5 ways DNFBPs can improve transaction monitoring

By 10 minute read

AML compliance is usually associated with financial institutions, but it extends far beyond that. We explain how to handle it.

Anti-money laundering compliance is for more than financial institutions, it also applies to designated non-financial businesses and professions (DNFBPs).

These businesses have been identified as potentially susceptible to money laundering and terrorist financing due to the nature of their operations and the transactions that they may be exposed to. And it’s important for them to meet AML compliance obligations that are only usually associated with finance.  

What are DNFBPs, exactly?  

The Financial Action Task Force (FATF) Recommendations provide a list of businesses that are DNFBPs, and the customer due diligence and record-keeping requirements set out by the recommendations apply to those that fall within the industries categories within this list. DNFBPs as prescribed by the FATF Recommendations are:  

  • Casinos when customers engage in financial transactions equal to or above the applicable designated threshold.
  • Real estate agents when they are involved in transactions for their clients concerning the buying and selling of real estate.
  • Dealers in precious metals and dealers in precious stones – when they engage in any cash transaction with a customer equal to or above the applicable designated threshold.
  • Lawyers, notaries, other independent legal professionals and accountants when they prepare for or carry out transactions for their clients. This includes managing client money, real estate, management of bank and securities accounts, and more.
  • Trust and company service providers when they prepare for or carry out transactions for a client concerning activities including acting as a nominee shareholder and acting as a director or secretary of a company, among other things.  

Within the FATF Recommendations, it’s also mandated that jurisdictional authorities should: 

  • Implement licensing requirements and ownership criteria for casinos.  
  • Prevent criminals and their associates from owning or controlling DNFBPs. 
  • Implement proportionate and dissuasive sanctions to deal with Designated Non-Financial Businesses and Professions compliance violations.  
  • Introduce effective monitoring systems to ensure DNFBP compliance with AML/CFT requirements.  

Key risks facing DNFBPs 

DNFBPs are in a particularly risky position because many criminals exploit the regulatory uncertainty and general lack of understanding of DNFBPs to commit financial crimes such as money laundering and terrorist financing. The specific AML challenges faced by DNFBPs often vary depending on the national regulatory environment and industry, however.  

National and regional challenges 

DNFBP AML compliance is a global regulatory challenge and deficiencies that exist within national and regional regulations provide criminals with the opportunity to carry out financial crimes. As such, governments and national authorities regularly take action to raise awareness of DNFBP money laundering because it relates to specific trends.  

In Australia, for example, the Senate recently reported on the country’s failure to expand its AML regulations to DNFBPs, something which led to billions of dollars being laundered through the housing market and systematic non-compliance of casino operators. As a result, the Financial Action Task Force recommended that Australia accelerate its legislative reforms, stressing that the government should introduce a beneficial ownership register to catch up with Western peers like the US, the UK, and the EU.  

Meanwhile, in the United States, real estate businesses do not have particularly stringent reporting requirements, especially for transactions that don’t require a mortgage. According to the U.S. Financial Intelligence Network (FinCEN), more than 50% of these transactions involve politically exposed persons (PEPs), along with their friends and associates, and many illegal transactions use shell companies to hide beneficial ownership.  

It has also been reported that even rogue states are exploiting DNFBPs. In January 2022, the Royal United Services Institute (RUSI) reported that North Korea is known to be targeting DNFBPs dealing in precious metals and stones to evade sanctions imposed against it. Research carried out by AML think tank RUSI, found that jewelry is featured in 25% of North Korea’s sanctions evasion cases, while diamonds are featured in 5%. 

5 ways DNFBPs can do more 

It’s the case that DNFBPs need to do more to protect their data and proprietary information and that of their clients, particularly firms that operate in the key industries highlighted by the FATF Recommendations. Unfortunately, companies often fail to acknowledge risks related to DNFBPs, which makes them inherently more vulnerable to serious compliance failures.  

However, the FATF Recommendations provide practical guidance for DNFBPs who wish to safeguard themselves against money laundering, terrorist financing, and other financial crimes: 

  1. Conduct robust and comprehensive client due diligence (CDD) and know your customer checks (KYC). 
  2. Leverage existing support networks of AML authorities in mitigating clandestine behavior. 
  3. Maintain proper records and documents of transactions for at least six years.  
  4. Submit suspicious transaction reports to AML authorities where appropriate. 
  5. Minimize the use of cash transactions and replace them with state-of-the-art payment processing solutions.  

DNFBPs should ensure that they follow these recommendations as a baseline for mitigating any potential risks related to their clients or themselves. The current regulatory landscape and the increase in global AML and terrorist financing regulations, such as the EU 6AMLD, place more pressure on DNFBPs to comply. There are several other high-profile AML regulatory developments that also highlight the growing need for DNFBPs to act.  

Ebook: 6AMLD In Practice: Key Risks & Opportunities for Fintechs

Transaction monitoring for DNFBPs is a particularly difficult issue. KYC and CDD checks have often been done regardless of AML risks to protect the business from fraudulent use. But transaction monitoring has not always benefitted from the same level of focus. Implementing a thorough transaction monitoring solution is key to protecting DNFBPs from being used by criminals to launder money. 

Automation can help DNFBPS 

It has never been easier for bad actors to carry out financial crimes, especially money laundering. Quick, widespread access to a vast range of financial products, from neobanks to money transfer services, has made the prospect of financial crime a much more accessible, attractive, and prosperous endeavor. 

As such, all firms, even those not strictly operating in the finance space, need to take steps to ensure that all money that flows through their accounts is being tracked and checked for potential money laundering, terrorist financing, and against sanctions lists, among other things. To achieve this, firms should use a robust automated transaction monitoring solution to reduce the time taken to remediate compliance issues efficiently and reduce the number of false positives that waste compliance officers’ time. 

Ebook: How to set efficient AML Transaction Monitoring Rules