Cash will do nicely, sir

Remember the days of “cash is king”?  It may still be handy for getting a good deal on a second-hand car, but otherwise, for those of us in the AML community, cash is a pain in the proverbial.  The Fourth Money Laundering Directive has done its bit to help drive it out of the system by lowering the threshold at which high value dealers must conduct AML checks from €15,000 to €10,000 – which will almost certainly have the effect of “persuading” more businesses to refuse to accept cash rather than registering as HVDs.  From an AML perspective, this a generally a Good Thing; if payments go through a regulated firm, such as a bank, there is a fighting chance that some due diligence will have been done.

The other side of the coin is how those regulated firms deal with cash-intensive clients.  There are plenty of these still around – taxi firms, hairdressers, nail bars, pubs and so on (my hotel in Crete recently offered me an 8% discount on the bill if I paid cash rather than by credit card – apparently this is normal in Greece) – and they mostly need bank accounts and accountants, and will have occasional dealings with solicitors and estate agents.  For those regulated businesses, the cash-intensive client (and I’m talking here about the non-HVD cash-intensive client) can be a nightmare.

CDD is based on knowing your client and knowing his patterns of activity and transactions.  But how much can a bank realistically (rather than idealistically) be expected to know about, say, the business rhythms of the local hairdresser?  My own hairdresser, for instance, tells me that she has peak periods in December (Christmas parties), July (weddings) and early June (May Balls for the university students).  The first two are predictable for all hairdressers, I should imagine, but the early June one is very specific.  Things were simpler when the local bank served the local community, but now that the hairdresser is banking online, how are the nuances spotted and then queried?

That said, this is perhaps a poor example, because the big banks tend to have very sophisticated transaction monitoring systems that can be minutely calibrated to spot variations.  It is more of an issue for the accountant who does an annual return for a cash-intensive business.  One year the business reports a 17% increase in turnover – all of it in the form of extra cash rather than card payments or bank transfers.  How odd is this?  Is a 17% increase acceptable?  How about 27%?  Doubtless the business will have the paperwork to back up its claims, but can the accountant trust that?  As I am asked so frequently in training, now I ask you: how far should your due diligence questioning go?  How expert is your knowledge of your client’s business expected to be?

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3 Responses to Cash will do nicely, sir

  1. Comment from a banker in Guernsey who is having technical problems today and so cannot post a reply from his own computer:

    I would disagree about the highly sophisticated transaction monitoring systems the big banks have in place. Faster Payments are not routinely checked as they believe that transferring from one UK bank to another is sufficient ‘knowledge’. UK banks will pass transactions up to their pre-defined limit (which is around £20k for some (RBS)) without question. Irrespective of whether this is in keeping with their customer’s profile. The limit for Faster Payments itself is £100k and transactions are instantaneous despite what you might be led to believe by the relevant transaction dates on your statements – apparently processing dates are different.

    Once a payment has gone it has gone. To add to that if funds are paid away as part of a scam unless the fraud is perpetrated against the bank in question they are extremely slack in trying to get the cash back, almost to the point of not being really bothered. There is a thirty day period in which the receiving bank has to investigate matters and return any funds and they supposedly sign an indemnity to this effect. In reality it takes far longer than 30 days and you probably won’t get back anywhere near what was paid away to the fraudsters.

    No wonder some of the more sophisticated scams get away with so much. Fraudulent activity is certainly not discouraged, more they seem to turn a bit of a blind eye. Unfortunately I’m talking from first-hand experience here.

    Food for thought don’t you think??

  2. Robert James Long says:

    Regarding the above comment, From the outside it has always seemed that banks are prepared to “tolerate” a certain amount of fraud in the system in return for ease and speed. Just the impression I get.

    Cash intensive businesses are a constant worry for all those reasons but I think they really are only useful up to a certain level of laundering and then only for the (we’re back to the old model of PLI) for making illegitimate funds look legitimate. Once you get too successful you need either multiple businesses or one really big cash based business (casino’s anyone?) which can attract all sorts of attention you don’t want or introduce a new regulator into your life.

    If you then need to reinvest some of your cash in other criminal enterprises your still faced with difficulties even with cash intensive business. If our nefarious criminal owns a few nail saloons he has an excuse for a lot of cash coming into his account which is great if he just wants to buy a nice house or cars. But sooner of later he will need to pay for a shipment of new product that he may not be able to do through his “official” books. Why is he making huge cash withdrawals (Pesky ML regulations mean a lot of drug dealers don’t want bank transfers)? Why is he buying lots of Euros? (Suppliers don’t always want to be paid in the local currency). These activities can still bring the wrong sort of attention if people ask the right questions.

    A quick answer is to not allow all your cash to go through the books of the Cash intensive business, so you still have illegitimate cash for illegal transactions, but then your still stuck with the problem of large amounts of unexplained cash lying around, ready for observant Law enforcement officers to seize or lose to rivals in robberies you may be reluctant to report.

    It can be hard to be a criminal sometimes…(is also why a lot of attention on enforcement goes to professional enablers or criminal cash controllers who help alleviate these issues for rapscallions!)

  3. This is a really helpful set of examples, Robert – thank you. Your key sentence? “These activities can still bring the wrong sort of attention if people ask the right questions.” That would be a good motto for MLROs.
    Best wishes from Susan

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