Cash Intensive Businesses – Managing Their Money Laundering Risks

October 9, 2020

While most Cash Intensive Businesses (CIBs) are conducting legitimate business, some aspects of these businesses may be susceptible to money laundering or terrorist financing.

According to the Report from the Commission to the European Parliament and to the Council on the assessment of the risks of money laundering and terrorist financing affecting the internal market and relating to cross-border situations, the risk scenarios associated with cash intensive businesses allow perpetrators to:

  • Launder large amounts of cash, which are proceeds of criminal activity, by claiming that the funds originate from economic activities;
  • Launder amounts of cash, which are proceeds of criminal activity, by justifying its origin based on fictitious economic activities (both for goods and services)
  • Finance, through often small amounts of cash, terrorist activities without any traceability

It is for these reasons that CIBs are considered high-risk businesses and appropriate due diligence and ongoing monitoring.

 

Identifying CIBs at Account Opening

According to the Federal Financial Institutions Examination Council (FFIEC), “banks should establish policies, procedures, and processes to identify higher-risk relationships; assess AML risks; complete due diligence at account opening and periodically throughout the relationship; and include such relationships in appropriate monitoring for unusual or suspicious activity.

At the time of account opening, the bank should have an understanding of the customer’s business operations; the intended use of the account; including anticipated transaction volume, products, and services used; and the geographic locations involved in the relationship.”

Questions to ask may include:

  • Purpose of the account.
  • Volume, frequency, and nature of currency transactions.
  • Customer history (e.g., length of relationship, CTR filings,300 and SAR filings).
  • Primary business activity, products, and services offered.
  • Business or business structure.
  • Geographic locations and jurisdictions of operations.
  • Availability of information and cooperation of the business in providing information.

According to Amanda DuPont, Public Records Product Specialist at Thomson Reuters, you’ll also want to determine the legitimacy of the business, including key factors such as:

  • Does it have corporate verification in a secretary of state filing database?
  • Can you verify the business in a third-party business database including the NAICs and SIC codes tied to what the business says its stated purpose is?
  • Does the company have the underlying business license such as the car dealer license, marijuana-related business license, money service business license and is that current?
  • Has the website been validated?
  • What type of address is being provided?
  • Can you verify the legitimacy of the business address?
  • Are PO boxes being used?

Dupont also says you’ll want to understand the beneficial owners of the company and see what businesses they are involved with and do a thorough KYC analysis. Criminal and fraud activity can sometimes be detected at the person level in public records. For example:

  • Does the principal have multiple businesses at the same address as the CIB?
  • Does the principal have multiple businesses in general?
  • Do any red-flags tied to criminal activity tie to the principal or those in close relationship to the principal (is your principal possibly just a clean-looking mule)?
  • Is the business or anyone tied to the business on a government debarred or watch/sanction list?
  • Do the principal’s assets revealed in public records (houses, vehicles, etc) reveal any high net worth or all cash purchases?
 

Monitoring Existing Accounts

Ongoing monitoring of transactions is an important aspect of an effective AML program.

According Dupont, from a transactional review process, confirm the business activity in the CIB account is consistent with the stated business activity established at account opening.

Look for trends in the nature, size, or scope of the transactions, paying particular attention to currency transactions. Finally, determine whether ongoing monitoring is sufficient to identify potentially suspicious activity in the account.

Key questions to determine if an existing account may belong to a cash-intensive business might include the following:

  • Does 50% of the income or more from this business derive from cash?
  • Which accounts have a high percentage of cash coming in versus all other deposits?
  • Which accounts generate large cash activity over $2,500 for CTRs-large deposits, monetary instruments, etc.
  • Which customers deposit or withdraw $5,000 or more in currency in one business day on at least ten business days during a 12-month period?

Once you have identified an account is or may now belong to a cash-intensive business, consider updating and verifying due diligence information and ensure appropriate monitoring of transactions is in place.

 

Potential CIB Red Flags

In its Guide to Cash-Intensive Activities, the Financial Intelligence Unit of Andorra (UIFAND) lists the following as red flags for different reporting entities:

Financial institutions

  • Businesses and/or customers that operate with amounts, denominations and types of currencies that do not fit their profile or their usual commercial activity;
  • Lack of correlation between the volumes of cash deposited and the volumes of money entering by other payment methods, without historical or commercial justification of such circumstance;
  • Acyclic cash payment trends relative to periods of greater commercial affluence;
  • Deposits of cheques or other monetary instruments from other businesses of similar nature or which are located nearby, without justification;
  • Use of cash machines for the deposit of large amounts of cash in a single deposit or in the sum total of deposits that are made, avoiding direct contact with the personnel of the bank entity;
  • Cash payments and/or cash investments in financial products;
  • Cash deposits in round amounts in accounts linked to businesses;
  • Businesses that register a significantly greater use of cash in comparison to other businesses of similar nature, location and characteristics;
  • The existence of non-resident beneficial owners in this type of activity should increase the risk assigned to the customer.

Insurance companies and insurance brokers operating in the field of life insurance

  • Request, by a cash-intensive business, of products and/or services associated with life insurance that allow cash subscriptions, payments and/or withdrawals;
  • Contracting of products for large amounts, which do not fit the risk profile or the knowledge possessed of the customers;
  • Payments made by third parties which do not appear to have a relation with the insurance policy holder;
  • Payments for which there appears to be some difficulty in determining the origin of the funds;
  • Partial and/or total reimbursements in cash, made repeatedly and excessively.

External accountants, tax consultants and auditors

  • Cash income obtained in an inconsistent way according to the stock records and the sales made;
  • Requests for the performance of transactions on behalf of customers in which cash transactions or cash transfers intervene without any apparent logic;
  • Advance cash payments of large amounts for future transactions or fees;
  • Lack of limitation of cash payments of fees;
  • Recording and accounting of cash payments of wages or supplies by customers;
  • Use of fictitious invoices or documents to cover up the origin of funds;
  • Business dealings with unusual invoicing cycles;

Notaries, lawyers and members of other legal professions;

  • Advance cash payment of large amounts for future transactions or fees;
  • Lack of limitation of cash payments of fees;
  • Customers seeking to carry out a new business activity and/or commercial activity in cash-intensive sectors, with a profile completely unrelated to their respective profession;
  • Cash payments made by third parties without apparent justification;
  • Performance of transactions of the same or similar nature within short periods of time, without any logical explanation;
  • Unexpected changes relative to the origin and/or provenance of funds;
  • Offers of payments greater than the established fees, paying the difference in cash;
  • Large cash payments that do not fit the profile of customers;
  • Payments for which there appears to be some difficulty in determining the origin of the funds;
  • Connection of family-, work- or company-related nature between the parties, for the execution of bilateral contracts;
  • Persons acting as administrators and/or representatives who do not appear to be appropriate for the exercise of such representation, increasing the risk of the use of front men or interposed persons;
  • Performance of transactions of the same or similar nature within short periods of time, without any logical explanation;
  • Significant differences between the stated price and the real value of the goods involved in the transactions carried out;
  • Lack of specific training relative to the risk of money laundering and terrorist financing in connection with cash transactions or with transactions carried out by cash-intensive businesses.
 

Reviewing Risk-Based Approach

Part of an institution’s risk assessment must include a periodic review of their AML compliance regime. Below is an example given by the Canadian Financial Intelligence Unit (FINTRAC) of how to review CIBs in order to ensure that the AML compliance regime in place is effective.

1- Select a sample of cash intensive clients/businesses.  From the sample selected, perform the following:

  • Review account opening documentation including client identification and a sample of transaction activity;
  • Determine if all applicable transactions have been reported to the regulator;
  • Determine whether the actual account activity is consistent with the anticipated account activity;
  • Look for trends in the nature, size, or scope of the transactions, paying particular attention to cash transactions;
  • Determine whether ongoing monitoring is sufficient to identify suspicious activity; and
  • Determine if the risk level for your client is appropriate or if it should be modified.
 

Lists of Cash Intensive Businesses

Companies that qualify as cash intensive business can vary. According to the above EU report, cash intensive businesses include:

  • Sectors of bars
  • Restaurants
  • Constructions companies
  • Motor vehicle retailers
  • Car washes
  • Art and antique dealers
  • Auction houses
  • Pawnshops
  • Jewelleries
  • Textile retail
  • Liquor and tobacco stores
  • Retail/night shops
  • Gambling services

On the other hand, the U.S. Internal Revenue Services (IRS) lists the following as CIBs in their Cash Intensive Businesses Audit Techniques Guide:

  • Bail bonds
  • Beauty shops
  • Car washes
  • Coin-operated amusements
  • Convenience stores, mini-marts and bodegas
  • Laundromats
  • Scrap metal
  • Taxicabs

The NAICS (North American Industry Classification System) lists the following organization types as cash intensive businesses (and their associated NAICS codes)

  • Convenience Store, 445120
  • Convenience W/Gas, 447110
  • Restaurant, 722110, 722211, 722212
  • Liquor Store, 445310
  • Tobacco Distributors, 424940
  • Vending Machine, 454210
  • Parking garage, 812930
  • Retail, 442110, 444210, 451110, 452111, 442210, 444220, 451110, 452112, 442299, 446110, 451120, 452998, 443111, 448120, 451120, 453110, 443112, 448150, 451130, 453210, 443120, 448190, 451140, 453220, 444110, 448210, 451211, 453310, 444120, 448210, 451220, 453998
  • Private ATMs, 454210
  • Non-governmental charity, 813219

Finally, Amanda DuPont at Thomson Reuters has another perspective and says the following types of businesses can be cash intensive businesses:

  • Check cashing operations
  • Currency dealer or exchanger
  • Money Service Businesses
  • Privately owned ATMs and Leased ATMs
  • Adult entertainment clubs
  • Used car or motorcycle dealers that finance their own sales
  • Used boat dealers that finance their own sales
  • Apartment houses
  • Charitable organizations
  • Doctors
  • Other Professional Services (accountant, attorney, etc.)

She also recommends to looks at industries that practices cash payments for services, such as construction, landscaping or trucking, where independent contract workers may be paid in cash. Cannabis (marijuana or hemp-related) businesses also may be considered CIBs.

As a final caution note, lending vehicles are becoming more and more popular with money launderers. Unusual or suspect actions, such as hesitancy to provide required identification, or refusal to provide the purpose for a loan, are key warning signs. Apparent unusual concern for secrecy regarding personal identity, occupation, type of business or property held. These are clues with any customer account – especially a CIB.

Lending information is available in public records on a company or person. As example, are there liens, judgments, litigation, UCC financing statements? Do these match up/seem consistent to stated purpose of the account or customer?

The above lists show that there can be variations on what business is classified as a cash intensive. For this reason, it is important to perform complete due diligence at account opening and periodically throughout the relationship to properly determine the risk level of a business.

 

Using Technology for CIBs

Failure to properly onboard and monitor high-risk businesses like cash-intensive businesses can have serious consequences to financial institutions and their assigned AML personnel.

In a recent enforcement action by the Office of the Comptroller of the Currency (OCC), the BSA program at a now-defunct New Jersey bank was described to be “critically deficient” and it had “inadequate oversight of the Bank’s high-risk customers and did not appropriately report suspicious activity”.

The former chairman of the board of directors, CEO, and president of the bank is facing a fine of $70,000 for this and other failures within the bank. Other board members are also facing fines for their roles in the bank’s operations.

Technology is a key tool that allows compliance teams to onboard and closely monitor transactions from cash-intensive businesses. Alessa by CaseWare RCM allows financial institutions to effectively perform due diligence, monitor transactions and report suspicious activities relating to high-risk businesses like CIBs. The solution includes:

  • Customer identification
  • Customer due diligence
  • Enhanced due diligence
  • Ongoing validation and notification of changes in customer information
  • Sanctions and watch list screening and filtering
  • Transaction monitoring
  • Transaction screening
  • Suspicious activity and red flag detection
  • Investigation tools
  • Regulatory reporting to financial intelligence units
  • Program reporting to management

Contact us to learn how Alessa can also help your institution with onboarding and monitoring CIBs to reduce the burden of AML compliance.

 
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