Non-financial institutions subject to KYC/AML regulations

KYC and AML regulations in non-financial institutions

KYC/AML laws are often associated with financial institutions. Of course, financial transaction players are on the front line but, contrary to what one might think, the regulations apply to many professional corporations.

In fact, many non-financial institutions are also subject to KYC/AML regulations.

They are also subject to control bodies that are directly assigned to them. The latter have the power to impose sanctions for non-compliance with the AML requirements imposed.

Through this article, we propose to list a few non-financial institutions that must comply with KYC/AML regulations.

  1. Art dealers
  2. The real estate sector
  3. The casino and gambling industry

The art market and KYC requirements

The art market is a sector that has been rocked by money laundering practices in the past. It must be understood that the volatility of art prices, the opacity of the sector and the anonymity of auctions make this industry conducive to money laundering attempts.

Questions about the art market and possible money laundering arose a few years ago, following an autumn sales session of the New York market. At this event, sales of dizzying amounts were recorded. Following this unusual session, a few questions were raised by observers, such as:

  1. "Has art become a criminal market?"
  2. "Who can today provide a concrete answer to the exponential increase in the value given to works of art?"

We may know that the acquisition of works of art is the mark of belonging to the closed circle of the world's great fortunes. This does not explain the inflation experienced by the art market, which is also known to be a particularly opaque environment.

  1. Authentication of objects is tricky.
  2. The sector is not much regulated.
  3. Cash transactions are common.
  4. The Free Port keeps the works out of the fold of the tax services.
  5. The anonymity of the purchasers is common
  6. The amounts spent on transactions are significant.

Concretely, it is all these parameters combined that have opened up suspicions of money laundering by various tax specialists of which Virginie Heem and David G. Hotte are leading figures.

The "Association for Research into Crimes Against Art" estimates that the art market would allow the crime industry to launder some $6 billion annually.

Since the spotlight of the art market as a possible facilitator of money laundering, strict measures have been taken to regulate the sector.

Thus, under KYC/AML regulations, art merchants are subject to obligations such as:

  1. The obligation to identify the buyer
  2. A strengthened identification process of the buyer or even a refusal to sell, for some European Union countries, for a cash payment above a defined threshold.
  3. The obligation to verify the identity of the seller of the works, including from a banking point of view.
  4. The obligation to archive transactions and keep them for 5 years.

The real estate is a sector conducive to money laundering

If real estate is subject to AML regulations, it is because it is known as a market where financial fraud has been actively practiced there.

Like the art market, the real estate industry has very interesting specificities. Prices are relatively stable; investment is appreciated over time and real estate can generate legal income (rental or resale).

While these parameters are significant for any investment, the sector attracts criminals for other criteria. Whether it is residential property or commercial or professional spaces, real estate offers an appearance of normality and legitimacy.

The money laundering process is well known by the regulator. Real estate is mainly used for integration, the last of the three steps in the money laundering process. The one where fraudulently collected capital is re-injected into the legal economy.

While it has been relatively easy in the past to hide the acquisition of real estate behind a nominee, the situation has become particularly complicated with regular updates to the KYC/AML laws and regulations.

Today, the entire real estate sector has to comply with anti-money laundering requirements. Thus, from the realtor to the notary, all players must carry out the necessary controls to ensure that the final client is not involved in a money laundering operation. And this must be done at the very beginning of the business relations.

It should be noted that not complying with the AML duties can have serious consequences since, in the event of a lack of control, any litigious transaction can lead the professional to be prosecuted for complicity in an attempt to launder money or finance terrorism.

In other words, the real estate players have a strong interest in implementing internal KYC procedures ensuring that they can prove that they acted in good faith and that they did carry out controls required by the regulator in the event of an inspection.

In practical terms, before entering into business, the professional must:

  • Assess the risk level related to the client and to the transaction
  • Formally identify the individual or legal person who acquires the property.
  • Identify and document the source of funds.

Beware, a real estate broker should not wait for the intervention of the notary to make the KYC controls, even if the latter must carry out his own research.

gambling in casino - KYC/AML regulations

Increased vigilance in gambling and casino

Casino and gambling have been widely used by money launderers to bring huge amounts into the legal economic system. Anti-money laundering provisions in casinos have been in place for some time. However, the new guidelines standardize rules, whether it's physical casino or online casino. Measures that affect these establishments include:

  • Obtaining an authorization to work in the sector issued by the competent authorities. Before issuing this authorization, a thorough investigation is carried out. Employees must therefore have a clean criminal record and demonstrate ethical and honest behaviour. In addition, management will have to present an impeccable record of business management.
  • Gambling and other slot machines are subject to complete random checks to ensure compliance with regulations and their proper functioning by reading the documentation of the settings made by the manufacturers.
  • All development projects in the distribution of the legal capital of a gambling company must be systematically reported to the relevant authorities. Any entry of a new shareholder into this type of company is scrupulously analysed before being authorized.

Customers are systematically subject to identity checks as soon as they enter the establishment or when creating an online player account.

Amounts considered to be winnings on the part of customers can only be returned after part or all of the initial bet has been put into play. This means that techniques such as: entering a casino, ordering chips, walking around the casino and collecting money is not (anymore) allowed.

The identity of the "winners" must be verified, and the amounts won must be archived together.

Surveillance cameras must be active at all times and gaming tables must be filmed. Video recordings must be kept and left accessible to screening agencies for several weeks. The video surveillance system is under the tutelage of an organization outside the Casino. It has no access to the video surveillance system.

The full accounting of the casino and all the supporting documents of each financial move must be made available to regulators on request. Including, the identity of each person concerned.

Regarding online casinos that are often located in tax havens, it should be noted that these are subject to the legislation of the countries where they operate. The site must display all the laws and obligations defined by the countries from which the site is accessible. Also, the site must give access to the charter of the applied anti-money laundering policy.

On these gambling sites, identity control must follow scrupulous procedures. Money depositing follows extremely strict regulations. Financial transactions are monitored in real time and the software used is validated by regulators.

Casino site operators must set up a monitoring and alert system for any abnormal behavior on the platform regarding financial movements or fraudulent use of software. They also have an obligation to intervene and block any suspicious transactions.

Automate control processes

The implementation of internal processes to meet KYC/AML requirements has proven to be particularly time-consuming and resource-intensive if carried out "by hand".

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