is a technology solution or an application. It is essential to understand that even though the name suggests that such software operates on a decentralized ledger, these applications have an authoritative structure where any person or group of a few individuals influence or control DeFi. This control or influence may be related to enhancing the functionalities of the application, aspects related to user interfaces, say, over the governing protocols, or even earning profits out of this network.

In line with the FATF’s intent to apply the AML regulations to a natural or legal person, the person who is exercising control or has sufficient influence over the DeFi shall be construed as VASP for the purpose of implementing the AML provisions. Accordingly, the owners, developers, or the application operators have to ensure that they undertake due ML/FT risk assessment prior to operating the application as DeFi. This shall also include the implementation of adequate routine AML/CFT procedures and ongoing monitoring measures.

For details on AML/CFT obligation on owners, developers, and operators controlling the DeFi, please refer to our article on Virtual Assets and VASP.

Our timely and accurate AML consulting services

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Share via :

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.

Reach Out to Jyoti

Risk-Based Approach For Dealers in Precious Metals and Stones (DPMS)

Risk-Based Approach For Dealers in Precious Metals and Stones (DPMS)

Protect your business with reliable and effective AML strategies with AML UAE.

Risk-Based approach for Dealers in Precious Metals and Stones (DPMS)

The importance of the Risk-based approach for Dealers in Precious Metals and Stones (DPMS) is understood from the nature of the business itself. Jewellers deal in precious metals, stones, jewellery, and by their nature, these items carry high value, and can be easily transported.

Unless a risk-based approach is applied in the jewelry business, it becomes too difficult for the DPMS to comply with the legal requirements of anti-money laundering law in the UAE.

How should DPMS assess the risks involved?

As a part of the risk-assessment process, you must identify specific areas of your business that are more likely to be used by criminals in order to conduct any terrorist financing or money laundering activities.

Therefore, you must assess the risks associated with all your business activities and services. Here are the four primary areas that you need to address while performing while determining your risk.

Geography of the potential clients.
Business relationships and the clients of your potential customer.
Products, services, and delivery channels.
Other relevant factors.

In order to do so, you must consider the nature and behavior of your clients, the products or services you deliver, and the ways or mediums in which you provide your offerings. However, if you identify any of the
situations that suspect unusual or illicit activities, you should instantly control these risks by implementing all the probable mitigation measures.

What is a risk-based approach cycle?

Here are the crucial steps of the risk-based approach for the Dealers in Precious Metals and Stones:

Identifying the inherent risks of your company
Creating risk-reduction or mitigation measures and critical controls
Efficient implementation of your risk-based approach
Reviewing your applied risk-based approach

In order to effectively assess your inherent risks, you can divide the process of risk assessment into two parts.

Business-Based Risk Assessment
Relationship-Based Risk Assessment

It is crucial for you to note that there is no documented methodology for assessing the risks of your business. Therefore, let us understand both of these processes in detail.

Business-based risk approach

In order to assess the risk associated with your business, you have to analyze your products, services, delivery channels, and the geographical location of the company. So let us learn about the same in brief.

1- Product and delivery channel

As a dealer in precious stones, metals, jewellery, and stones, you have to assess your products as well as delivery channels in order to ascertain any high risk associated with the same. This may include the following.

Buying precious metals, stones, and precious jewels
Sale of precious metals, stones, and precious jewels
Indirect transactions with unknown clients. These could take place through the internet, mail, or a telephone.

Here are a few things that you might want to consider while assessing your product and delivery channels.

Assess your products as per the type of market you are operating into, along with the kind of clients they are curated for.
Assessing the physical characteristics of your jewellery items is also a critical aspect that you must watch out for. Portability, value, storage options, etc., are considered as the physical characteristics of the products.
The jewellery products which are lesser in value usually aren’t subject to significant risks.
Determining the modes of communication with your client also has a role to play: face-to-face communication or any form of virtual communication that occurs through the mail, telephone, or video conferencing.
Considering the mode of delivering your jewellery items is also crucial and should be thoroughly monitored. Needless to say, the mode of the transaction should also be observed.

Here are a few examples of potentially high-risk products if you are a DPMS.

Gold

Gold is undoubtedly a high-risk product because it is transformable, exchangeable, and potentially provides secrecy in the transactions. In addition to that, gold has a universal price standard, and it can be used as a currency.

Here are a few red flags associated with the trading of gold.

An existing customer buying substantial quantities of gold bullion without any legitimate or explainable reason, or a potentially new customer asking for converting vast amounts of gold into bullion.
An existing or potential buyer purchases a massive quality of gold and makes the payment in cash.
Any known or unknown foreign national buying vast quantities of gold bullion in a relatively short span.
The purity, weight, value, and origin of gold are misclassified misleading on the custom declaration forms.
Unlicensed individuals or companies producing and commercializing gold.
Gold bullion does not meet the industry quality standards.
Higher gold prices as compared to the local markets.

Diamonds

Diamonds also possess high trading risks because they are easily concealed, transportable, carry enormous financial value, facilitates secrecy and ease of transacting, and are highly challenging to trace.

Here are a few red flags associated with the trading of Diamonds.

A customer is buying diamonds in bulk without having logically explainable or reasonable reasons. The trading of diamonds could be illogical both economically and from a business point of view.
Trading of diamonds whose origin is quite suspicious. This is particularly the case with raw diamonds, which are not accompanied by legitimate Kimberley process certificates.
A Kimberley process certificate that comes with an exceptionally long validity or is forged.
A supplier or customer who is known for trafficking conflict diamonds.
A customer or a supplier who is unaware of the best trade practices or the one who seeks help from third parties before finalizing a transaction.
Bulk trading of diamonds and the payment is made in cash from the geographical locations where such transactions are unusual.
Any customer who requests to purchase polished diamonds in bulk without any logical reasons.

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Behavior of counter parties in some transaction

Here are a few behavioral traits that you must watch out for.

Any counterparty that proposes any unusual transaction which is entirely insensible and baseless or the transactions that are pretty high veiled or include high potential profits.
Any counterparty who leverages the power of non-banking financial institutions and money service business for no logical and legitimate business reason.
Any counterparty that frequently changes bank accounts, especially when on foreign land.
Any counterparty seeks secrecy by conducting ordinary business transactions with the help of lawyers, accountants, or any other intermediary.

Various other indicators of High Risk

Here are a few other factors that indicate high risk.

A supplier who is not willing to provide accurate or complete contact information, business affiliations, and financial references.
Offering loose diamonds in bulk which retains their wholesale value because they can be easily liquidated.
Offering risky stones like diamonds through indirect means and to clients whom you haven’t been in direct touch with. These types of transactions are hazardous.

2- Geography

Assess the risk associated with either your own business or the location in which it is located. For example, the movement of money or goods to and from the client company might include high-risk or severe financial crimes like money laundering or terrorist financing.

When you assess your geography, you have to consider whether the geographic locations in which you operate or your clients are based out possess high risks of money laundering activities or terrorist financing. Depending upon the operations of your business, this can range from your immediate surrounding to a province or a territory.

Here are a few examples of geographic elements that are required in your risk assessment.

Locations that experience a considerably higher crime rate may lead to the enhanced potential risk of money laundering or terrorist financing.

A rural area where the customers are known to you could present a lesser risk as compared to an urban area where new and anonymous clients are more likely to bring significant risks involved with them.
Is your company closely located near a border crossing? If yes, it could elevate the risks involved because your company can be the first entry into the enormous financial systems.
If your potential clients are located in countries subject to sanctions or embargoes, you must consider their high risks.

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Various other factors relevant to your company, if applicable

Assessing all the other factors related to your business but that does not fall under any of the previously mentioned headings is also crucial to mitigate or eliminate any potential risks. For instance, the size, structure, employees, and number of branches of your business are a few aspects that also need to be assessed for the availability of any risks.

As a dealer in precious stones, metals, or jewels, you enter a professional relationship when a customer conducts a transaction with you that requires you to determine their identity irrespective of whether the transactions are related to each other or not. If you have a professional relationship with your clients, you need to conduct a risk assessment based on the inherent characteristics of your customers. It can be done on the basis of the following factors.

The product you are offering and the channel of delivering you are opting for.
The geographical location of either your existing or potential client.
The characteristics of your clients.
The financial activities and transactional patterns of your clients.

In addition to that, it is quite a possibility that your business deals with clients out of a professional relationship. These types of interactions might be sporadic. As a result, there would not be sufficient information available for your business and the legitimacy of the clients. The risk assessment of these clients is more likely to focus on monitoring transactions than having a file under the name of your client. Monitoring such clients is nothing but an obligation to report any suspicious activities like money laundering or terrorist financing.

Here are a few examples of the characteristics of your clients that you might consider as high-risk.

A client who is not at all disturbed or concerned about the price.
A client who makes the payment for expensive jewelry in cash.
A client who tries to use a third-party credit card or a cheque.
A client buying precious metals or stones without having any legitimate interest in the value, size, or color.
A client who has unexplainable distance from the offerer or you in this case. A client who orders precious items in bulk makes payment in cash, cancels the order, and gets the refund, preferably through cheque.
A client who is not willing to share adequate and accurate amounts of information.

Here are a few examples of transactions that you might consider that you might feel as high-risk.

Transactions that look structured in order to avoid reporting requirements.
Any transactions that involve third parties, either as payers, or recipients of payment, without apparent logical purpose.
Use non-bank financial mechanisms, like currency exchange or money remitters, instead of a legitimate banking system.
Any kind of unusual payment methods, like large amounts of cash, multiple numbers of money orders, cashier’s cheque, traveler’s cheque, or any type of payment from third parties.
Funds that come from an offshore financial center instead of a local bank.
There are multiple affiliated entities in the payments chain.

Final words

Dealers in precious metals and stones are already more prone to dramatic risks. But it is essential to apply a risk-based approach in the same. The entire process is quite challenging and needs expert advice and help, and this is when AML UAE comes into the picture to provide its expert AML Consultancy Services.

Frequently Asked Questions (FAQs)

Here are a few frequently asked questions.

Here are a few risks that you need to assess in order to carry out an adequate risk profiling for dealers in precious metals, stones, and jewels.

Product, service, and transaction-related risk

Supply channel-related risks

Geographical risk

Client-based risk

The entire industry is prone to high risks. In order to keep yourself safe from reputational losses and regulatory penalties, you have to follow a few things deliberately.

Ask your clients to fill up a KYC form and submit legally authorized documents to verify the details provided.

You must also check the name of the purchaser in sanction lists, PEPs list, or adverse media reports details.

Verify the details, and if any suspicious activity is diagnosed, you must immediately follow an enhanced due diligence process.

If you suspect any type of money laundering or terrorist financing, you
must immediately file a STR.

The entire process can be pretty time-consuming, and your clients might
feel frustrated. However, there are a few things you can do in order to engage with them while all other essential aspects are being carried out.

Offer some refreshments

Engage the client by showing a video of your warehouse where the jewelry masterpieces are being designed and curated.

Ask the client whether they would like some loyalty cards for future purchases.

Annex A: Business-based Risk Assessment
Here are the instructions in order to complete the business based risk-assessment which includes products, geography, delivery channels, and many other relevant factors.

AList of FactorsEffectively describe your products, factors
related to geographic locations, and delivery
channelsBRisk RatingThere are multiple risk factors, and all you have
to do is to rate all of your risk factors. Risk
factors include delivery channels, nature of
products & services, geographic locations, and many other relevant factors. It is important to note that you can have either a low or high-risk category or to have a legitimate complex rating scale. Moreover, the scale you develop should be established, tailored as per the size and
nature of your business.CRationaleWhenever you assign a risk rating to all the risk factors, it is important to provide a reason for that. Furthermore, if required, you can even
make a reference to a website, a report, or a
published paper.DDescribe Mitigation
Measures For High-Risk
FactorsAll the factors identified as high-risks should be
addressed with documented mitigation
measures. Written policies and procedures will make it easy for you to explain how you will reduce or control these risks in your daily activities.

Here are a few examples of mitigation
measures you might want to consider.

Enhance your awareness of high-risk
situations in your company line across
your enterprise.

Facilitate targeted training to staff regarding probable red flags and indicators of high-value, high-risk products such as diamonds or gold.

Facilitate adequate controls for relatively higher-risk products like management
approvals.

Enhance the overall frequency of
monitoring transactions that are associated with relatively high risks.

Annex B: Client relationship-based risk
assessment
Here are the instructions in order to complete the client relationship-based risk assessment:

AHigh-Risk Clients
or Business RelationshipsDetermine all your high-risk business
relationships and clients. You might want to assess risk each business relationship
individually or maybe in groups that share
almost the same characteristics.BRisk RatingYou must rate each of your business
relationships. You might use a scale of the
low, medium, or high in order to risk rate your
business relationships.CRationaleMention a reason why you assigned a
particular risk rating to each of your clients or business relationship.DDescribe Enhanced
Measures In Order To Determine The Identity of or Existence of High-
Risk ClientsDescribe how the identity was determined or how the existence of a high-risk entity for
each high-risk client or business relationship
was identified.

Here are a few examples.

Seeking some additional information
beyond even the minimum requirements in order to ascertain the identity of the client.

Get the independent verification of the gathered information.

Establishing more strict and rigid
thresholds for ascertaining identification.

EDescribe Mitigation
Measures For High-Risk FactorsYou have to mitigate and control the risks of
each high-risk client or business relationship
you have identified.

Here are a few examples of mitigation
measures you might want to consider.

Set limits to transaction amount in
specific situations.

any cash payment.

Conduct a few transactions only in
person.

FDescribe How Will
You Keep Client
Information Updated For High- Risks Business
Relationship And
ClientsYou are required to build policies on how and often you will update the information of the high-risk clients or business relationships. The
information that usually needs to be constantly updated includes the following.

If the client is an individual, name,
address, contact number, and the occupation of that individual.

If the client is a corporation, name,
address, and the name & address of the
directors of the corporation.

If the client is an entity or something
more than a corporation, name, address, and the principal place of the
business.

Methods to keep client identification updated include asking the client to provide
information to confirm or update information
related to your identification.

GDescribe Enhanced
Monitoring For High-Risk Clients And Business
RelationshipsFor high-risk clients and business
relationships, you require to conduct
enhanced monitoring.

Here are the things that you need to keep in
mind when it comes to the enhanced monitoring process.

What should be the frequency of the
enhanced monitoring?

How is it conducted?

How will it be reviewed?

Here are a few examples of how enhanced
monitoring is conducted and reviewed for
high-risk clients and business relationships.

Ask for additional information like volume of assets, occupation, and
information available through public
databases.

Review transactions on the basis of an approved schedule that includes
management sign-offs.

Set business parameters or limits
related to transactions that would figure
out early warning signs.

Try to review transactions more
frequently against any type of suspicious activities related to high-risk clients or business relationships.

From an AML perspective, precious metals are considered high-risk and associated with ML/FT typologies. Precious metals, owing to their size and value, offer a lucrative market to the money launderers – as they are easy to hide, transport, and hold as investments of their huge illegal funds in small volumes.

Ghost shipping under AML indicates a bogus or fictitious transaction, wherein buyer and seller come together to prepare fake documents for the fictitious transaction indicating that the goods were supplied and payments were made, where neither there has been any goods movement nor any payments transferred. Ghost shipping is one of the Trade-based money laundering methods.

Precious metals can be traded over the counter with dealers in precious metals (not being regulated on exchanges), wherein the prices of the precious metals are speculated and impacted by demand and supply.

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About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is an ACAMS-certified AML consultant specialising in governance, risk, and compliance for regulated entities in the UAE. He brings over 28 years of experience, with 1,000+ hours of AML training and 200+ advisory engagements across DNFBPs, VASPs, and FIs. He supports businesses in aligning with AML/CFT requirements from the CBUAE, DFSA, MoET, MoJ, VARA, CMA, FSRA, and FATF. Known for translating complex regulations into audit-ready procedures, Pathik enables operational clarity and compliance readiness.

Reach Out to Pathik

What is terrorist financing?

Protect your business with reliable and effective AML strategies with AML UAE.

What is Terrorist Financing?

Terrorist financing is one of the most complex and troublesome financial crimes across the world. The potential and level of impact of terrorist funding have increased dramatically in the last few decades. Terrorists require a considerable amount of money in order to execute their ill intentions. As per the current state of terrorism across the world, terrorist financing makes available for non-state actors or individual terrorist accommodation, training & development, funds to buy or test weapons and to cater to other financial needs for observing terrorism in the world.

How are funds for terrorism provided?

The funds for terrorism are provided through several means; a few of them are listed hereunder:

Huge sum of money is obtained through several illicit activities
Leveraging the power of money laundering activities in order to utilize the illegally occupied cash in a more destructive way
Obtaining massive sum of money with the help of criminal activities like smuggling of drugs, kidnapping, fraud, money laundering, and extortion

Anti-money laundering or AML regulations are a key measure to counter-terrorist financing. Financial institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs) play a vital role in combatting the financing of terrorism simply because criminals or terrorists mostly rely on them, especially banks, in order to transfer illicitly occupied funds.

Therefore, many regulations and laws have been enacted in order to prevent terrorist financing, primarily known as counter-terrorist policies. As per the counter-terrorist policies, financial institutions should know their customers closely.

Therefore, they should monitor and keep records of the transactions of the customers or clients. In this manner, business enterprises can have sufficient information related to their customers and ensure that their customers or clients are not involved with any financial crimes or illicit financial activities.

Suppose a massive sum of money is found with an intention to support terrorist activities. In that case, law enforcement agencies will come into the picture to combat some of these crimes or illicit financial activities.

Financial Action Task Force (FATF)

FATF is an abbreviated form of Financial Action Task Force established in 1989 by G-7 countries to prevent money laundering activities from the economy as a whole. The FATF comprises 35 governments and two regional organizations. The FATF is working in order to combat terrorism financing and money laundering by developing standardized procedures to stop the threats to the international financial system.

Criminals like terrorists can infiltrate the economic system of several countries with weak controls. Therefore, it is pretty challenging to check the financing of terrorism by establishing standard procedures. The FATF standards require governments to take several legal measures to ensure that the serious crime of terrorism financing, covering most of the elements stipulated by the convention of terrorism financing, be punished as a separate crime altogether.

Furthermore, the FATF reflects the measures created to counteract money laundering activities and make sure that the implementation of the private sector’s required preventive measures is being taken in the best possible manner.

The Terrorism Prevention Branch or the TPB of the United Nations (UN) office on Drugs and Crime (UNODC) sweats on the legal aspects of all the relevant universal legal documents that are proudly countering terrorist financing.

This law usually includes a review of internal legislation to counter terrorist financing and the appropriate punishment of crimes. It also provides for the implementation of all of these international standards and empowers law enforcement officials with specialized training.

Anti-money laundering compliance solutions

Terrorist financing is a serious criminal activity that can have severe consequences. These illegal activities are perceived as financial crimes like money laundering, which involve obtaining vast amounts of money through several illicit methods. Therefore, all financial institutions and DNFBPs at the risk of terrorist financing should comply with the home country and global regulations such as FATF. Although compliance with these regulations appears complicated, complying with them has become much easier with the help of anti-money laundering-related technology-based solutions.

How can AML or CFT tool help?

Here are a few ways in which AML/CFT tool can help:

AML and CFT can lead to forfeiture and recovery of unlawfully acquired assets
It aids the authorities with legitimate roadmaps to identify those who facilitate illicit and criminal activities
Expose the infrastructure of criminal or illegal organizations conspiracies and webs of corruption to commit inhuman terrorist attacks
Support effective and broad deterrence efforts against a wide range of illicit and unlawful activities, including the funding of terrorism

In addition to that, clear and effective communication is a must for an anti-money laundering Compliance Officer because he is the one who is in touch with almost all the employees of the business enterprise and also has the responsibility to report the suspicious transactions to the Financial Intelligence Unit on behalf of the organization. Therefore, a Compliance Officer is expected to share an essential piece of information with the Company’s staff at a specific time to ensure adherence to AML/CFT regulations.

About AML UAE

The above information clarifies the meaning of terrorism financing and the negative impact it can have on the economy of the organization and the country as a whole. However, in order to combat this terrorism funding, any business entity has to follow a few steps and control their relevant internal legislation minutely. For that, one may need expert help like us, AML UAE.

AML UAE provides various services like drafting of AML Policies and implementation thereof, setting up on internal AML Compliance department, AML training, and assistance in the selection of AML Software. Get in Touch Now!

Frequently Asked Questions (FAQs)

Strict enforcement of AML/CFT Laws

Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) measures

Fines and Penalties on violators

Filing of STR (Suspicious Transactions Report) with the FIU

Here are a few actions that must be taken to enhance the overall financial intelligence in the battle against terrorist financing:

By introducing whole new centralized banking and payment account registers

By aligning the rules of Financial Intelligence Units with the latest international trends

a. Intention or purpose of crime:

Money laundering: To hide the source of illegal funds and integrates such funds into the legit financial system
Terrorism financing: Collating funds to carry out terrorist activities to threaten the peace and integrity of the society

b. Source of funds involved:

Money laundering: As the definition suggests, the source of funds involved in laundering is always illegal
Terrorism financing: Funds collected for terrorist activities may not always be illegally obtained, as sometimes genuine profits are also diverted for terrorist activities

c. Driving force for conducting crime:

Money laundering: Generating more profits through illegal activities
Terrorism financing: Driven by ideologies and emotions to adversely affect the society

d. Stages & Process

Money laundering: This is a cyclical process, where profits generated through illegal activities are-invested back into illegal activities. Involving 3 stages – Placement, Layering, and Integration
Terrorism financing: This is a straight/linear process where funds are consumed for carrying out the terrorist activities

e. Stages

Money laundering: 3 stages – Placement, Layering, and Integration
Terrorism financing: 4 stages – Collecting, Storing, Moving, and Using

The following elements make the tracing of terrorism financing challenging:

Terrorism financing hardly follows any pre-determined pattern, and that too is not fixed all the time,
Terrorist groups are aware of countermeasures being deployed. They identify the loopholes to avoid the attention of authorities and evade these measures,
Terrorism financing involves other criminal activities like smuggling, narcotics, money laundering, etc., which complicates the terrorism funding process,
Involvement of multiple countries and high-profile individuals,
Counterfeiting and increased use of cash instead of digital/bank transfers do not leave any trail to identify the source of such funding

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About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is an ACAMS-certified AML consultant specialising in governance, risk, and compliance for regulated entities in the UAE. He brings over 28 years of experience, with 1,000+ hours of AML training and 200+ advisory engagements across DNFBPs, VASPs, and FIs. He supports businesses in aligning with AML/CFT requirements from the CBUAE, DFSA, MoET, MoJ, VARA, CMA, FSRA, and FATF. Known for translating complex regulations into audit-ready procedures, Pathik enables operational clarity and compliance readiness.

Reach Out to Pathik

Why gold is still the second-best mode for money launderers

Protect your business with reliable and effective AML strategies with AML UAE.

Why money launderers prefer using gold for money laundering

Other than using Gold for Money Laundering, the uses of gold are wide-ranging and well-documented. Since ancient times, gold has been used in various cultures as a medium for exchange or payment. Historically, governments minted coins out of a physical commodity such as Gold, Silver, Copper, and Bronze. In addition to its value as an investment, the physical appearance and properties of gold lend themselves to be used in jewelry and for various technological/manufacturing uses.

For example, in many developing countries, gold jewelry is not only perceived as an adornment but also as an effective savings vehicle. Even now, the Gold reserve of the country determines its creditworthiness. Gold stands tall as a status symbol and has a lot of cultural values too. Hence making Gold for Money Laundering as a perfect choice. It is also an instrument of investment.

As the financial regulators grow strong and robust, so do the Gold for Money Laundering methods. The inventions and discoveries on Gold for Money Laundering methods and trends never end. Precious metals like Gold, Platinum, and silver were not much on anyone’s radar. So when banks tightened the noose, the money launderers resorted to precious metals like gold and platinum, and real estate, etc., to use Gold for Money Laundering.

Using Gold for Money laundering is not a new trend. This comes from history. The BFSI industry is shutting its door one by one, so money launderers will find some new trends or retrofit the old trends. One does not need a tax identity to buy gold. This paves the way for using Gold for Money Laundering in all 3 layers of Money laundering. Gold seems to be lucrative for all sides of the transaction.

The regulatory authorities identified this trend, and it started monitoring the precious metals sector by bringing it under the preview of the AML law UAE by terming them as Designated Non-Financial Businesses and Professions (DNFBPs).

12 reasons why Gold for Money Laundering is used:

1. Contango:

The gold market is mostly in Contango. This means the Future price of gold is greater than the spot price. Even during the downtimes, gold has been the prime choice for commodity trading.

2. Liquidity:

The liquidity of gold is high when compared to other modes of investments like Bank FDs, Stocks & Mutual Funds. Unlike the other investment products, you don't need a bank account to buy or sell gold. Redemption from gold is instant & we can get ready-cash instantaneously.

3. Always OTC:

Gold can be sold anywhere Over the Counter & isn't controlled by any exchange. Unlike markets, you can even sell or buy on weekends too. It is easy to find buyers or sellers for gold rather than stock. Hence they use Gold for Money Laundering.

4. Tax:

There is no tax associated with gold when you go with an investment perspective. The sales tax or VAT is all that you pay.

5. Return on investment:

Unlike Stocks/Bonds, Gold will give reliable returns depending on the market rate.

6. Attractive for tax evaded money:

Money laundering need not necessarily be done for Terrorist financing or illicit proceeds. Sometimes people launder the money that was evaded from tax. This can be rental income, Benami transactions, money coming from Hawala transactions/remittances.

7. Efficient:

Gold can be used in all 3 layers of Money Laundering. Be it Placement or Layering, or Integration.

8. Global currency:

Gold is considered a global currency. One can buy or sell gold anywhere around the globe. There is no currency conversion or loss there. One can buy it in the eastern part of the world and sell it in the west without losing the face value.

9. Complex transactions:

The transactions involving the gold or jeweller are too complex to drill down. There might be multiple persons involved on both sides of the transaction.

10. Transformable:

Gold can be changed into many forms (Jewelry) and denominations (Coins / Bars) without losing the face value. This helps money launderers to use gold for Smurfing or Smuggling and many such methods.

11. Win-win game:

The jewellers need gold for trading and manufacturing purposes. So there's always a demand for it. It's a win-win situation for dealers in precious metals and stones, and the money launderer as both of them get to trade for their benefit.

12. Lack of regulatory reporting:

Unlike Banks / FIs, they can keep their transactions under their control. In many countries, there is no periodic submission of Cash transaction report or Suspicious Transaction report. Such a multi-faceted commodity somehow missed the attention of the regulators. Even if it comes to a need for supervision, there will be a question of 'Who will regulate the gold?' Will it be the commodity market? Or the Central Bank? Or the Government?

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FAQs on Gold for Money Laundering

From an AML perspective, precious metals are considered high-risk and associated with ML/FT typologies. Precious metals, owing to their size and value, offer a lucrative market to the money launderers – as they are easy to hide, transport, and hold as investments of their huge illegal funds in small volumes.

Gold carries high value compared to its volume and is considered one of the best mediums to store funds and transport them easily across borders. Further, gold can be easily traded anywhere and anytime, with the realization of the optimal value.

Gold is easy to store and has its value (almost the same) across the globe. Investment in gold offers a higher rate of return than bank rates, as the value of gold is subject to speculation based on the demand and supply of this metal. Moreover, it is considered one of the best hedging tools against inflation.

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The uses of gold are wide-ranging and well-documented. Since ancient times, gold has been used in various cultures as a medium for exchange or payment. Historically, governments minted coins out of a physical commodity such as Gold, Silver, Copper, and Bronze. In addition to its value as an investment, the physical appearance and properties of gold lend themselves to be used in jewelry and for various technological/manufacturing uses. For example, in many developing countries, gold jewelry is not only perceived as an adornment but also as an effective savings vehicle. Even now, the Gold reserve of the country determines its creditworthiness. Gold stands tall as a status symbol and has a lot of cultural values too. It is also an instrument of investment.

As the financial regulators grow strong and robust, so do the money laundering methods. The inventions and discoveries on money laundering methods and trends never end. Precious metals like Gold, Platinum, and silver were not much on anyone’s radar. So when banks tightened the noose, the money launderers resorted to precious metals like gold and platinum, and real estate, etc., to launder the money.

Using Gold for Money laundering is not a new trend. This comes from history. The BFSI industry is shutting its door one by one, so money launderers will find some new trends or retrofit the old trends. One does not need a tax identity to buy gold. This paves the way for money launderers to use the gold in all 3 layers of Money laundering. Gold seems to be lucrative for all sides of the transaction.

The regulatory authorities identified this trend, and it started monitoring the precious metals sector by bringing it under the preview of the AML law by terming them as Designated Non-Financial Businesses and Professions (DNFBPs).

12 reasons why gold is used for money laundering purposes:

1. Contango:

The gold market is mostly in Contango. This means the Future price of gold is greater than the spot price. Even during the downtimes, gold has been the prime choice for commodity trading.

2. Liquidity:

The liquidity of gold is high when compared to other modes of investments like Bank FDs, Stocks & Mutual Funds. Unlike the other investment products, you don't need a bank account to buy or sell gold. Redemption from gold is instant & we can get ready-cash instantaneously.

3. Always OTC:

Gold can be sold anywhere Over the Counter & isn't controlled by any exchange. Unlike markets, you can even sell or buy on weekends too. It is easy to find buyers or sellers for gold rather than stock.

4. Tax:

There is no tax associated with gold when you go with an investment perspective. The sales tax or VAT is all that you pay.

5. Return on Investment:

Unlike Stocks/Bonds, Gold will give reliable returns depending on the market rate.

6. Attractive for tax evaded money:

Money laundering need not necessarily be done for Terrorist financing or illicit proceeds. Sometimes people launder the money that was evaded from tax. This can be rental income, Benami transactions, money coming from Hawala transactions/remittances.

7. Efficient:

Gold can be used in all 3 layers of Money Laundering. Be it Placement or Layering, or Integration.

8. Global Currency:

Gold is considered a global currency. One can buy or sell gold anywhere around the globe. There is no currency conversion or loss there. One can buy it in the eastern part of the world and sell it in the west without losing the face value.

9. Complex transactions:

The transactions involving the gold or jeweller are too complex to drill down. There might be multiple persons involved on both sides of the transaction.

10. Transformable:

Gold can be changed into many forms (Jewelry) and denominations (Coins / Bars) without losing the face value. This helps money launderers to use gold for Smurfing or Smuggling and many such methods.

The jewellers need gold for trading and manufacturing purposes. So there's always a demand for it. It's a win-win situation for dealers in precious metals and stones, and the money launderer as both of them get to trade for their benefit.

11. Win-win game:

12. Lack of Regulatory Reporting:

Unlike Banks / FIs, they can keep their transactions under their control. In many countries, there is no periodic submission of Cash transaction report or Suspicious Transaction report. Such a multi-faceted commodity somehow missed the attention of the regulators. Even if it comes to a need for supervision, there will be a question of 'Who will regulate the gold?' Will it be the commodity market? Or the Central Bank? Or the Government?

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About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is an ACAMS-certified AML consultant specialising in governance, risk, and compliance for regulated entities in the UAE. He brings over 28 years of experience, with 1,000+ hours of AML training and 200+ advisory engagements across DNFBPs, VASPs, and FIs. He supports businesses in aligning with AML/CFT requirements from the CBUAE, DFSA, MoET, MoJ, VARA, CMA, FSRA, and FATF. Known for translating complex regulations into audit-ready procedures, Pathik enables operational clarity and compliance readiness.

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Importance of AML/CFT measures

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Importance of AML/CFT measures

As the world economy is growing and the entire globe is coming together as an integrated society, two vices are trying to take a toll on this society – Money Laundering and Terrorism. Money laundering has been a setback to the global financial system, pumping the illegally generated money into the economy, making it appear to have come from a legitimate source. Such funds generated from criminal activities are used again for multiplying the effect of illegal activities, such as terrorism, and impacting the security and integrity of the countries. The need of the hour is to be resilient against such evils of the society to make it a better place to live, and thus, various countries are coming up with the Importance of AML/CFT measures.

AML/CFT Measures undertaken by various countries

Due to sheer Importance of AML/CFT measures, Singapore Ministry of Law has developed a division under the name of “Anti Money Laundering / Countering Financing of Terrorism,” with whom Cash Transaction Report for suspicious transactions is furnished.

Similarly seeing the Importance of AML/CFT measures, the Australian Government has issued the Anti-Money Laundering and Counter-Terrorism Financing Act in the year 2006, which requires businesses to have a proper program in place to protect the company from financial crimes by timely identification/mitigation of these kinds of risks.

AML/CFT measures undertaken by UAE

The United Arab Emirates is also one such nation amongst the list who understands the Importance of AML/CFT measures, and is devoted to controlling the money laundering activities and financing of terrorism or other illegal activities from there. As a part of this strategy, the UAE government has introduced the regulation “Anti-money laundering and combating the financing of terrorism and illegal organization” and issued the guidelines to enforce the law better.

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Designated Non-Financial Businesses and Professions (DNFBPs)

If one deep dives into the lawmakers’ intent, one would understand that DNFBPs have been categorized looking at the risk involved in the business or the vulnerability of business towards the criminal activities or the one having access to the suspect’s accounts/ finance details.

If we take the example of auditor, the federal laws regulating the audit profession anyway imposes specific obligations on auditors regarding the reporting of crimes detected during auditing the accounts of clients, as they have access to the books and internal controls.

When it comes to protecting the financial sector from such criminal exploitation, certain businesses and professions could serve as first aid to curb these. With the same thought, under UAE guidelines, class of people/businesses have been defined as Designated Non-Financial Businesses and Professions (“DNFBPs”).

They have been obligated under the law to perform the Due Diligence of their customers and risk profiling. These DNFBPs have been made responsible for reporting the transactions to the authorities, where any suspicion involving money laundering or illegal activities such as financing terrorism, drug trafficking, etc., is doubted.

It is pertinent to know the group of businesses and professions that have been identified as DNFBPs. This list includes the following:

Let’s talk about precious metals and stones. The high intrinsic value of the product vis-a-viz the compact form of the same and the value appreciative nature of such items (gold, silver, diamonds, etc.) make it easy for the money launderers to exploit the sector and fund the criminal activities.

Looking at the nature of business/professions obligated with tasks under anti-money laundering and combating of financing of terrorist activity, it is apparent that the purpose is to trace back such money launderers and check the illegal or criminal activities. For this, it is important to have in place a dependable source of information about the business relationships and transactions. This is pertinent as the money launderers and the persons involved in criminal activities try to hide their identity and camouflage the proposed transactions.

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Responsibilities of DNFBPs

In the context of the responsibilities shouldered on the DNFBPs, it would be treated as an offense if they do not report the suspected transactions (where they doubt the involvement of money laundering or any other criminal act) or tip-off about the transactions reported with the supervisory authorities.

For this, the regulations have suggested specific ways and means to assist the DNFBPs to comply with the guidelines and discharge their obligations of reporting the suspicious transaction in a fair method, such as:

Developing and implementing the internal controls and policies/procedures (commensurate to the size and complexity of the business) that seems to be adequate to identify the doubtful transactions and prevention of the money laundering related activities;
Maintaining appropriate AML documentation such as “Know Your Customer” document, Customer Due Diligence practice, Risk profiling policy, etc.
Communicating such policies to the staff and imparting training thereupon;
Monitoring and adhering to the compliance requirements under the guidelines.

Thus, the law revolves around adequate measures for identifying customers and risk assessment to evaluate the cause for concern and report the same to apt Governmental authorities for necessary proceedings against the felonious person.

FAQs On Importance of AML/CFT measures

AML/CFT regulations are essential to fight financial crimes – money laundering and terrorism financing – to ensure the integrity of the society and stability of the country’s financial system and the whole world, mitigating the adverse effect of such crimes on society. Having AML/CFT measures as regulations would mandate the country’s ordinary people to join this fight.

AML/CFT requires the designated entities to implement countermeasures to fight against money laundering and terrorism financing, such as implementing the robust AML/CFT compliance framework, verifying a person’s identity before transacting, staying alert to any red flags, timely reporting of suspicious activities, etc.

Combatting terrorism financing is critical as it facilitates funds to the terrorist group for their operations, propaganda, etc., which ultimately impacts global peace and threatens society. It also results in the rise of other criminal activities like human trafficking, the use of narcotics, etc. Thus, CFT becomes pertinent to prevent incidences of terrorism.

Having robust AML guidelines in place would leverage a country in fighting financial crime with the united support of fellow citizens. Further, predefined guidelines will clearly lay down the government’s intention, ensuring that the prescribed best practices to fight money laundering are followed consistently across the nation.

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About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is an ACAMS-certified AML consultant specialising in governance, risk, and compliance for regulated entities in the UAE. He brings over 28 years of experience, with 1,000+ hours of AML training and 200+ advisory engagements across DNFBPs, VASPs, and FIs. He supports businesses in aligning with AML/CFT requirements from the CBUAE, DFSA, MoET, MoJ, VARA, CMA, FSRA, and FATF. Known for translating complex regulations into audit-ready procedures, Pathik enables operational clarity and compliance readiness.

Reach Out to Pathik

Know Your Business (KYB) – Key element of AML compliance

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What is Know Your Business (KYB)?

Know Your Business or KYB is the process of identifying the authenticity of a business with which the company deals. It might be suppliers, third-party consultants, intermediaries, or B2B clients or customers. KYC process would be relevant for any business organization directly dealing with the company.

Know Your Business is an essential step toward protecting an organization from financial crimes. Similar to the Know Your Customer (KYC) process, KYB is a practice followed by the companies to know with whom they are doing business. For every organization, it is very critical to be aware of their business partners. Their identities need to be verified and validated. The foundation of a business relationship with another business should be based on a proper KYB procedure.

It serves two purposes – it enables a business to know that the business it deals with is real and a lawful entity. It is not a shell company that is commonly used as a technique to launder money. Secondly, it lets the business know whether the persons controlling and running the business are involved in any criminal activities.

Therefore, KYB is a common practice in the B2B sector. Many companies rely on it to know if they are dealing with legitimate companies and lawful entities with a genuine legal structure.

Why is KYB needed?

Increased instances of money laundering have urged companies to adopt a strict approach towards safeguarding their company from being exposed to financial crimes, with procedures and methods to know the customers and business partners. Since the money laundering typologies are evolving and moving towards the use of network structure, the focus now should be on knowing the legal persons with whom the company is transacting by the “Know your Business” process.

Identifying the legal structure and its ownership is a top concern when dealing with other businesses, which is an essential process. By following the best KYB practices, the companies can identify the structure and people operational for conducting financial crime well in time and thus, reduce the possibility of financial crimes. Adequate and effective KYB procedures would keep the customers’ and stakeholders’ interest in the business intact and save from reputational and monetary damages.

Are KYC and KYB the same?

KYC and KYB are both verification processes targeted at different customer categories.

The subject of the verification differs in both cases – KYC is for verifying the identities of an individual customer or business partner (natural person). At the same time, KYB aims to assess businesses (legal persons) and those controlling, owning, and running these businesses.

However, both the processes have a common aim: to identify and verify the identity of the person with whom the company is transacting to deter criminals from misusing a business’s financial structure for money laundering and other financial crimes. Both methods help comply with the AML rules and regulations and safeguard an institution from reputational damage caused by being vulnerable to financial crimes.

The increasing importance of KYB

KYB is a new entrant into the framework of risk mitigation and prevention of financial crimes. KYC has been in place for a long time to help organizations protect themselves from financial crimes but was focused more on the customer segment. Now, realizing the growing importance of dealing with all the business associates and the spread of money laundering networks, one glaring gap has attracted everyone’s attention – verifying a business’ identity. Now with KYB, business relationships are monitored with the same effectiveness as the assessment of individuals as per the KYC process.

The US Financial Crimes Enforcement Network (FinCEN) introduced the KYB regulations to implement a standard procedure for verification of the legitimacy of a business. KYB is vital because criminals may use different ways and create various sources to launder money, such as shell companies, which exist only on paper and are used to transfer illicit money.

Moreover, criminals also use legitimate businesses to launder money and fund terrorism and other criminal activities. Considering this aspect, US FinCEN introduced the KYB regulations. When carrying out the Due Diligence process, KYB has also become a standardized procedure that businesses employ to verify the identity of the organization they work with.

Who should conduct KYB?

KYB is fast gaining acceptance, and businesses realize its importance. Companies should conduct KYB to identify and prevent financial crimes timely. They can comply with the regulations and protect their business from criminals who often target legitimate businesses for money laundering. It should be a common practice for banks, financial institutions, and companies to conduct KYB procedures.

Wholesalers, manufacturers, and suppliers who deal with other companies must know their counterpart’s identities.

KYB will let a business know that their associates are legitimate, and they will not have to face legal repercussions while doing business with them.

Steps to Conduct KYB

Verification of Business

KYB helps determine that the business is not a shell company and exists in reality. It also verifies that the activities and operations the business is conducting are lawful and the business per se is legitimate. It assures a business that the organization is genuine and is not involved in any unlawful activity.

Different documents should be sought and reviewed to establish the authenticity of a business, such as:

Registration documents and certificate of incorporation
Ownership structure
Constitution of the management or board of directors
Financial statement, if possible

Verification of business owners

After knowing that the business activities and operations are legitimate, the next step is to verify the authenticity of the business owners and the controlling parties. The verification will reveal if the owners and stakeholders are law-abiding citizens with no criminal records.

An essential aspect of the verification of business owners is also termed Ultimate Beneficial Owners (UBO) verification. The process consists of identifying UBOs and evaluating if they are genuine natural persons, not merely names existing on paper. Moreover, businesses should verify whether any of the UBOs are on sanction lists.

With such a thorough verification process, a company can make informed decisions about maintaining or continuing a business relationship with the entity.

Simplifying Know Your Business

KYB is an essential process that businesses should follow to know the authenticity of their associated companies. It may be suppliers, manufacturers, wholesalers, logistics partners, or intermediaries. The KYB process is laden with several challenges, which businesses can simplify with the help of experts. The significant challenges in the KYB process are:

Collation of different documents and information from various sources
Verifying the information collected from varied sources and screening them against different databases to establish the authenticity
Compilation of the KYB procedure – its proper documentation

Given the critical factors involved, it is recommended to rely on technology to implement the KYB procedure correctly to avoid the risk of non-compliance. Technology and advanced software would ensure accurate results and streamline the process to yield faster and more comprehensive outcomes. Automated verifications with the help of software are an ideal solution for any business that wants to diligently comply with the KYB regulations. Outsourcing may also help conduct the manual verification process seamlessly, without the need to invest in technology and own workforce.

Implement Know Your Business (KYB) processes with professional support

AML UAE is a team of expert advisors offering AML Compliance services on a wide range of services such as KYC & KYB, AML Policy, procedures and controls documentation, AML training, etc.

We help businesses in the B2B segment to understand the authenticity of the organizations they are doing business with. KYB will help companies to comply with the verification rules and regulations, safeguard the interest of their customers and stakeholders, and protect their reputation from being tarnished by criminals for their illicit gains.

By outsourcing the AML compliance services and KYB procedures, you can benefit from the expertise of compliance experts who will seamlessly handle KYC and KYB procedures.

Our experts use technology to deliver accurate results. Get a complete check on your customers and companies you are doing business with – be it KYC, KYB, business or customer Due Diligence, Enhanced Due Diligence, identification of PEP or UBO, and sanction screening results.

Get peace of mind with our professional identity verification, authentication, and validation approach. It will allow you to concentrate on business growth rather than getting caught up in the KYC and KYB regulations. Get in touch with our expert team and how they can help you with the KYC and KYB processes.

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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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Lack of regulations

A rise in the amount and volume of trade

Increase in free trade zones

Use of open account payment method

How is trade-based money laundering conducted?

Over-invoicing of goods

Under-invoicing of goods

Multi-invoicing

Changing the quantity of goods

Misrepresentation of goods

Non-documentary trade

What are the red flag indicators of trade-based money laundering?

What is the way out for businesses from trade-based money laundering?

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AML Business Risk Assessment Template for DNFBPs in UAE

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What activities or transactions are to be reported in HRC/HRCA?

How and to whom is HRC/HRCA to be filed?

What is the Financial Institution’s and DNFBP’s obligation post-filing HRC/HRCA?

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FAQs About High-Risk Country Reporting

Is HRC reporting obligation applicable to DNFBPs?

Is it possible to delegate HRC and HRCA reporting responsibilities to third parties?

As DNFBP, are we supposed to file HRC and HRCA with the goAML Portal of FIU UAE?

Concerning which countries are DNFBPs required to file HRC or HRCA?

Which countries are classified as high-risk jurisdictions subject to a “Call for Action” by FATF?

What is the threshold amount for reporting HRC and HRCA?

What are the types of transactions exempted from HRC reporting obligation?

How long should an entity put a transaction on hold after filing HRC/HRCA?

Are the domestic transactions not involving cross-border fund transfers to high-risk countries required to be reported?

Are the transactions related to the trading of stocks, forex, crypto assets, bonds, mutual funds, commodities, etc., to be reported in the HRC/HRCA?

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Why did UAE FIU perform the strategic analysis of DPMS?

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Conclusions of the UAE FIU’s strategic analysis of the DPMS sector

Trade-based money laundering

Money laundering through “foreign currency exchange”

Gold/cash smuggling

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How should DPMS assess the risks involved?

What is a risk-based approach cycle?

Business-based risk approach

1- Product and delivery channel

Gold

Diamonds

Behavior of counter parties in some transaction

Various other indicators of High Risk

2- Geography

Various other factors relevant to your company, if applicable

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Which all types of risks should be assessed in order to carry out risk profiling for DPMS?

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