The 10 biggest risks identified in AML4 - and how to deal with them

As the 26th June deadline for implementing Directive (EU) 2015/849, more informally known as the 4th anti-money laundering directive or AML4, fast approaches, it's vital that compliance professionals become as familiar as possible with those aspects of the regulations that could most affect efforts to remain compliant.

As we mentioned in a recent blog post, What you need to know about AML4, this legislation places a heightened emphasis on risk. In fact, as we pointed out, the EU has even published an accompanying list of specific risk factors (as part of this Joint Consultation Paper), which businesses are urged to monitor and assess, as part of their business dealings and decision-making processes.

Whilst all of the items on the AML4 list deserve attention, here are our nominees for the top 10 risk factors that compliance teams have to watch out for and deal with:

1. PEPs as owners, beneficial owners or people of significant control

When contemplating getting involved with a company, one of AML4's risk guidelines warns that compliance professionals should be on the lookout for any possible associations that the proposed client or business partner might have with politically exposed persons (PEPs). In order to accurately assess and mitigate this risk factor, it's crucial for you to find out whether or not the company itself, or any of its beneficial owners, directors or people of significant control (PSCs), are PEPs.

Orbis – our flagship database which covers more than 200 million companies and powers solutions such as Compliance Catalyst – provides accurate and frequently updated data on PEPs. Using our company information solutions gives you a reliable, easy and quick means to identify and neutralise any possible connections to companies owned by or connected to individuals that might be compromised by their positions of or proximity to power.

2. Industries with excessive amounts of cash

According to AML4's guidance, companies should beware of getting involved with businesses and/or their beneficial owners that "have links to sectors that involve significant amounts of cash." This makes ample sense due to money launderers' propensity to work with or through firms whose operations involve a high turnover in hard (and hard-to-trace) currency. Cash transactions, after all, offer one of the simplest methods to wash dirty money, or transform illegally gotten gains into funds that look above-board or "clean".

3. Business connections to or dealings within certain high-risk sectors

As far as assessing and avoiding risk, the AML4 guidelines don't view all industries equally. Instead, they assign higher corruption risk levels to certain sectors. Because of this, the guidance counsels that you should take extra care when considering any type of business involvement with companies or beneficial owners that "have links to sectors that are associated with higher corruption risk, such as construction, pharmaceuticals and healthcare, arms trade and defence, extractive industries and public procurement."

By giving you the ability to easily view companies by industry, Orbis can help you make sure that you are well aware of the sectors in which any potential partners or customers operate.

4. Adverse media reports from credible news outlets

Negative stories in the news, especially those that, according to the AML4 guidance, include "allegations of criminality or terrorism (proven or not)" can be a flashing caution sign that a potential customer or business partner might pose a compliance risk. However, the EU guidelines recommend that you "determine the credibility of allegations on the basis of the quality and independence of the source data and the persistence of reporting of these allegations..."

Fortunately, Orbis monitors and offers you access to the most up-to-date and credible news media reports, compiled and curated by a carefully selected and reputable group of sources. Our news data provides you with the timely, high-quality information that you need in order to make the most well-informed and risk-adverse decisions possible.

5. History of one or more asset freezes

If any company (or its beneficial owner, or indeed anyone significantly associated with the company) has been "subject to an asset freeze due to criminal proceedings or allegations of terrorism or terrorist financing," this should ring a warning bell for compliance professionals. In fact, the AML4 guidance actually goes further in spelling out this risk factor, cautioning that, even if you merely have "reasonable grounds to suspect" that there has been an asset freeze in the past, this should be enough to serve as a sign of peril.

6. Complex or non-transparent ownership structures

Several of the risk factors listed by the EU as part of its AML4 advice touch upon the question of ownership, specifically getting to the bottom of the relevant details regarding just exactly who owns a company that you're considering allying yourself with.

The guidance recommends that you make sure that a company's "ownership and control structure [is] transparent and… make[s] sense." If not, it's time to investigate whether there's "an obvious commercial or lawful rationale" that explains the murky ownership situation. Failing that, there could be genuine cause for concern, from a compliance perspective.

Orbis's corporate ownership database can act as an excellent tool to help you wade through complicated structures and arrive at the clearest picture of who truly owns a firm you're researching. Featuring a virtually unrivalled collection of detailed company structures, including links between them, our corporate ownership database offers global coverage with over 30 million links.

7. Ownership in the form of a non-legal person

In keeping with the theme of ownership-related concerns, the AML4 list of risk factors includes this item, which encourages compliance professionals to find out whether or not a proposed client or partner is "a legal person or arrangement that could be used as an asset holding vehicle."

Any uncertainty about the nature of a firm that you're contemplating doing business with could, according to this AML4 guideline, pose a threat to your efforts to stay compliant. Discovering the true legal makeup of a company's owner(s) is also a function that the Orbis's ownership database can make much simpler, quicker and easier for you to perform successfully.

8. Questions about the identity of the owner or beneficial owner

Another risk factor associated with ownership issues, which the AML4 guidance lists, has to do with verifying beneficial owners' identities. If you have any doubts whatsoever regarding the true identity of a company or its beneficial owner(s), this guideline presses you to investigate further by enhancing your due diligence and heightening your scrutiny procedures. By doing this you'll be better equipped to allay your doubts and stay on the right side of current compliance legislation. Orbis's corporate ownership database could prove useful in cases requiring enhanced identity research.

9. Unknown or questionable source(s) of a beneficial owner's wealth

It is essential, in order to avoid risk, that compliance professionals find out about the existence of any unexplained wealth or funds possessed by a potential business partner or customer. If a company's (or its beneficial owner's) profits, holdings or income cannot be clearly traced back to a tangible, legitimate origin – such as the justifiable results of an occupation, investment capital or inheritance – then you might be in danger of becoming involved with a firm that represents a compliance risk.

10. Company operates in a country subject to sanctions

The final risk factor from the larger AML4 list, which we want to highlight here, relates to companies, beneficial owners or connected third parties who operate, wholly or in part, in countries or jurisdictions, "subject to financial sanctions, embargoes or measures that are related to terrorism, financing of terrorism or proliferation issued by, for example, the United Nations and the European Union."

In short, if a company that you're considering allying yourself with can be proven to have dealings (even through a third party) with a region under sanction, it's vital that you make yourself aware of that fact. Otherwise, you could find yourself in breach of sanctions regulations and facing substantial monetary fines.

Minimise risk by harnessing one of our compliance solutions

As mentioned above, Orbis and the compliance solutions that it powers offer you the ability to stay out in front of the growing number of risks associated with money laundering, terrorism financing and other compliance issues. By providing you with the crucial structured information that you need to identify, act on and react effectively to, you can head off any potential regulatory breaches. Orbis gives you a heightened sense of certainty that you can navigate successfully through the current treacherous compliance landscape.

The 10 biggest risks identifie...