The global business environment is constantly evolving, and with the current economic climate, companies or wealthy individuals often need to engage with a law firm, a real estate firm, or an accounting firm across several regions to support their operations.
Passporting is common practice that enables companies to serve clients across multiple jurisdictions. If a company requires services in the UK and the US for example, passporting allows them to engage with the same law firm in both countries, without having to undergo separate onboarding and AML checks for each engagement. However, the risks associated with passporting shouldn’t be ignored, as they pose a threat to a firms’ AML compliance.
Should I ‘passport’ my high value client?
Passporting can create significant risks if all relevant AML checks are not undertaken. These risks stem from the potential for inconsistent AML processes, as AML regulations in each jurisdiction differs.
A classic example of this is that AML standards in the US can be looser than that in the UK - so a firm may feel pressure to forgo their usual checks because the client is already ‘known’ to them, albeit to a lesser standard than usual.
This creates an internal conflict - do you forgo your required AML checks, to appease a high paying client? Or do you risk frustrating a client with multiple AML checks across the various regional offices?
By ignoring a new region's AML requirements, passporting can create opportunities for money laundering and other financial crimes, as AML checks may not be thoroughly conducted or are are bypassed altogether.
What can you do about the risks?
To mitigate the risks associated with passporting, ensure that all relevant AML checks are triggered when transitioning clients from non-AML services to AML services. This includes conducting full customer due diligence, identifying UBOs, verifying the identity of these UBOs, and conducting ongoing monitoring of transactions.
Implement robust internal controls and training programs to ensure that your staff understands the importance of AML compliance and the risks associated with non-compliance. Ensure that steps aren’t skipped, just because a client is already AML verified in one region.
Furthermore, your compliance team has to be aware of the AML regulations in each jurisdiction in which they operate. The failure to comply with AML regulations can result in significant financial penalties, reputational damage, and even criminal liability. For example, the Crown Resorts were recently fined AUD$120m in damages after being negligent to their AML requirements.
In addition to complying with the relevant AML regulations, you can mitigate the risks associated with passporting by implementing robust risk management frameworks. You could also consider working with third-party AML compliance providers to ensure that your AML processes are effective and comply with the relevant regulations.
Don’t risk it for the extra cash
Passporting in AML can be risky because it allows businesses to engage with clients in different jurisdictions without having to undergo separate onboarding and AML checks for each engagement. While passporting can be convenient for both the law firm and the client, it can create opportunities for money laundering and other financial crimes if all relevant AML checks are not undertaken.
AML standards in one country may be looser than those in another, and this can create opportunities for money launderers to exploit gaps in the AML processes. In addition, passporting can make it difficult to identify and trace suspicious financial activity.
Without consistent AML processes, it can be challenging to detect unusual transactions that may indicate money laundering or other financial crimes. This can be further compounded by the fact that different jurisdictions may have different reporting requirements, making it difficult to get a comprehensive view of a client's financial activity.
It’s imperative to ensure that all relevant AML checks are triggered when transitioning clients from non-AML services to AML services, and that they comply with the AML regulations in each jurisdiction in which they operate. Failure to do so can result in significant financial penalties, reputational damage, and therefore loss of revenue due to lack of trust from prospective clients.