Mitigating ML/TF risks associated with high-net-worth individuals

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Mitigating ML/TF risks associated with high-net-worth individuals

The ML/TF risks associated with high-net-worth individuals are high. Their relation to money laundering (ML) and terrorist financing (TF) is two-fold:

  • Fraudsters and criminals target them because of the presence of many opportunities to commit fraud.
  • High-net-worth individuals can themselves engage in illicit business activities; their wealth might be from illicit sources or dirty money.

If you have a high-net-worth individual as a customer, you are prone to money laundering in both cases. So, you must have appropriate AML measures to deal with the risks of high-net-worth individuals. But first, let’s understand what a high-net-worth individual is in AML and the ML/TF risks posed by them.

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Risks associated with high-net-worth individuals (HNIs)

Generally, the definition of HNIs varies from industry to industry and within the same industry. However, an individual with a net worth between US$1 and US$5 million is considered a high-net-worth individual. Net worth means a person’s liquid financial assets. If the individual has a net worth of US$5-30 million, they are very high-net-worth individuals (VHNIs). Then there are ultra high-net-worth individuals (UHNIs) with a net worth exceeding US$30 million.

High-net-worth individuals are more vulnerable to money laundering and other financial crimes. The potential threats include:

  • With the digitalisation of transactions, high-net-worth individuals’ transactions are at a higher risk. Cybercriminals access these transactions to change the destination of funds transfers.
  • HNIs might be keeping funds in offshore bank accounts to enjoy the tax savings in that jurisdiction. Also, it helps them transfer funds anonymously or protect illicitly gained assets.
  • As they are HNIs, they have connections with PEPs, other HNIs, and other influential persons. Such connections might force them to take part in or assist with fraudulent transactions or money laundering activities.

In all these cases, you are at risk as a product or service provider to such HNI. So, when you onboard a high-net-worth individual, consider the risks they pose to your business. Your exposure to such risks will increase your vulnerability to money laundering and terrorist financing threats.

Considering the risks, if you do not onboard such HNIs, you will lose big sales and revenues. It will also affect your credibility in the market. It will not have much impact in the short term, but the long-term effects are unavoidable. So, you need to be cautious while dealing with the AML risks of high-net-worth individuals.

Best practices to deal with ML/TF risks posed by high-net-worth individuals

You must implement the following  best practices and AML measures to deal with the risks of high-net-worth individuals:

Maintain a list of ML/TF red flags

The first action you can take is to be aware of the fact that high-net-worth individuals are risky for your business. It does not mean they will indeed cause money laundering or terrorist financing. However, the ML/TF risks are high. So, you must know the potential red flags or warning signs of HNIs’ money laundering activities. Some of these red flags are:

  • Not cooperating in the KYC and due diligence process
  • Providing wrong documents or missing out some information in the KYC process
  • Engaging in financial transfers with unusual patterns, different from their usual transactions
  • Unexplained or erratic customer behaviour while conducting financial transactions
  • Using unrelated or unknown third parties in a transaction
  • Financial activities that don’t align with the HNI’s business
  • Sudden or unexplained large transactions to or from high-risk jurisdictions
  • Providing incorrect information on identity, business, or transactions
  • Too many transactions of buying and selling properties despite financial losses
  • Linkages to business in sectors like gambling, weapons of mass destruction, or arms trade
  • Frequent cross-border transactions in jurisdictions with no relation to HNIs’ business interests
  • A high volume of cash transactions

If you are aware of these, you can take the right action. You can investigate the transaction further to confirm the particulars. If found suspicious, you can report it to the UAE FIU.

Perform Enhanced Due Diligence

HNIs are high-risk customers. Since you know this, you must be ready to implement strict KYC and due diligence on your HNI customers. So, deep research should be conducted on these clients.

Conducting in-depth research on HNI customers’ identities is essential. You must know the following details:

  • Full names with family details
  • All the previous residential addresses
  • Past and present passports held
  • Nationalities and citizenships of different countries
  • Professional background
  • Shareholdings in different entities
  • Utility bills

Focus on finding every possible information on their wealth, funds, assets, and structuring. So, you must collect and verify the following information on HNIs:

  • Origin and legitimacy of their funds
  • Overall wealth (holdings and assets) and their sources
  • Types of assets like properties, salaries, investments, inheritances, dividends, bonuses, and shareholdings
  • Financial statements
  • Identifying their structures’ complexity
  • Presence in opaque and risky jurisdictions

All these data points help you spot suspicious activities or transactions.

Perform name screening

HNIs are hi-fi individuals known to the public. But you must be careful before dealing with them. In addition to due diligence, try every possible method to learn more about them. Conduct a deeper examination of their identities and financial behaviour. Screen them against lists of:

  • National, regional, and international sanctions released by authorities
  • Terrorists or terrorist-funding organisations
  • Politically Exposed Persons (PEPs)
  • High-profile people with links to financial crimes like money laundering, corruption, bribery, etc.

It’s not enough to check only if HNIs’ names are on the list. HNIs might have linkages to people featured in these lists. So, you must also verify those points. Use databases and intelligence tools for any linkages to illicit activities.

Another check that is essential for you is adverse media sources. Check if their names appear in any adverse news related to crimes. Any negative mention of their names in media must be investigated in depth. The issue is that some criminals own such media channels or pay them good money to hide their negative news. They plant more positive news about themselves to paint an optimistic picture. That is why you must have experts working on investigating HNIs.

Examine tax compliance status

Checking high-net-worth individuals’ sources of wealth, linkages to financial crimes, and assets is crucial. But another critical factor that is generally ignored is their tax compliance. You must know about their tax compliance status to decide on their connections with illicit activities.

Generally, criminals use many offshore bank accounts to transfer money from one tax jurisdiction to another. Also, they engage in multiple global money transfers, which is, again, a suspicious activity. They also use structures like trusts, shell companies, and charities to invest, move, and control assets.

Collect necessary data on their tax compliance to understand if they are compliant. Identify any tax evasive strategies they have used in their past or current operating years. Check if they have used shell structures or other opportunities to avoid paying taxes or mitigate tax liabilities illegally.

Ongoing monitoring

You have already conducted KYC and due diligence. However, there is a chance that you will miss some data points or fail to focus on a document. So, ongoing monitoring is essential to prevent any money laundering risks to your business from high-net-worth individuals.

Constant monitoring helps to factor in:

  • Changes in the data of HNIs
  • Emerging risks of money laundering and terrorism financing
  • Advanced technologies and techniques for collecting information
  • Variations in HNIs’ risk profiles

If you have HNIs as customers, conduct real-time monitoring of their transactions. You must look for some unusual patterns or suspicious activities. Set a threshold or limit to transactions and investigate them if you observe outliers. Manual reviews of such suspicious transactions enable you to draw more conclusions.

Scrutinise crypto investment or payment

Are your high-net-worth customers dealing in cryptocurrencies?

Do they make payments using cryptocurrencies?

If your answer is yes to any of these, you must be extra careful. Cryptocurrencies are more vulnerable to money laundering. Also, cryptocurrency transactions have a higher degree of confidentiality and privacy. This fact makes it easier to conceal the illegitimacy of a transaction.

That is why if your HNI customer uses cryptocurrencies, conduct more investigations. Check if they are trading crypto assets or have invested in such assets. All these data points help you confirm your high-net-worth customers’ legitimacy.

Partner with an expert AML consultant

All of the above measures are necessary to confirm the identities of your HNI customers. You need to know them in and out to check for any connections with financial crimes. Collecting and verifying all these data points is an arduous task. So, hiring a specialist AML consultant who performs identity verification is a better option.

Search for a services provider with expertise in KYC and customer due diligence. One, who can collect all information on high-net-worth individuals and verify with respective documents. The vendor must have industry connections, access to databases, and skilful professionals to conduct these exercises. They will have complete knowledge of UAE’s AML regulations to ensure compliance. Such expertise is essential to ensure data accuracy, relevance, and completeness for high-net-worth customers.

So, as a regulated entity in UAE with high-net-worth individuals as customers, you must apply these seven AML measures to avoid falling prey to money laundering risks. For the last one, you have the best option in AMLUAE as your expert AML compliance partner.

AMLUAE – your partner for professional AML consulting services

AMLUAE is an expert provider of AML compliance consulting services in the UAE. You can always ask our experts for help in AML compliance. With immense knowledge and extensive experience in AML compliance, our professionals can help you through any AML procedure.

We help you with KYC, due diligence, and screening of all types of customers. If the customers are high-net-worth individuals or high-risk, you’ll have more digging to do. Our AML experts manage all data collection and verification with a unique investigative approach. We help you build customers’ risk profiles so that you know whom to onboard and, thus, take a risk-based approach to fight ML/TF.

Besides KYC and due diligence, our expertise lies in:

  • Monitoring transactions of your customers
  • Conducting risk assessments and building customers’ risk profiles
  • Creating and implementing customised AML policies and procedures
  • Selecting proper AML software for your compliance needs
  • Hiring and appointing an expert AML compliance office
  • Forming a capable and skilful AML team for your business

So, for all these needs, you have one contact to call – AMLUAE.

Mitigate the AML risks of high-net-worth individuals,

With AMLUAE’s expert AML compliance strategies.

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About the Author

Pathik Shah

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

Pathik is a Chartered Accountant with more than 25 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing.

He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework.