Role of AML Compliance in Non-Financial Businesses (DNFBPs)

1. Introduction  

Anti Money Laundering (AML) compliance is no longer a concept solely applicable to banks or  financial institutions. Over the past two decades, regulatory authorities worldwide have  acknowledged that Designated Non, Financial Businesses and Professions (DNFBPs) play a pivotal  role in combating money laundering and terrorist financing. It is a frequent occurrence that  offenders exploit non, financial sectors such as real estate, legal services, precious metals, and  gambling in order to conceal illegally obtained money and integrate it into the standard economy. 

Due to this transformation, AML requirements have been extended to cover DNFBPs. 

The environment of AML compliance has undergone a major change. It is no longer sufficient for  only banks to monitor for suspicious activities; a broad spectrum of businesses are required to be on  their guard. This alteration is indicative of the increasing comprehension that money laundering is  not limited to financial transactions only. It infiltrates different sectors, and if those sectors do not  pay attention to it, the whole financial system can be weakened. 

So, what exactly does this signify for DNFBPs? Simply put, it implies that they are required to  establish and maintain their own AML programs. Such programs must, among other things, entail  risk assessment, customer due diligence and monitoring of transactions on a continual basis. The  ultimate objective is, without a doubt, to guarantee that any suspicious activity is detected at an  early stage and duly reported to the competent authorities. 

It is quite intriguing to realise that the broadening of these obligations has not always been met with  a positive and straightforward response. Majority of DNFBPs are still figuring out how they should  operate under the new regulatory regime. Some might even be unaware of the magnitude of their  duties. This situation inevitably leads to compliance gaps which are very risky. The risk is that, if a  DNFBPs fails to meet its obligations, it could face a heavy sanction, including a monetary penalty  or imposition of criminal liability.

2. Understanding DNFBPs 

DNFBPs is an acronym for Designated Non-Financial Businesses and Professions. There are a  small number of designations set forth by FATF standards. The designation includes the following  professionals: lawyers (including notaries), independent legal practitioners, accountants/auditors,  real estate brokers/dealers, dealers of precious metals and stones, trust and company service  providers (TCSP), and casinos and gambling providers. 

Although these businesses typically don’t take customer deposits like banks do, they still have an  important function in the National Financial System. These DNFBP organisations manage large  value transfers and complicated ownership structures and transfer of assets. As a result, these  organisations serve as attractive targets for money launderers who want to conceal their money. For  example, lawyers/notaries use trusts and shell companies to mask the actual ownership of assets by  the clients who created them. Accountants maintain the clients’ books and records; however, these  activities may include the perpetration of hidden financial activities if accountants do not exercise  appropriate due diligence. Real estate agents often conduct large cash transactions that appear  legitimate on the surface but may be used to launder funds. 

The dealers of precious metals and precious stones can also be categorised as DNFBPs since they  engage in transactions involving valuable items with an instantaneous ability to buy or sell their  products and, therefore, create a mechanism for converting illegal cash into valuable items and,  therefore, into legitimate assets. Likewise, casinos are another example of this trend. They provide  criminals with a means to launder their cash through gambling activities as well as providing  criminals with a relatively easy way of concealing their criminal activities. Instead of going directly  to the bank, criminals can go to a casino, get cash in exchange for chips, and then, cash out the  chips without much scrutiny or oversight. 

While the increase in the number of DNFBPs indicates that regulators have become more aware of  how money laundering can occur and that money laundering occurs in ways beyond just using banks, the increase in the number of DNFBPs also represents the growing number of potential ways  that criminals can exploit different industries or professions to launder their proceeds. As such,  DNFBPs are receiving increased attention from regulators as well as from those working within the  industry itself to enhance compliance to prevent the potential for money laundering. 

It is important for DNFBPs to understand their role as an active participant in AML efforts to  prevent the movement of illicit funds through DNFBPs; therefore, it is essential that these  professionals understand their responsibility and implement procedures for identifying and  reporting potentially suspicious activities related to potential money laundering; otherwise, they  may ultimately become victims of money laundering operations themselves.  

The difficulty in ensuring that DNFBPs are able to operate effectively has to do with equipping  them with training and resources. Many DNFBPs do not fully understand risks and obligations  created by AML laws. This can result in compliance gaps, and these compliance gaps represent a  risk for all parties concerned. 

3. Legal Basis for AML Obligations on DNFBPs 

3.1 International Framework 

The primary international standards governing Anti-Money Laundering (AML) obligations for  Designated Non-Financial Businesses and Professions (DNFBPs) originate from the Financial  Action Task Forces (FATF) Recommendations. The most important of these recommendations are  22 and 23, which specify that DNFBPs must implement several measures including; Customer Due  Diligence (CDD), Record Keeping, Suspicious Transaction Reporting (STRs), as well as  establishing an internal control structure and compliance program. Countries that do not enforce  these requirements risk ending up on one of FATF’s monitoring lists, resulting in potentially  damaging reputational and economic ramifications, something no country desires. 

3.2 Domestic Implementation

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The FATF sets standards for many countries to follow by enacting such standards into law.  Countries typically implement the FATF’s standards into their national law through the use of: 

(a) Anti-money laundering (AML) acts, or anti-money laundering (AML) directives; 

(b) AML regulations established by financial intelligence units (FIUs) (operating as quasi governmental agencies in most countries); and 

(c) AML Compliance rules that apply to different sectors. 

For example, lawyers and accountants frequently have to comply with AML laws resulting from  statutory regulations and the practice standards of their respective professions. This creates a  situation where lawyers and accountants have to comply with a “dual layer” of compliance  obligations. Lawyers and accountants need to comply with both sets of laws. 

It is critical that these professionals have a good understanding of the requirements that they must  meet to be compliant with applicable laws and regulations, as well as the risks of their respective  professions. Being knowledgeable of the laws and regulations will assist the professional in  protecting himself or herself and their clients from any potential issues with the law. 

In addition, as the AML landscape continues to evolve, designated non-financial businesses and  professions (DNFBPs) need to keep pace with the evolving AML landscape, as there is an  increasing recognition that DNFBPs are a mainstay of the fight against money laundering.  Therefore, keeping up to date and compliant with the evolving AML landscape is necessary not  only as a legal obligation, but also for DNFBPs to continue to maintain confidence and trust  between clients and the general public. 

4. Core AML Compliance Duties for DNFBPs 

4.1 CDD for DNFBPs

• All DNFBS must perform Customer Due Diligence (CDD) to identify and verify its  customers and beneficial owner(s) along with the reason(s) for the relationship between the  DNFBP and customer(s). The acquisition of Enhanced Due Diligence (EDD) is necessary  when establishing a relationship with customers considered to be high-risk, for example  persons Politically Exposed Person (PEPs), or customers who use complex cross-border  structures. 

4.2 Record Keeping for DNFBPs 

• Most jurisdictions require DNBPs to maintain both transaction records along with the  identification records for a minimum of five to ten (5-10) years, although this varies  between jurisdictions. These records shall be provided to the regulating authority along with  Law Enforcement Authorities when requested. 

4.3 STR for DNFBPs 

• DNFBPs, by Law, must report Suspicious Transaction(s) (STRs) to the FIU of that country  whether or not a transaction was conducted. Lack of compliance may lead to severe  penalties, civil and/or criminal. 

4.4 Compliance with Internal Controls/Training 

• To comply with AML requirements, DNFBPS must: 
• Have a Written AML Policy and related procedure(s) 
• Designate an AML Compliance Officer (where available) 
• Train their staff regularly 
• Have Independent AML Audits/Reviews of their AML Compliance System

       5. Balancing AML Compliance and Professional Privilege

The tension between AML reporting obligations and the obligations of legal practitioners under LPP  or confidentiality poses one of the largest challenges for DNFBP’s, particularly lawyers and  notaries, to fully comprehend the interrelationship between the potential conflicts. 

Most of jurisdictions have addressed this legal dilemma through using the following methods: 

(a) They exempt information that reaches an attorney through attorney-client privilege or during the  course of a litigation from being reported, or; 

(b) they only impose an obligation to report when the legal practitioner is involved in financial  transactions or dealing with a financial institution. 

In most cases, judges have taken the position that LPP or privilege cannot be used to shield or  provide protection from criminal conduct. This has further strengthened the legitimacy of the AML  reporting obligation. 

6. Regulatory Enforcement and Penalties 

Regulatory Authorities globally are increasing enforcement against “Designated Non-Financial  Business and Professions” (DNFBPs). Regulatory authorities may impose the following  forms of sanctions: 

– Administrative penalties (fines) 

– Suspension or revocation of license 

– Criminal liability due to intentional disregard for the requirements of the applicable AML Laws – Damage to reputation (through the application of professional sanctions and/or disciplinary action) 

The increased enforcement against DNFBPs demonstrates increased public awareness that weak  compliance by DNFBP actors presents a risk to the entire AML regime’s credibility. 

7. Challenges Facing DNFBPs

Although DNFBPs have specific statutory obligations, they experience a variety of difficulties as  outlined below:  

• They have fewer resources available for compliance than the banking sector;  
• They typically do not possess the same level of experience in anti-money laundering (AML)  activities due to being unregulated professions by nature;  
• There is a lack of clarity regarding how AML regulations should be applied based on a specific  risk profile;  
• Clients resist providing disclosure information.  

To mitigate these challenges, DNFBPs will require proportional regulations, clarity from regulatory  bodies, and frequent educational opportunities for members of the profession. 

8. Conclusion 

When people follow Anti Money Laundering laws, they help protect all businesses from people  using their money for illegal activities. By forcing all businesses to follow Anti Money Laundering  laws, they help weed out criminal activity, which damages the integrity of the financial system.  People who are not involved in the financial sector may find following Anti Money Laundering  requirements a nuisance; however, they are necessary to protect consumers and ensure that there is  a fair economy. Additionally, they protect both individuals and organisations. 

As regulators ramp up enforcement of AML laws, DNFBPs need to view compliance as more than  simply adhering to a regulatory requirement. They should view AML compliance as an important  part of their ethical and legal obligations in the global financial system.

REFERENCE(S): 

1. Financial Action Task Force, International Standards on Combating Money Laundering and the Financing of  Terrorism & Proliferation (The FATF Recommendations), Recommendations 22 & 23 (2012, as amended Oct.  2023). 
2. Financial Action Task Force (FATF), Glossary to the FATF Recommendations (defining “Designated Non Financial Businesses and Professions (DNFBPs)”) (2012, as amended 2023). 
3. Financial Action Task Force (FATF), Guidance for a Risk-Based Approach for Designated Non-Financial  Businesses and Professions (Oct. 2019). 
4. Financial Action Task Force (FATF), Risk-Based Approach Guidance for Legal Professionals (June 2019).
5. Financial Action Task Force (FATF), Risk-Based Approach Guidance for Accountants (Oct. 2019). 
6. Financial Action Task Force (FATF), Methodology for Assessing Technical Compliance with the FATF  Recommendations and the Effectiveness of AML/CFT Systems (2013, updated 2022). 
7. United Nations Office on Drugs and Crime (UNODC), Anti-Money Laundering and Counter-Terrorist  Financing for DNFBPs (UNODC Global Programme against Money Laundering, 2017). 
8. United Nations Convention Against Transnational Organised Crime, art. 7, Nov. 15, 2000, 2225 U.N.T.S. 209.