AML related risks and recommendations for payment agents & e-money distributors
The National Risk Assessment (NRA) of Luxembourg revealed Money Laundering (ML) related risks of the money services business sector (MVTS) which consists of the sub-sectors: payment institutions, e-money institutions, payment agents and e-money distributors in December 2020.
The results were clear: Not surprisingly, the inherent risks of the MVTS sector were high in Luxembourg, meaning that the nature of business of these entities are generally high. However, the NRA came also to the conclusion that there is a significant residual risk (medium risk) which stands for the risks after mitigating measures against ML took place.
Since the payment agents and e-money distributors are not overly familiar with the risks and regulations within the financial sector the CSSF decided to publish a guidance paper supporting these entities to comply with the present rules and laws in20th of December 2022. The paper makes a deep dive into the ML related risks including the specificities of the sector.
Firstly, the guidance provides an overview about the sector showing that the number of agents and e-money providers are limited compared to the rest of Europe. However, these entities had almost 290,000 active clients in 2021.
The CSSF highlighted the major ML/TF risks for the sector as follows:
- Agents are commonly used for fast transfers of money across customers and geographies while some of the customers are located in countries with less mature financial systems.
- Customers use agents to repatriate funds to their country of origin to support their families and friends. Some customers might also be frail and vulnerable persons and their personal affairs can be easily exploited by criminals who coerce them to act as "front men". Since these customers have difficulties in entering the traditional financial sector the usage of these agents get more attractive in order to process their transactions.
- Agents are particularly vulnerable against TF risks. Migrants remitting money to their home countries which have more issues with terrorist activities are specifically affected. It might be difficult for agents to detect people with a link to terrorist groups.
- Agents are commonly used for a one-time transactions due to the business model. Therefore, there is no assessment of the behavior of the customer and no possibility to analyze the transaction patterns.
Further ML/TF risks and a "red flag" list can be found in the guidance:
https://www.cssf.lu/wp-content/uploads/Payment-agents_AML_CTF_guidance.pdf
AML/CFT obligations
Understanding the risks is one part of the solution. The other part is to follow the rules and regulations to mitigate the risks. Following this, the CSSF provided specific and practical recommendations to combat ML/TF:
- Understanding the AML/CTF risks to which the entity is exposed due to the specific business activities. Therefore, profound due diligence measures and controls must be applied across the business relationships.
- Establishment of AML/CTF policies and procedures. Specific documentation will help the MVTS to secure the quality of actions that are conducted against ML/TF and supports the staff acquiring deep knowledge for this topic.
- Acceptance of a business relationship - or not. The decision of entering a business relationship assures that business partners which have substantial ML risks are not automatically accepted.
- Conducting a Know Your Customer (KYC) analysis. The KYC process will significantly help the entities to get a deep understanding of their business partners. This due diligence is seen as one of the most effective ways to combat ML/TF.
Further measures to mitigate the risks such as risk categorization and name screening are mentioned within the guidance as well.
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