HOW CAN BUSINESSES TACKLE FX RISKS IN HIGH-RISK SECTORS?

 Managing payments internationally is critical to a business. But FX transactions come with several risks:

These include money laundering and other illicit activities, structural vulnerabilities, and the need for strong AML controls. Here’s how to overcome them.

AML/CFT VULNERABILITIES

Money laundering and terrorist financing pose risks for many industries, but the risks are especially high for businesses that offer remittance services or foreign exchange. These businesses often face significant regulatory and enforcement challenges and are vulnerable to exploitation through their business models, services, and transaction channels.

These vulnerabilities are exploited by criminals looking to conceal their illegal funds and embed them within the legitimate financial system. One of the most common methodologies is structuring, which involves moving funds through multiple FX firms to disguise their origin and avoid detection.

In order to mitigate this risk, FX transfer solutions for high-risk sectors must collect, analyze, and monitor a large amount of data. This can be costly and time-consuming, but software automation can reduce human error and help companies achieve compliance on an ongoing basis.

STRUCTURING POTENTIAL

The foreign exchange market is one of the most liquid in the world, with a daily volume of over $5 trillion. It facilitates international trade and investment by determining exchange rates, converting national currencies, and transferring funds.

Considering the relative anonymity of FX transactions, criminals can exploit them to launder money. Structuring involves a series of steps, often taking place just below regulatory thresholds, to disguise the origin of illegally obtained funds and embed them within the legitimate financial system. Remittances and foreign exchange services are a common vehicle for laundering.

Complex B2B payments to global suppliers can present a significant foreign currency and FX management challenge. FX transfer solutions for high-risk sectors can help reduce exposure to volatility, enhance visibility into costs and transaction statuses, and improve supplier relationships, all while mitigating risks.

ANTI-MONEY LAUNDERING

There are a wide variety of ways criminals can launder funds, including through foreign currency exchange services. With this in mind, a strong anti-money laundering (AML) program is essential to safeguard your business against these risks.

Financial institutions must conduct a number of AML checks to identify suspicious transactions and customers. These checks can include screening for politically exposed persons (PEPs), identifying shell companies, examining customer patterns, and investigating high-risk accounts and customers.

In addition, many countries have laws requiring financial institutions to check that payments don’t involve sanctioned individuals and entities. A strong AML program can help detect these transactions and protect you from fines.

While traditional correspondent banking relationships face challenges in high-risk regions, modern FX transfer solutions for high-risk sectors offer streamlined global payments with visibility and control. This includes automated AML and KYC checks on both payers and beneficiaries, preventing fraud while reducing costs and speeding up payments without compromising compliance.

BENEFICIAL OWNERSHIP

Beneficial ownership is one of the greatest challenges in identifying criminal threats and thwarting money laundering schemes. The names found on official documentation do not always reflect the true identity of the beneficial owners. This is especially problematic with shell corporations and the frequent use of physical addresses for corporate formation agents to hide the real location.

Financial institutions are now required to verify the identity of beneficial owners of legal entity customers unless they can reasonably determine that obtaining such information is not practicable. This requirement could impose significant new costs on a financial institution’s AML systems and processes and create new burdens on business relationships.

The availability of beneficial ownership data can enhance AML monitoring capabilities by allowing the identification of connections between previously unrelated legal entities and individuals. FX transfer solutions for high-risk sectors can integrate this data into compliance systems, such as OFAC screening, to flag transactions prohibited by sanctions, enabling further investigation.

CONCLUSION

Effectively managing FX transactions in high-risk sectors requires a proactive approach to address vulnerabilities, ensure compliance, and mitigate risks such as money laundering and terrorist financing. FX transfer solutions for high-risk sectors play a critical role in overcoming challenges like structuring, beneficial ownership transparency, and AML/CFT compliance.

By leveraging advanced technologies and implementing robust monitoring and automation systems, businesses can navigate the complexities of international payments with greater confidence. These solutions not only enhance compliance and reduce regulatory exposure but also provide greater visibility and control over global payment processes, ensuring long-term financial stability and security.