Anti money laundering: is your business partner master data your ally?

Business relationships in many organizations are not limited to local and, especially, to personally known companies. Aside from this fact, the different countries in which customers and suppliers are located also entail various risks. Non-transparent ownership structures, supply chains that are not clearly traceable, but also country risks due to corruption and money laundering are just a few of the risks that companies are confronted with.

Another important dimension linked to these risks that need to be dealt with outside the company is the poor data quality on which decisions are made inside the company. In combination with external influences, decisions based on poor data quality can have far-reaching consequences, such as business relationships with sanctioned companies.

Red flag alert

This can lead to reputational damage, legal consequences for the company (up to company closures), but also to severe consequences for the company. From fines up to imprisonment of the responsible management, the cost of entering a business relationship without all due risk-based scrutiny is not worth it. At CDQ, we believe the better business partner data is, the easier it is to stay out of trouble (or jail).

The better business partner data, the better AML compliance

In an era defined by global connectivity and intricate financial networks, the fight against financial crime has taken on new dimensions. Anti-Money Laundering (AML) efforts are at the forefront of safeguarding the integrity of the financial system, and businesses must navigate a complex landscape to maintain compliance. But did you ever consider your customer and vendor master data a strategic component to be managed as part of your AML compliance?

Anti-Money Laundering requirements oblige you to

• identify and verify the identity of your customers and business partners
• assess the risk of money laundering and terrorist financing
• report suspicious transactions to the relevant authorities

High-quality business partner data can help you prevent fraud and other financial crimes.

By ensuring that you have accurate, up-to-date and complete information about your business partners, you can detect discrepancies or inconsistencies that may indicate sanctioned entities, political exposed persons, country risks or fraudulent activities. High quality data is essential for conducting effective due diligence and making informed decisions about whether you should or should not do business with a particular partner.

Let's explore how solid management of your customers and vendors can be the best ally for AML initiatives.

Trustworthy Business Relationships:

Accurate customer and vendor master data is the cornerstone of establishing trustworthy relationships within the business ecosystem. By maintaining up-to-date information about customers and vendors, your company can better evaluate the legitimacy of the entities you engage with. Comprehensive data profiles enable businesses to perform risk assessments and due diligence checks, identifying potential red flags before entering into partnerships or transactions.

Accurate Risk Assessment and Profiling:

AML regulations require that businesses conduct thorough risk assessments to identify and mitigate potential money laundering risks. Customer and vendor master data provide essential insights into the entities' historical behaviors, transaction patterns, and affiliations. This data allows companies to build accurate risk profiles, enabling to differentiate between genuine business operations and suspicious activities that might warrant further investigation.

Insightful Transaction Monitoring:

Effective AML compliance requires continuous monitoring of transactions to identify unusual or anomalous behavior. If you have accurate customer and vendor master data, you can establish baseline transaction patterns, making it easier to detect deviations that might indicate money laundering attempts. For example, sudden changes in transaction volumes, frequency, or geographic locations can trigger alerts for closer scrutiny.

Simplified Regulatory Reporting:

Regulatory bodies require businesses to provide detailed reports on their AML efforts. Accurate and complete customer and vendor master data streamlines the reporting process, and ensures that the right entities are included in reports. This accuracy minimizes the chances of overlooking entities that might pose AML risks, thereby enhancing overall compliance.

Holistic AML Strategy:

By integrating customer and vendor master data into your AML strategy, your company can create a more holistic approach to risk management. This allows you to identify potential connections and interactions between customers and vendors, and unveil hidden relationships that could raise suspicions of money laundering.

Let's see some examples of companies facing serious challenges in maintaining AML standards due to poor management of business partners.

Losing trust

A cornerstone of any business relationship is trust. Accurate and up-to-date customer and vendor master data lay the foundation for building and maintaining trust within the business ecosystem. Businesses rely on this data to verify the authenticity of their partners, ensuring that they are engaged in legitimate activities.

• Example: In 2018, the Danske Bank scandal came to light, where the bank's Estonian branch was involved in a massive money laundering scheme. The bank's failure to properly verify the identities of its customers and perform due diligence on its non-resident customers led to billions of euros being laundered through its accounts.

Wrong risk profile

Effective AML strategies demand robust risk assessments and profiling of business partners. Comprehensive customer and vendor master data provide invaluable insights into historical behaviors, transaction patterns, and affiliations. This data enables businesses to create accurate risk profiles, differentiating between genuine business operations and potential money laundering risks.

• Example: The Panama Papers leak in 2016 revealed how Mossack Fonseca, a Panamanian law firm, helped clients establish offshore shell companies to facilitate money laundering and tax evasion. Inadequate due diligence and poor understanding of customers' risk profiles contributed to this wide-scale financial misconduct.

Unnoticed transaction glitches

Accurate master data is instrumental in transaction monitoring and anomaly detection. Understanding typical transaction behavior is crucial for identifying suspicious activities.

• Example: HSBC, one of the world's largest banks, was fined $1.9 billion in 2012 for facilitating money laundering and terrorist financing through its lax AML controls. The bank's failure to monitor transactions effectively, coupled with inadequate customer data, allowed suspicious activities to go unnoticed.

Poor reporting

Regulatory bodies demand comprehensive AML reports, which rely on accurate customer and vendor master data.

• Example: In 2019, Swedbank faced allegations of facilitating money laundering through its Baltic branches. The bank's failure to report suspicious transactions and maintain proper master data contributed to its regulatory compliance issues.

Regulatory Pandora’s box

Integrating customer and vendor master data allows businesses to uncover hidden connections between seemingly unrelated entities.

• Example: The "Troika Laundromat" scandal involved a network of offshore companies used to launder over $4.8 billion. Inadequate data management prevented financial institutions from detecting the connections between seemingly independent transactions, allowing the money laundering operation to persist.

The challenge…

Anti money laundering battle requires a multifaceted approach that hinges on accurate and comprehensive master data management. If you underestimate the strategic importance of customer and vendor data, you risk reputational damage, financial penalties, and regulatory intervention.

In an interconnected world, robust master data management is not just a compliance necessity, but a strategic imperative for safeguarding the integrity of the global financial system.

… and the solution

CDQ Compliance Screening provides the ability to screen business partners to identify potential sanctioned entities and take the necessary subsequent actions. In order to obtain a good and valid screening result, CDQ provides more than 2,500 data quality rules and the possibility to enrich and validate master data with more than 70 external data sources, governmental as well as commercial, in order to fulfill the due diligence requirements set by the Money Laundering Act for companies.

Visit CDQ Compliance Screening