Is AML / CFT compliance absolutely necessary for companies?
Hello everyone! My name is Ildar Shakirov and I am a financial lawyer and I help my clients with legal issues arising while conducting business. You can read my full story here.
Today I want to go over very interesting and very important topic — AML / CFT compliance.
What does AML / CFT stand for?
“AML” stands for Anti-Money Laundering and “CFT” stands for Combating the Financing of Terrorism.
What does it all have to do with me doing my business?
If you are a business owner, sooner or later you are going to open a bank account in the name of your company in order to make financial transactions with your contractors.
We presume that your business starts growing, then the number and the sum of incoming transactions increases as well. And out of the blue your bank freezes your account with all your money without any prior notice.
Next thing, you pick up the phone, call your bank and kindly ask what is the reason your account is frozen. The manager on the other end of the line tells you that the latest transactions that went through your account qualify as “suspicious transactions” and you must provide documents explaining the business nature of such transactions.
Why do banks do this to their clients?
Every commercial bank has a license which is given by the central bank in each jurisdiction. If the central bank finds out that a bank has been knowingly or unknowingly facilitating money laundering or terrorism financing, it is going to revoke the license, which is very difficult and costly to get. Thus, every bank makes sure that transactions of their clients that are above a certain threshold have proper supporting documentation, proving that transactions do not facilitate money laundering or terrorism financing.
What can I as a business do to be ready for such situations?
Ideally, at first, you should identify each of your business partners and verify their identity. The type of information that would normally be needed to perform this function would be:
- name, legal form and proof of existence — verification could be obtained, for example, through a certificate of incorporation, a certificate of good standing, a partnership agreement, a deed of trust, or other documentation from a reliable independent source proving the name, form and current existence of the customer;
- the powers that regulate and bind the legal person or arrangement (e.g. the memorandum and articles of association of a company), as well as the names of the relevant persons having a senior management position in the legal person or arrangement (e.g. senior managing directors in a company, trustee(s) of a trust);
- the address of the registered office, and, if different, a principal place of business.
Secondly, you should request for the proof of sources of funds which is collection of documents that explains where the funds of your business partner originated. The type of information that would normally be needed depending on each source of fund is:
- nature of income, amount, date received and from who;
- bank statements;
- copy of latest audited financial statements ;
- copy of latest management accounts;
- tax declaration form;
- copy of contracts, etc.
Thirdly, it is recommended for each company to have its internal AML/CFT policy which outlines procedures and internal controls designed to ensure compliance with AML/CFT regulations.
Having followed all the above steps, your company will be hundred percent ready not to be bullied by the bank and will be able to provide any requested information on each “suspicious” transaction.
Is it absolutely necessary though?
If you are a small local retail business and your bank account has never been frozen, then, you probably might not even face problems with AML/CFT compliance. However, if you are a growing business, especially working in international market, you should closely consider implementing all the abovementioned steps within your company (group of companies) in order to prevent situations when your operations stop due to a frozen account.
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If you have any questions or comments, please, feel free to contact me at your convenience or leave your question here.
Kind regards,
Ildar Shakirov
Partner
The information in this article is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this article is not untrue or misleading, but the author does not represent that it is accurate or complete. The author does not accept any liability for any direct, indirect or consequential loss arising from any use of this presentation. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the article and are subject to change without notice.
