, money laundering
At the International Compliance Association, we regularly find ourselves discussing money laundering and related issues. The reporting of suspicious transactions is a topic that often crops up and we’ve recently done some work around different reporting regimes around the world, how figures from different countries compare, whether national challenges are similar and if there are similarities in the entities submitting the highest number of reports. As a result, I took a closer look at the Netherlands.
Financial institutions play a key part in the fight against money laundering and terrorist financing and sharing information with law enforcement agencies is critical in combating these threats and wider criminal activity.
The duty to report when there is a suspicion that funds are the proceeds of criminal activity, or are related to terrorist financing, is enshrined in the Financial Action Task Force (FATF) Recommendations. Any country that is a member of FATF, or a FATF-style regional body, requires that financial institutions report such suspicions to their relevant financial intelligence unit (FIU).
Yet while the requirement to report seems clear cut, there is no ‘minimum amount’ required for reporting and attempted transactions must also be reported, so putting this into practice can present difficulties. Concrete proof is not required, but the decision on when to report and what constitutes a ‘suspicion’ are, by their nature, subjective.
Focus on numbers
When analysing the number of reports, it could be easy to infer that the more submitted, the more effective the jurisdiction’s regime. But if FIUs only received reports containing genuine, well-articulated suspicion, would the numbers go down? Would FIUs see a benefit if the reports were based on quality over quantity?
The fear of getting it wrong has led, in some jurisdictions, to ‘defensive’ reporting. Money laundering enforcement action around the world has seen financial institutions take a more conservative approach to requirements. As a result, some firms may err on the side of caution and report transactions, even when they do not have a reasonable ground for suspicion.
Focus on the Netherlands
In 2014, the latest year for which figures are available in the Netherlands, FIU-the Netherlands recorded a total of 277,532 reports under its unusual transaction reporting regime. It’s a substantial number, although the ‘unusual’ standard adopted in the Netherlands is rather broader than ‘suspicious’, with obligations on more than 20 reporting groups – such as accountants, banks, casinos and investment firms – to report transactions that display certain indicators.
These indicators include objective tests (e.g. whether a transaction is above a certain limit) and if a transaction involves one of these indicators, it must be reported. If there are no objective indicators displayed, a ‘subjective’ test may apply: does the business involved have reason to believe the transaction is related to money laundering or terrorism? In other words, the reporting firm must analyse the information available and make the decision to report for itself, opening up the potential to play it safe with ‘defensive’ reporting, as highlighted earlier, particularly as the FIU is proactive in cracking down on institutions that do not comply with the duty to report.
The objective tests are group-specific. For example, for tax advisors a transaction of €15,000 or more must be reported as unusual but for money transfers, reporting requirements kick in at a €2,000 threshold, which explains why these made up around 85% of reports received in 2014, maintaining a similar percentage as in 2012 and 2013.
Taking money transfers out of the equation, the next highest reporting bodies were other government agencies, such as Customs, with just over 18,000 reports and banks, although more than half of the 14,696 reports here related to money transfers.
Overall, the number of unusual transaction reports in the Netherlands has increased significantly in just a couple of years, with 2014’s total almost 70,000 up on 2012 and continuing an upward trend stretching back almost a decade – in 2006, the total was just over 170,000.
Drilling down deeper
Out of reports received, 29,382 – consolidated into 5,661 files of related transactions – were declared suspicious and passed to investigative and enforcement agencies. The vast majority of these transactions were completed, involving a total value of almost €2.4 billion, which was more than double the value of suspicious transactions in 2013.
While almost half of the €2.4 billion was made up of 33 transactions of €10 million or more, 90% of transactions categorised as suspicious involved no more than €10,000, including some of just tens of euros, though as FIU-the Netherlands points out, these can be valuable by providing proof of relationships within a network or about individuals and their whereabouts.
In just under 2,000 files (relating to FIU-the Netherlands’ own investigations or information requests from the National Public Prosecutor) crimes were identified. Of these, the largest type by some distance was money laundering (43%), with fraud (16%) a distance second. Drug-related crimes made up 10% of the total and terrorism 6%, with all other categories less than this.
An emerging trend
One trend identified in the 2014 annual report involved bitcoins, with FIU-the Netherlands saying it pays ‘a lot of attention to this new mode of payment’. A total of 56 investigation files were declared suspicious, resulting in new criminal inquiries, or details feeding into existing investigations or being passed to overseas FIUs.
The potential role for bitcoin in financial crime, as highlighted by the FIU, was illustrated in January 2016 case in which ten Dutch nationals were arrested in a series of co-ordinated raids across the country in connection with laundering up to €20 million, using bitcoins, for drug dealers trading on the ‘dark web’
Quality v quantity
In Europe alone, transaction reporting levels vary widely. For example, in the UK there were 381,882 suspicious activity reports between October 2014 and September 2015 but in France, a country with a similar-sized population to the UK, there were only 43,000 suspicious transaction reports in 2015.
Variations in reporting levels and national approaches reflect the fact that there is no ‘one size fits all’ when it comes to reporting and we go back to the point of quality v quantity. What is clearly crucial is that institutions with obligations to report ensure that they understand emerging threats, have implemented a robust internal reporting framework and ensure that employees are adequately trained in both recognising suspicious activity and knowing where to report the activity.
Individuals with the responsibility to report to FIUs must understand best practice and be able to clearly detail the suspicion in order to provide the FIU with the intelligence that is required to extract meaningful information.
Money laundering, terrorist financing and other illicit activities are clearly not going away: but having the right systems in place – for managing and mitigating risk, maintaining good governance and compliance systems and detecting and reporting financial crime – are essential to nipping them in the bud.
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