AML risk-based approach

Businesses trading in goods that carry out, or may carry out, cash transactions equivalent to EUR 5,000 or more are subject to anti-money laundering rules. This applies both to a single transaction and where several transactions are, or may reasonably be assumed to be, linked.

For the business, compliance is therefore not simply a matter of identifying the threshold and remaining below it for each individual transaction. Practical implementation requires the business to identify relevant transactions, understand how its activities could be exploited for money laundering or terrorist financing, and translate that assessment into customer due diligence, review, documentation and internal procedures.

The national risk assessment also provides practical guidance on the types of business arrangements that may require particular attention. Trading in cars, watches, jewellery, gold and other assets that retain their value illustrates how products, payment methods and customer behaviour need to be assessed together.

An AML risk-based approach needs to reflect the business

A central principle of anti-money laundering rules is the risk-based approach. This means that a business must design its measures according to the risks present in its own operations.

The general money laundering risk assessment therefore serves a practical function. It should help the business identify where its exposure lies and which controls are required.

For a business trading in goods, the analysis may, for example, cover:

• the types of goods sold and how easily they can be resold,
• the amounts normally involved,
• whether the same customer can make several purchases within a short period,
• whether a third party can pay for a purchase,
• how returns and refunds are processed,
• whether gift cards or other stores of value are used, and
• whether the business has international purchases, sales or payment flows.

When these issues are documented and linked to specific procedures, the money laundering risk assessment becomes a tool for the ongoing application of the rules.

The EUR 5,000 threshold needs to be applied in context

For businesses professionally trading in goods, cash transactions equivalent to EUR 5,000 are a central part of the scope of the anti-money laundering rules. However, the assessment must not be limited to each individual payment in isolation.

Several transactions that are, or may reasonably be assumed to be, linked must also be taken into account. The business therefore needs to be able to identify situations where several purchases are, in substance, a single purchase that has been divided into a number of smaller transactions.

One example is the purchase of several gift cards on different occasions, where each purchase falls below the threshold but the gift cards are later used together to purchase a more expensive item. This type of arrangement illustrates why the context of a transaction is as important as the individual amount.

A clear process should therefore specify when several payments must be assessed together, which information must be documented and when a transaction requires closer review.

Customer due diligence becomes part of the transaction process

Where the conditions under the anti-money laundering rules are met, the business needs to take the relevant customer due diligence measures. In practice, this means having an effective process for identifying the customer and, where required by the rules, understanding on whose behalf the customer is acting and how the business relationship or transaction is structured.

The extent of the measures required depends on the risk identified by the business. A purchase that is consistent with the business’s normal customer and transaction patterns may justify a different level of scrutiny from an arrangement involving several risk factors at the same time.

Such factors may, for example, include:

• large or unusual cash payments,
• payment by someone other than the purchaser,
• several purchases or payments made within a short period,
• a price or arrangement with no clear commercial explanation,
• rapid resale of assets that retain their value, or
• international transactions that are inconsistent with the customer’s or transaction’s normal profile.

With a clear decision-making structure, employees can more easily determine when standard customer due diligence is sufficient and when additional information needs to be obtained.

Car trading shows how several elements of the rules interact

Car trading is a clear example of a business in which several risk factors may arise simultaneously. A car may have a high resale value, the trade may be international, and the purchase may involve financing, a deposit or payment by a third party.

The risk assessment highlights, among other things, situations where car loans have been obtained on incorrect grounds, where payments are made by persons other than the borrower, and where vehicles are overvalued or undervalued in connection with trade between different countries.

For a car dealer, an AML risk-based approach may therefore require controls extending beyond verification of the customer’s identity. The business may also need to understand the payment flow, who is actually financing the purchase and whether the economic structure of the transaction appears reasonable.

A well-documented assessment makes it easier to demonstrate why a particular transaction was handled in a particular way.

Watches, gold and jewellery require focus on the function of the asset

Luxury watches, gold, jewellery and other assets that retain their value can function as stores of value. They can be purchased using proceeds of crime and subsequently resold, pledged as security or transferred out of the country.

The risk assessment should therefore not be based solely on the payment method. The liquidity of the asset and the customer’s behaviour may also be relevant.

A transaction may, for example, warrant closer scrutiny where a customer with limited known financial means repeatedly purchases very high-value goods, or where goods are rapidly purchased and resold without a clear commercial explanation.

Defining such indicators in internal procedures makes it easier to apply the rules consistently in day-to-day operations.

International trade may require scrutiny of the transaction’s economic logic

In import and export transactions, money laundering may take the form of trade-based money laundering, often referred to as Trade Based Money Laundering or TBML. Examples include over-invoicing and under-invoicing, over-delivery and under-delivery, and arrangements where the documentation records trade that has no, or only a partial, equivalent in actual deliveries of goods.

For a business engaged in international trade, practical implementation may therefore require comparison of a broader range of information. Contracts, invoices, payments, transport documents and information about the value of the goods can together provide a stronger basis for assessing whether the transaction has a reasonable commercial explanation.

Building an AML risk-based approach into daily processes

Effective AML compliance becomes easier when the requirements are integrated into the business’s existing sales and payment processes.

Practical control points include procedures for:

• identifying cash transactions that reach the relevant threshold,
• linking transactions that may be connected,
• determining when customer due diligence must be carried out,
• documenting relevant customer and transaction information,
• identifying third-party payments and unusual payment patterns,
• handling returns and refunds in a traceable manner,
• escalating unusual transactions for enhanced review, and
• handling suspicions and reporting in accordance with the anti-money laundering rules.

The procedures must also be adapted to the size and risk profile of the business. A small shop and a large international car dealer may therefore require different levels of control even where both are subject to the same fundamental rules.

The money laundering risk assessment should drive practical implementation

The practical value of a general money laundering risk assessment only arises when it influences how the business actually operates.

If the assessment shows, for example, that third-party payments, international transactions or repeated cash purchases present a higher risk, this needs to be reflected in procedures, control levels and decision-making processes.

The same applies when the business changes. New products, payment solutions, customer groups or geographical markets can alter the risk profile and justify an updated assessment.

With the right structure, it becomes easier to establish a clear chain from risk assessment to customer due diligence, review, decision-making and documentation. This supports both stronger compliance and more consistent decision-making within the business.

Morling Consulting’s AML lawyers and anti-money laundering experts help businesses translate regulatory requirements into risk assessments, procedures and practical control processes. This gives the business clearer decision-making processes and a stronger basis for ongoing implementation. Read more about our services here.