Proactive Approaches to Know Your Customer (KYC) and Customer Due Diligence (CDD) processes for Robust Banking Compliance

Practical, Grounded in reality. This whitepaper includes examples that are relatable to the Financial Crimes occurring throughout the world, primarily in Asia, the Middle East and Africa

By Muhamad Rizwan Khan-CFCS

CCO, Premier International Exchange, Dubai, UAE

January 22, 2018


Executive summary. 2

Importance of KYC and CDD.. 3

Challenges and Solutions. 4

Elements of stringent KYC, Risk Assessments of customers. 7

Triggers for changes in circumstances. 8

Identifying sanctions exposure through (KYC/CDD) 9

Transaction monitoring and aid from KYC.. 9

Bulk Cash imports from African Countries – challenges in CDD.. 10

Correspondent Banking AML/KYC challenges in $ Transactions. 11

Foreign Remittances Inward, Outward, CDD/EDD challenges. 11

Investigations and aid from KYC processes 13



Financial crimes come in many forms. Perpetrators often use financial institutions to conduct their criminal activities to make money or gain an economic advantage. Money laundering exists in all financial crimes and is a common element that all financial crimes share, irrespective of how they made their money.

Money laundering may be practiced in many different ways and stages. Non-governmental organizations, like the Financial Action Task Force (FATF), the Egmont Group, Interpol and others, play a vital role to combat financial crime, including Money Laundering.

Know your customer (KYC) and Customer Due Diligence (CDD is an effective way safeguard against financial crimes, as these processes can generate helpful leads to detect and prevent financial crime.  Money laundering is a big challenge and it is associated with a host of other crimes and predicate offenses, something adequate customer identification and due diligence can mitigate and lower the overall risk of non-compliance.

In this paper, I plan to address different compliance challenges in the areas KYC and CDD. The reason: the financial industry is a target for Money Launderers and many corrupt politicians and government officials are using financial institutions to launder their ill-gotten gains in their daily transactions.

These transactions may seem low risk at first glance, and be for things like payments for consultancy fees, commission charges, agent fees, freight charges, or even a property payment or even just building up their savings, etc. In my own job as a compliance officer, when I conducted KYC/CDD/EDD (Enhanced Due Diligence) of those transactions, I mostly find third-party connectivity and opaque beneficial ownership structures.

But as a compliance community – including compliance officers, regulators and investigators – our main objective is to make our industry safe and fully compliant, even risk free. But Money Launderers have smartly adopted new methods of cleansing dirty money for concealment and this paper shares practical ways in which this is happening and on-the-ground realities of the financial industry to respond.


A sound KYC/CDD program includes robust customer identification and account-opening procedures, which allow the institution to determine the true identity of each customer and to assess the risk or potential risk presented by the customer.

The foremost tool of anti- money laundering/combating terrorism financing policies (AML/CFT) and procedures is to know your customers before executing any transactions. It involves efforts to determine the true identity and beneficial ownership of accounts, source of funds, the nature of customer’s business and more.

Beyond matching names, a key aspect of KYC controls is to monitor transactions of a customer against their recorded profile, history of the customer transactions and so on.

Key elements of a ‘KYC’ & CDD program [2]

KYC includes “Enhanced Due Diligence” (EDD) for customers that pose a higher risk based on attributes determined at the opening of the account or the customer activities after the account is opened.

Common account opening procedures and best practices include:

  • Gathering and verifying customer identification materials through paper documents and/or electronic identity verification.
  • Verifying and authenticating the customer’s identity
  • Screening the customer against sanctions lists and politically exposed persons (PEP) lists,
  • Documenting the normal and expected activity of each customer, including occupation and business operations
  • Documenting the customer’s relationship with the institution or organization, including all lines of business within the organization and its subsidiaries that the customer will utilize

The Basel Committee Publication[3] states the CDD for Banks is another significant guideline. It provides guidance on the elements and implementation of CDD programs for banks and explains key elements of a “KYC” policy, including policies for accepting customers, identifying customers, ongoing monitoring of accounts and transactions and risk management.

It also discusses the key role of supervisors and managers in the KYC process and best practices for implementing KYC across national borders. The Basel Committee commented, that “Sound KYC procedures must be seen as a critical element in the effective management of banking risks.”

“The Basel Committee’s interest in sound KYC standards originates from its concerns for market integrity and has been heightened by the direct and indirect losses incurred by banks due to their lack of diligence in applying appropriate procedures. These losses could have been avoided and the damage to the banks’ reputation significantly diminished had the banks maintained effective KYC programs.”

This article will focus on this particular aspect of the CDD process because of its direct relevance to financial exclusion. Reference: (Money laundering control and suppression of financing of terrorism: Some thoughts on the impact of CDD measures on financial exclusion.)

The Forty Recommendations[4] of the Financial Action Task Force (FATF) are the leading international standards for such CDD measures in the AML/CFT context. In terms of Recommendations for CDD, measures should be undertaken when business relationships are established or relevant occasional transactions are undertaken:

  • Identifying the customer and verifying that customer’s identity using reliable, independent source documents
  • Identifying the beneficial owner, and taking reasonable measures to verify the identity the beneficial owner. For legal persons and arrangements this should include financial institutions taking reasonable measures to understand the ownership and control structure of the customer.
  • Obtaining information on the purpose and intended nature of the business relationship.
  • Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of the relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, including, where necessary, the source of funds.”
  • For higher risk customers, relationships and transactions, EDD is required, while reduced or simplified measures may suffice where there are lower risks. A financial institution should also consider filing a suspicious transaction report (STR) under the applicable AML/CFT laws in relation to a suspicious customer.
  •  In addition, these measures should also be undertaken when there is a suspicion of money laundering or terrorist financing.

The International Organization of Securities Commissions and the International Association of Insurance Supervisors have also adopted CDD principles that are based on the FATF Recommendations.

In addition to these regulatory standards, there are also industry initiatives. The Wolfsburg Group, for instance, drafted AML and CFT principles for private banks. The Wolfsburg Principles were published in October 2000 and were subsequently revised in 2002.


Many money launderers control exchange houses directly or indirectly and disguise themselves behind the wall of corporate culture. They finance the exchange companies to meet the capital adequacy requirements and continue their operations.

In such exchange houses, they employ qualified people and even pay more to compliance officers to construct a strong wall to ostensibly give the appearance of legitimacy and to better hide their wrongdoings, including by giving false reports to their regulators.

Regulator criteria for identification of beneficial owners in exchange houses should be very stringent and compliance officer selection interviews must be conducted by the regulator, with a thorough criminal background check of the compliance officer.

Regulators should also coordinate these background checks, if possible, with other investigative bodies and financial intelligence units (FIUs), to see if a compliance officer is already the subject of an ongoing case, as a potential lead they could be tied to a criminal entity.

A very common practice is when the financial institution receives an email from the regulators for audit verifications, and the operation responds by constructing fake documents, including fake invoices for outward remittances in U.S. dollars managed by the launderers.

In these situations, complicit compliance staffers have different options for invoice formats that can look legitimate to the auditor. Mostly, these would entail false EDD reports attached in customer KYC files. But one way to realize they are false: even the style of the report looks the same and in many cases even includes the same or similar wording, even though the customers are completely different.

To better catch a money laundering exchange operation unawares, random audits can be very successful. In some circumstances, examiners should also access the compliance officer’s computer systems, including risk assessments, transaction monitoring and SAR creation.

To determine the veracity of systems and data, a regulator should take some records into its custody and have examiners conduct their own KYC/CDD.

Fake Invoices may be tracked by using good investigative skills, including look for round figures, improper fonts, mismatched invoice dates and requisition submission dates and errors in describing items involved. Finding any of those issues can be lead to greater evidence the exchange is engaging in illicit operations.

Some exchange houses have even prepared fake ancillary reports on the examination night – in some cases even creating fake WorldCheck reports by editing the reports in PDF formats. Money exchangers can also cook the data of outward remittances that is uploaded through a regulatory portal to avoid detection.

To better uncover such tactics, regulators should check the uploaded data for their examination on different dates and always match such reports with other reports, including overall country-wide transactions, and transactions at similar-sized exchangers or banks to look for mismatches.

Typically, these launderers will be well connected people and most often work within specific communities. They facilitate each other in the wrong practices. As per research, there are many money services businesses (MSB) that maintain big capital with regulators, but they establish very weak internal compliance controls in their exchange houses.

But even with illicit exchanges creating documents to look more legitimate, it’s in those very same documents you can uncover when something is amiss. For example, in my own compliance duties, I make sure to monitor transactional and supporting documents very closely and in certain instances have found leads that made a transaction suspicious.

In one case, it involved a $100,000 transaction from the home base country to China, where following documents were attached:

  • Request form.
  • Company valid trade license.
  • Invoice.
  • World Check Report.
  • Sanctions Screening Report.
  • Meta search details of beneficial company.
  • Source of Funds: Bank check.

When proper KYC/CDD was conducted I came to this conclusion that:

  • Fake signature on the request form.
  • The trade license was valid, but the company doesn’t have a physical office.
  • Opaque ownership structure.
  • Invoice was fake. Improper fonts and basic requirements are missing. Payment terms are an advance payment because in this case you will not able to enquire bill of lading at the initial stage.
  • Payment terms are dubious.
  • Item prices are not matched with the current running prices.
  • Beneficiary company is only a shell company.
  • EDD report showed no movement of goods, only movement of funds.
  • Investigating the ordering customer and the ultimate ordering customer revealed it was ordered from a high risk jurisdiction without EDD.
  • Sanction screening was ok.
  • Meta search did not give proper record of beneficiary company.
  • Ordering customer gave a check of a bank to make the payment of this transaction but the customer was not able to justify source of funds. In fact, the money came to him by predicate offenses and through informal value transfer, mostly “Hawala.”

Auditors/reviewers must keep a close eye on supporting documents and establish their own KYC/CDD internal controls to mitigate the risk in such circumstances.

But to get a better idea of the underlying predicate crime, you need to understand what crimes are prevalent in a given jurisdiction.

Mostly, transaction orders from India, Pakistan, and Bangladesh are to evade the taxes through under invoicing and wide bulk cash smuggling. In these countries, corruption is very common and politically-exposed persons (PEPs) remit their money by utilizing these types of channels and transfer money into their shell companies or secret heavens.

In developing countries, PEP identification and non- face to face customers’ transactions require deep attention because there are many risky factors involved. The question is how can we find the connectivity among buyers and sellers for such transactions and where the middle agents would also involved.

Hence, compliance officers need to establish a proper chain of documents for better understanding to the parties and entities involved.

China is also a region where companies and individuals want to escape taxes and tight currency controls. As a result, there are lot of shell companies working in China and money is transferred to these accounts, in many cases, through US correspondents, to eliminate the risk of foreign correspondents.

Mostly foreign banks open their U.S. dollar accounts in China in different areas, and then they make sure to maintain good U.S. dollar balances in those accounts so they take orders from the Gulf exchange houses and make payments within China without moving the payment for U.S. clearing.

Some European banks also maintain U.S. dollar accounts in Chinese banks so they can make payments without the intervention of the United States in such circumstances. These accounts can be havens for money launderers with most of the orders taken from Gulf countries.

In cases where an MSB is knowingly complicit in laundering, KYC/CDD is nearly always ignored. As well, it’s very surprising that some general trading and remittance companies can open accounts in banks and on a daily basis send 30 to 40 remittances through a U.S. correspondent relationship with few limitations or questions.

That is further eye-opening because, currently, U.S. regulators have been more aggressively penalizing foreign banks in Europe and Asia that have not had adequate oversight of their correspondent portals.

But, unfortunately, part of the issue is that relationship managers (RM) are paid well by launderers for facilitating such activities.

As per my research, there are many good banks that yet ignore KYC/CDD and execute such transactions and become victims of money laundering, with the eventual result that, say, after one year such, the banks wind up closing the accounts due to regulatory pressure or through realizing their true risk.

This kind of illicit money laundering can get even more complicated when you get into investments, trading and the foreign exchange, or FOREX, markets, due to the convoluted trading schemes available in options, derivatives, omnibus and sub account relationships.

For example, some banks and Treasury departments offer package deals, such as if you invest $100,00 USD IN FOREX, they will offer you good exchange rate for U.S. dollars to Arab Emirates Dirhams (AED), and they allow unlimited electronic trading or TT trading, execution through US banks, where they would normally have tie ups.

In these situations, it’s vital compliance officers think like criminals. Launderers can have a seemingly unlimited amount of money to cleanse and it can be much easier for them to invest such amount in forex deals and execute dozens of electronic trades, and whether the investment goes up or down, go into a bank and make a withdrawal, because no invoice or source of funds is required.

In certain cases, a bank may even assume that the securities firm that has a relationship with the customer, or FOREX firm, has already done their due diligence – but that may end up being a dangerous assumption depending on the AML controls of that jurisdiction or controls at that particular trading firm.

Some banks, however, have become very risk averse and don’t open accounts easily for foreign or domestic MSBs. How these “de-risked” entities can get around this is by creating shell companies with no direct connection to MSB activities.

But unbeknownst to the bank holding the account, the MSB would still be executing transactions for customer and companies, without the financial institution being able to risk assess the operation or properly set and tune their transaction monitoring system.

Even if an MSB slips in the front door through subterfuge, banks should still conduct proper KYC/CDD procedures to attempt to better control the fallout of such failures. One key backstop: the transaction monitoring system (TMS) and suspicious activity reporting (SARs), also called STRs.

If a bank notices the transactions are going beyond the scope of the shell company, giving evidence of possible MSB activity, the institution should flag the account for follow up monitoring.

The bank should consider applying limit to transactions for the company, possibly to two or three a day and even lower reporting thresholds. Any transactions that don’t correspond to the company’s business should be watched closely and potentially reported to regulators as suspicious.

Also, in such cases, the bank should keep close tabs of the Treasury department involved and any relationship managers as they may be complicit insiders and engaged in a fraud that is lending to money laundering.


Strong compliance implementation is only possible when an organization’s KYC controls are good and customers are properly categorized according to their Geography, Products and Services. Identification of risk for financial services firms includes strategic Risk, Operational Risk, financial Risk, Legal, Regulatory and Reputational Risk.

Challenge & Mitigation

Money launderers often have dual nationalities and execute their transactions through the country which is not sanctioned. In investigations, I have seen instances where the person is originally based in Iran, Sudan etc. but also have a British nationality.

But in an EDD report, it concluded that the person was also an Iran national, and to avoid the sanctions screening, they showed their British nationality. Hence exchange houses/banks need to determine what the actual origin of the customer is.

Some companies don’t deal with sanctioned countries, but in some instances, they may have distributors or are dealing with a customer with affiliate offices in sanctioned countries like Iran, Sudan and Libya, etc.

In can recall one case in particular. There was a case when one remitter, XYZ general trading from Dubai, was sending U.S. dollars to India in a bank where a receiver company account was maintained.

During routine sanctions screening, this company did not have any potential matches and passed through several vendor-based systems, including WorldCheck, Lexis Nexis, Thomson Reuters and Dow Jones.

However, on conducting meta searches through Bing, Google and MSN, I got information that this company was working under a larger company that had different offices in sanctioned and high-risk countries, like Libya and Sudan. These searches helped in minimizing the risk.

Some customers are never able to provide credible sources of income and the data provided does not match with their apparent business. As a result, such customers must not be onboarded, their accounts dropped if they were given banking access or monitored more closely for aberrant activity.

There are two major big issues in KYC/CDD, what many consider the first phase of doing a customer Risk Assessment. They are:

  • Source of funds
  • Identification of Beneficial ownership

In the case of many shell companies, source of funds and beneficial ownership will be opaque and will require more due diligence. Many companies provide the list of their legal owners, but CDD of such companies sometimes show that they are only a registered owner with a very low-profile. This is referred to as a straw owner. Some companies pick laws firms as owners or even another shell company in an offshore secrecy haven that doesn’t share true ownership details.

In conversations, some regulators have also shared their experiences with us that they conducted an audit of a company and when they inquired about ownership of the account, it was a low-grade staff member, hence real ownership was not transparent.

But even getting the name of an owner is only one key piece of the puzzle. The other is finding out where the individual, or group, got his or her money and does it make sense.

To understand the risk of customer’s source of funds is a key risk factor. Banking history can be a big piece of information that either raises or lowers the customer’s risk. For instance, an account reference from a bank that is generally considered to have strong AML controls and excellent KYC/CDD practices may give some bit of comfort up to some certain extent when onboarding a customer.

But part and parcel of the customer risk matrix is not just who they are, how they got their money and where they are operating, but what kind of products and monetary instruments they are using. At the top of the risk lists for banks, regulators and law enforcement on that note: virtual currencies.

As a result, regulators around the globe have been stricter in approving products where there is a chance of anonymity, including digital products like Bitcoin, mobile money transfer and virtual currencies.

As I noted above, such products are easy targets for money launderers because of the actual or perceived anonymity. In many instances, criminal groups can buy Bitcoin with fake names, engage in transactions on the Dark Net, or even take payments from victims in Bitcoin – reaping further illicit profits.

Hacking and cybercrime threats have exploded in recent years and banks must ensure they are not unwittingly party to a transaction tied to a cyber gang. For instance, if a bank has a customer that is a virtual currency exchange, the bank likely doesn’t have insight into the customers of that exchange, making a risk assessment of that user population difficult.

So banks must be wary of high-risk products combining with online transactions where the customer’s true identity can’t be ascertained and related transactions difficult to trace.


Money launderers change their portfolios and the nature of their transactions. A major challenge is when a customer maintains different accounts in different banks and the person is conducting trade-based transactions and moving money from one account to another account, or suddenly the customer shifts their remittances from one country to another, specifically in a secrecy haven.

Sometimes, sudden changes in a customer’s profile or company partnership without justification or change in power of attorney, is a red flag for money laundering.

There are some companies that start operations with limited transactions, but as they establish some confidence with bank compliance teams, they start to increase transactional volumes and in few months volumes are so high, that they trigger alerts for a change in circumstances that must be further investigated to determine if a SAR or STR is warranted.

Many exchange houses make arrangements with U.S. banks to provide details of their customers to the bank to keep the account and also register their expected volumes.

But after a certain time period, suddenly volumes increase and after further investigations, the bank holding the account can find out exchange houses were “Nesting,” or taking orders from other exchange houses and executing transactions from the US correspondent bank account.

Some indications of suspicious sub-activity for a client could include:

  • If a grocery store deposits $10,000 a day in the bank but after a short time, volume increases suddenly and out of scope with the demographics of the business and region, that would warrant an alert for further investigation.
  • Diversification in business. For example, a company that was dealing in textile items suddenly starts a business for IT equipment. That would require more due diligence
  • Bank statement income increases. A change in a customer’s wealth status is a red flag or alert that requires further investigation.
  • A customer’s outgoing remittances start going to secrecy haven. Such a scenario should always trigger alerts for further review.
  • A customer account is long dormant and suddenly becomes active with high volumes of transactions should generate more scrutiny.
  • Customer transactions are circuitous or “U”-tripping. Meaning, money is going out from the account and then coming back to the same account is always a worry for compliance teams, meaning more investigative would should be done.

Identifying sanctions exposure through (KYC/CDD)

In the game of evading sanctions screening, sometimes launderers avoid detection when they misspell their name, company name, or use fake passport numbers to avoid screening.

In many cases, exchange houses/banks have automated, integrated systems of name checking, including against blacklisted jurisdictions, companies and individuals through European Union, United Kingdom, United Nations and United States lists, denoted by the letters: OFAC, EU, UN, HMRC and the like.

But in some cases, all specially designated national (SDN) transactions can pass through the remittance department without alerts, only later finally being detected by a regulatory audit.

Any exact match must be reported to the regulatory authorities and as well as notified to OFAC the blocked funds must be kept in an interest-bearing account. As well, the bank can’t tip off the customer and inform them the reasons behind the action as that itself could be considered an offense.

In one case, a general trading company came to a bank and they misspelled the company name in the application request. The bank missed the point and there were lapses in a second review of transaction activity. As a result, the transaction was executed and the correspondent bank for this transaction was a leading bank in the U.S.A.

The U.S. bank’s investigation team later detected the designated entity and froze the transaction, eventually asking for more details from the remitter bank. When the remitter bank asked for more details from the customer, the customer said it was not his direct transaction and that it was a third-party order.

Further investigation revealed that it was an Iranian who was blacklisted and sanctioned trying to send the money to India to pay for a shipment to Tehran, one of the many techniques money launderers and sanctions evaders adopt.

The U.S. Bank froze the funds and forwarded the case to regulatory and law enforcement investigators. Investigators. Later, the remitting bank lost its correspondent banking arrangement due to this negligence and weak KYC/CDD for sanctions screening.

This scenario is also not an isolated incident when you consider the creativity or rogue regimes like Iran in evading U.S. and other global sanctions initiatives.

As a compliance officer, you have to realize that a surprising number of orders that are executed through Pakistan, India and Bangladesh may have close links to Iran. In tandem, even some Euro accounts, when money is sent through the UAE, can have links with Iran.

I got to know that a lot of Iran nationals maintain accounts in Germany in the name of shell companies. To evade sanctions, when money reaches their account, the account of the shell company, they transfer it to secrecy haven and then transfer the money to their home country.

Sanctions screening tests and logs must be maintained with the company and these checks must be done to verify its effectiveness:

  • Sample instance checking through the screening process, with some sanctioned persons and entities that are named on the SDN list.
  • Potential Partial matches, repeated orders for potential matches, must be watched very closely and carefully.
  • Automated systems must be integrated with World Check and other vendor lists and logs must be maintained so they can be analyzed later as part of the AML internal audit, checking and verification to report the proper effectiveness of the overall compliance sanctions program.
  • Remittances and Currency exchanges must both have sanctions screening and company partners screening. As well, company name screening and beneficiary screening must be part of the overall sanctions screening program and requires KYC/CDD controls to mitigate the risk.
  • When there are updates to restricted countries’ lists, they must be updated immediately.


Regulators are strict on TMS and some regulators have observed certain financial institutions applying weak live scenarios rules, flawed authorization controls and software generating automated reports that have too many false positives – eating up scarce analyst resources.

The financial services industry has come under immense regulatory pressure to improve and expand monitoring and surveillance of transactions for the purposes of preventing and detecting money laundering & CTF activities.

As well, many examiners have concluded that the heart of a strong AML program is a a well-defined Transaction Monitoring System. Transaction monitoring in the simplest form means to collect and analyze the transactions processed by a customer.

This can be explained as:

  • To ensure that all transactions conducted through an exchange house are in compliance with the laws and regulations, both locally and internationally.
  • To assess the transactions of all customers, to see whether they are in line with their profiles or known and stated business activities.
  • To identify suspicious activity which might lead to money laundering that may ultimately result in the filing of an STR.
  • Analyzing transactions to update the original risk assessment, in essence strengthening and updating the foundational KYC & EDD procedures.


KYC/CDD in bulk cash imports is a big challenge, both a historical and current vulnerability. In some regions, it’s a new addition to the AML/KYC world. For example, African countries bring foreign currencies into Gulf countries (GCC) to convert the funds into local currency and buy U.S. dollar remittances for their customers.

But because the money is moved as cash and can be deposited or wired below identification thresholds, the situation can create challenges for compliance teams to identify the source of the money and identification of end user.

That is a particular challenge when criminals “smurf” money by using many low-level criminals, or even duped consumers, to move small amounts of money on the larger group’s behalf, making it difficult for any one bank, MSB or exchanger to realize one interlinked group is behind the laundering scheme.


One corridor of concern would include parcels to GCC from west Africa, mainly from Ghana – Accra, Niger and Nigeria.

When I traveled to Ghana in 2017 as a Compliance officer during my previous role, I observed that no exchange house had evidence of the foreign currencies in their possession. The volume of currency did not match their bank statements where they had claimed to have brought it from. Deposits and withdrawals happened fast without a healthy balance in the bank, which was not a good sign.

Since the Ghana government does allow transport or movement of $10,000 and above, criminal groups move the cash from Ghana to go through a Hawala. These parcels which come in to GCC are then converted into local currency and then changed into dollars, Euros, or British Pounds (GBP), with outward remittances sent through exchange houses.

Niger, Ghana and Nigerians often open their shell companies in GCC to send the remittances for their customers, many of which hail from China.


  • Predicate Offense
  • Money Laundering
  • Local Country law violation
  • Source of income is not justified
  • Export barriers ignored in these circumstances.
  • Informal value transfer like Hawala, Hundi, Malwadi not properly compliant with AML/KYC procedures.
  • Owners are opaque.
  • Use of shell companies.
  • PEP involvement.


  • KYC/CDD must be very robust to achieve the compliance standards.
  • Money laundering chances can be mitigated only through strict compliance controls.
  • Cover Payment EDD must be done through Meta searches and open source intelligence (OSINT).
  • Country legitimacy must be followed as per local law and regulations.
  • Source of funds must be verified through proper investigations.
  • Beneficial owners must not be opaque, they should be very transparent.
  • Verification of cover payments through valid invoices/ bills of lading and through movement of shipments.
  • EDD of shell companies must be done.
  • Regulator’s approval must be taken before establishing such arrangements with bulk cash import from high risk countries or where there is a higher risk of money laundering, fraud or corruption.
  • Robust KYC/CDD is required to determine the PEP as these individuals can be very influential in Africa. They can also have little regard for local laws because they are under the umbrella of another jurisdiction or higher-ranking PEP.
  • Movements of goods for cover payments must be verified through shipping cargo facilities.
  • Transshipment must be watched carefully.


U.S. dollar transactions are a very attractive source for Money Launderers. Typically, the tactic is to open an account with an exchange company or bank, take the facility of U.S. dollar remittances and misuse the facility by money laundering.

Reputable banks mostly become the victim of money laundering when they rely too much on their respondent bank customers, rather their own due diligence.

Many get tripped up with their regulators through weak AML controls, which, in a correspondent relationship, can end up being disastrous for bank arrangements. It creates regulatory risk and can even lead to some institutions doing less business with that bank or country.


Mostly, some local and foreign banks allow inwards and outward remittance facilities.

But in some cases, where the business line pressures the senior management to increase the liquidity through new business, some banks can ignore the required due diligence of inward remittances, with some institutions introducing new business lines they may not be familiar with, including currency buying and selling supported with exchange receipts.

Inwards facilities in local and foreign correspondent accounts are always risky because EDD is required to mitigate the risk of inwards. Many inwards from Europe, especially Switzerland, are risky because many launderers try to repatriate their wealth and then send U.S. dollars to Gulf banks, where they maintain their shell companies’ accounts.

There are agents in Switzerland who bring customers from that country to Gulf countries to open their accounts in GCC banks in the name of their newly established shell company or Free Trade Zone Company.

In such accounts, they transfer the U.S. dollars inwards from Switzerland, Panama, Cayman Island and other secrecy heavens.

These inwards are mostly in round figures like $100,000 or similar figures and then quickly abruptly this inward amount is wired to another account or sometimes used to buy different monetary instruments in the layering stage of the money laundering cycle.

Inwards come in for a short span to the shell company’s account without a legitimate link with the business.

Round Tripping is also a feature of such inwards transactions, when they come into a shell company account and then go back into the same account. Like “U”-tripping, the purpose of such activities is only to hide detection and avoid legal consequences.

Hawala payments get covered through these inwards and hawala payments coming into the banks through Europe and even in London, where AML compliance is considered very stringent. India, Pakistan, and Asia are some of the main culprits for Hawala payments and they also make the age-old system, based on familiar bonds and trust, accessible for other countries.

Some banks have good controls on such inwards and they ask the detail of the beneficiary. If the beneficiary is not able to justify such incoming transactions, then they return it to the remitter’s bank, giving the chance for the remitter bank to investigate why the transaction was rejected or if the parties are associated with a potential predicate offense or sanctioned party.

Bribes taken to Open an Account for Shell Companies

In some countries and financial institutions, relationship managers have been known to take a bribe from the money launderers to open accounts, allowing the parties to quickly start moving a high number of transactions or transactions in high dollar figures.

The eventual result: in some cases, after billions or even trillions of dollars in transactions from a seemingly well-reputed bank, the corrupt insiders are uncovered and the bank gets subject to regulatory and law enforcement penalties, in some cases in multiple jurisdictions, due to weak controls that allowed money laundering.

For example, in September, the New York Department of Financial Services (NYDFS) fined Habib Bank’s New York branch $225 million to due extensive and longstanding AML violations and ties to known terror groups. The Pakistan-based bank had faced a penalty of as high as $630 million, but that figure dropped during remediation negotiations.

Outward remittances Wire transfers are also targeted by the hackers

Cyber hackers are also targeting banks in an attempt to change wire details for their own gain, moving ostensibly legal cash for their own illicit gains.

There are cases where outward wire transactions are hacked and the details of the beneficiary changed. That results in the money being credited to the wrong account, a mistake that proper KYC/CDD might have uncovered before sending the files to the updated destination.

In those scenarios, Swift messages are not adequately scrutinized and bank statements and transactions not properly reconciled before the transaction was completed. Cybercrime detection using AML/KYC CDD is getting to be considered mandator with regulators in certain major economies – a trend called compliance convergence – and are educating financial institutions to better implement controls to stop cybercrimes.

Challenges in identification of beneficial owners, Money Launderers’ new techniques to counter AML/KYC controls

  • Include declaration form of beneficial owner as a part of initial KYC process, in corporate customer form.
  • While implementing a system, banks must ensure at least 25% ownership is identified as per the international standards.
  • The bank should also collect the organization chart as part of the business formation document on all entities in the hierarchy.
  • Shell companies (which can be established with various forms of ownership structure), especially in cases where there is foreign ownership that is spread across many jurisdictions.
  • Complex ownership and control structures involving many layers of shares registered in the name of other legal persons.
  • Bearer shares and bearer share warrants.
  • Unrestricted use of legal persons as directors.
  • Formal nominee shareholders and directors where the identity of the nominator is undisclosed
  • Informal nominee shareholders and directors, such as close associates and family
  • Trusts and other legal arrangements which enable a separation of legal ownership and beneficial ownership of assets
  • Intermediaries used in forming legal persons, including professional intermediaries.


This is powerful tool that is available to both private and public sector investigative teams through subpoenas, requests for production of information, and it compels the production of records through an agency summons, a grand jury subpoena, or a statute providing these powers.

It allows the investigator to follow money flows through bank accounts, brokerage companies, asset purchases, nominee owners, shell companies and private individuals. The discovery of one document may trigger a domino effect in which one piece of evidence flows directly to another lead and evidence.

The analysis of bank accounts, for instance, is a simple three-step process:

  • List, group and analyze all inflows (deposits) of money. Follow the domino chain backwards to determine the source of each deposit and continue tracing until the ultimate source of funds is identified.
  • List, group and analyze all outflows (checks or debits) of money from the account, Follow the chain of the outflows until their ultimate destination is determined. This may be the purchase of multiple assets after the money has passed through many accounts.
  • Identify the balances in the account at key moments, depending on the needs of the investigation. For example, if a source and application of funds analysis is being prepared, then the beginning and ending balances will be identified as part of this.

Conducting an Internet and Public Record Data Search

Not long ago, checking the real property ownership of an investigative subject used to take months. Real estate ownership in the US is registered at the county seat where the property is located, and each county would need to be visited and the property records manually searched through mountains of handwritten logs.

Today this same search, for the entire United States, can be conducted in minutes from the desktop computer of an investigative analyst, investigator, forensic accountant or other financial crime specialist.

In an interrogation, the investigator has a single objective: To learn if the suspect committed the crime or is responsible for another thing the investigator is seeking to prove or disprove. If not, who did it? The investigator is looking for confessions and admissions. He or she is asking simple and direct questions and expecting simple and direct answers. The questioning is accusatory in nature.


The role of the compliance function is to ensure that appropriate due diligence is undertaken both on clients through KYC assessments and on market counterparties. The KYC process will also involve the firm in ensuring they have a full understanding of the client’s risk appetite. KYC/CDD controls can mitigate the risk of becoming a financial victim or prevent additional regulatory scrutiny or potential penalties.

In this paper, I have tried to give as many real situations as I know of and share what is the on-the-ground reality for many compliance professionals. But these talented individuals must also employ a bit of creativity to be successful.

The KYC/CDD process can’t be a static list or a “one size fits all” document. As well, compliance officers should be hands on by observing changes happening in the customer’s account. Taken together, transaction activity and EDD are some of the most important tools to be used when behavioral changes are seen in a customer, allowing compliance analysts and bank supervisors to take action appropriately.

Improving information sharing can only improve the overall efficiency of the KYC/CDD review process.

Also, performing thorough EDD on high-risk customers and utilizing that information when performing other important analyses should improve the efficiency of an investigation and assist in making quicker decisions and determinations.

This will also improve reporting as higher quality information will be delivered to local and federal authorities, while eliminating unnecessary information.

KYC/CDD processes can be very effective tools for preventing money laundering and thwarting ever more creative launderers who are using new tactics to avoid tracking. In certain cases, bank transaction alerts and STRs are generated due to false positives due to lapses in adequate CDD. Meaning: only robust KYC/CDD can mitigate the risk of financial crimes.

Financial institutions can cover their operations by adopting stringent KYC/CDD procedures especially in certain higher risk banking sectors, including foreign currency exchanges, MSBs, correspondent banking and outward /inward remittances.

These areas must be scrutinized more aggressively at the beginning of the relationship through adequate risk assessments and through tighter transaction monitoring to manage preventive and detective controls.

[1] CFCS Certification examination study manual – Brian Kindle, Kenneth Barden, Brian Golden, Donald Semesky, Karen Van Ness

[2] CFCS Certification examination study manual – Brian Kindle, Kenneth Barden, Brian Golden, Donald Semesky, Karen Van Ness

[3] http://www.bis.org/index.htm

[4] http://www.fatf-gafi.org/

[5] Governing Principles of Anti Money Laundering & Combating Terrorism Financing Standards for Exchange Houses – FERG

[6] Global Financial Compliance – Chris Seldem BSc(hons) ACIBS, chartered MCSI