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Mobile financial services (Product risk ( products that favour anonymity…
Mobile financial services
mobile phones to store value m-Money and m-Payments products not requiring a traditional bank account, which may be launched and managed by mobile network operators (MNOs).
Distribution channels
m-Money and m-Payments are generally provided through a network of agents who are subcontracted to the MNOs,
Money laundering and terrorist financing vulnerabilities
The nature of m-FS is such that they offer customers speed, portability and security.
the fact that m-FS leaves a digital record that can be monitored means that transactions are traceable so they pose a lower risk than when cash is used.
Geographic risk
Use of m-FS that provide the facility to move and store money has particularly grown in developing countriesThese developing jurisdictions are often recognised as having deficiencies in their AML controls. For example, there might be lack of effective laws and regulations imposing requirements on the financial sector to undertake customer due diligence (CDD). There may be a lack of resources provided to law enforcement
the distribution model employed by MNOs often relies on a geographically widespread network of agents who act as the direct point of contact with customers. This distance increases risks by reducing the ability of MNOs to identify customers and supervise systems and controls. Remote agents may fail to apply adequate customer identity checks, fail to follow set procedures or not receive adequate training.
Summary of geographic risk factors:
countries identified as having weak AML regimes
countries subject to sanctions or embargoes from the international community
countries identified as having significant levels of corruption or other
criminal activity such as human trafficking, smuggling and illegal drugs
countries identified as providing funding or support for terrorist activities.
Customer risk
m-FS typically operate a business model using high volumes of low-value transactions on behalf of customers with low incomes. As such, obtaining appropriate CDD and identifying documentation from poorer customers without access to traditional bank accounts can be difficult, particularly in the absence of a national identity document.
Risk factors also include customers with multiple m-Payments or m-Money accounts, in that low transaction limits could be bypassed by opening multiple accounts. In addition, customers who are politically exposed persons (PEPs) constitute a higher- risk profile,
higher risk include those who:
travel unexplained distances to conduct transactions
undertake higher-volume/value transactions with no apparent rationale or appropriate context
divide transactions into smaller amounts (which could indicate structured deposits or ‘smurfing’ of the proceeds of crime)
are suspected of acting on behalf of a third party but not disclosing that information
offer false identification documents or information.
Agent risk
The agent distribution network used by many MNOs relies on commission income.
The range of corporate entities and structures behind agents can also raise the risks. Agents may be sole-traders or part of a larger corporate group. Complicated structures will make it more difficult to identify the controlling parties and conduct appropriate due diligence before entering into a relationship with the agent.
The ultimate beneficial owner (UBO) of an agent will need to be identified by the service provider to ensure that the true nature of the relationship is understood. Failure to identify the UBO could result in the MNO breaching the international sanctions regime as well as increasing the regulatory, commercial and legal risks.
The majority of agents will come from a non-financial services background and may have had little exposure to compliance and AML issues. In many developing countries, agents may operate a very small commercial enterprise and have
little in the way of formal education. Cultural norms, such as close links through communities and kinship ties, may impede AML activity (e.g. an agent in a small village may be reluctant to submit a suspicious activity report (SAR) on a customer with whom he has a family or kinship tie).
Further areas of agent risk
agents conducting unusually high numbers of transactions (particularly with an agent in a geographic area of high risk linked to drugs, corruption or other criminal activity)
agents with high/disproportionate transaction values
agents with poor data/CDD collection standards
agents with a lack of infrastructure (e.g. electricity, photocopying)
agents with seasonal business fluctuations not consistent with other agents
agents who are established by criminals as a front for criminal activity or .recruited by criminals to facilitate the laundering of the proceeds of crime through m-FS accounts
agents who are not complying with internal policies and procedures related to AML
complex ownership models.
Product risk
products that favour anonymity for customers (i.e. when no or little CDD is undertaken at account opening or for the duration of the business relationship)
products that enable withdrawals by unregistered consumers
very high or unlimited transactions
a level of functionality beyond domestic money transfers
a facility for customers to open multiple accounts
a facility enabling the movement of funds across national boundaries
providing services in partnership between a MNO and a bank, resulting in
potential for ambiguity around the AML roles and responsibilities.
Typologies
Informal international agents
A customer can use m-FS and in particular m-Payments to send money abroad as an informal international money transmission agent, in contravention of local licensing or regulatory requirements in respect of money transfers. Thus an international money transfer has occurred which appears as a domestic money transfer on the MNO’s transaction system.
Example
Customer Mr X, based in the US, received cash payments from ex-pat Ugandan nationals to remit back home to relatives. Mr X was using his m-FS account with his roaming SIM card registered in Uganda to send money into Uganda. His m-FS account was being managed in Uganda by an accomplice making peer-to-peer (P2P) transactions to maintain the e-money float.
In this capacity Mr X was acting as an informal agent and taking a fee by way of commission. This arrangement was in contravention of the law in that Mr X had not obtained the appropriate licence to conduct money transfers on behalf of his customers.
Inform
Informal international agents red flags
One customer sending money to many others.
A sending customer receiving e-money in large amounts from another user
or by direct deposit from an agent.
A sending customer rarely or never making a withdrawal.
Activity performed mostly during the working day.
Customers located outside the country (i.e. not on the home network).