The world runs on supply chains. Every company from all over the world are running on a supply chain which is allowing them to deliver their products and services to their customers.
Some companies have large supply chains whereas some have small ones. But irrespective of the size, supply chains are built with third parties. These third parties can be in the form of vendors, partners, suppliers, transporters, consultants, distributors, etc.
On one hand, a company builds a resilient supply chain with these third parties for a smooth end-to-end workflow, but on the other hand, the same third parties can also bring a lot of risks including money laundering threats to the supply chain and to the organization.
Risks can come in different forms such as Legal, Compliance, and even reputational risks that can make or break the image of your brand.
Having a resilient supply chain is important, but having a third party risk management system is an equally crucial step to be confident that your third parties are not involved in criminal activities such as fraud, money laundering, or financial terrorism and are compliant with the AML/CFT regulations within their operating jurisdiction.
While a company may always stay compliant with the regulations and implement robust compliance measures, the third-party firms might not be doing the same thing which makes them non-compliant and risky. This further raises a question on your vulnerability status as you establish a relationship with them.
Threats can be countered and mitigated before making any impact on your business with the implementation of a third-party money laundering risk mitigation system. This can be done by asking the right questions at the time of onboarding and collecting all relevant information and screening them against multiple sources.
Why Due Diligence is the Key solution to Third-Party Money Laundering Risk?
Third-party due diligence is the process of vetting, validating, and verifying third parties prior to initiating a business relationship. It is important for firms to have an end-to-end resilient supply chain due diligence network, in order to identify and mitigate risks at every stage of the supply chain and third-party lifecycle.
In order to run assessments on someone who is suspected of money laundering activities, a company must collect all the necessary information from third parties.
- Company names, addresses, taxpayer references, and incorporation documents
- Name of company owners and UBO (Ultimate Beneficiary Officer) information
- Company cash flow and asset expenditure data
- Debts, liabilities, and other contingencies
- Employment status of company employees
- Historical financial data
- Internal business risk assessments and growth projections
- Historical AML compliance performance
Third party risk mitigation is a continuous process and needs to be executed periodically by companies to identify any potential threats and take necessary actions. Risks related to third-party money laundering risk can be diverse in nature. Therefore, if not vetted properly, a company can expose itself to risks such as –
Industrial Risk –
As a company, you may operate in a low-risk industry. Still, the third party you are partnering with might come from a high-risk industry. For example, there are high chances of more money laundering or fraud instances in shipping, art, or payment service industries.
These factors increase the chances for companies to be exposed to higher AML risks with unparalleled consequences.
Locational Risk –
A locational risk is involved when a company partners with a third party from a country or jurisdiction that has lower control over AML/CFT regulations. In these scenarios, you might face compliance standard dissimilarities between you and the third party.
Sanction Risk –
Third parties from international countries can have business relationships with persons sanctioned internationally or are subjected to restrictions. Dealing with such parties can impact your company’s image and reputation in the global market.
Political Risk –
Identification of individuals associated with third parties can be a difficult process. These individuals might have the risk of being Politically Exposed Persons and might pose politically influential threats to your company.
How companies are implementing countermeasures to combat Money laundering Risks with Third Parties
Planning, processing, and conducting third-party due diligence can be a strategic activity for companies to follow. In order to reduce vulnerabilities, and chances of potential risks, companies need to have a robust strategy in place even before the journey with the third party starts.
Over the years, companies have implemented several tactics to keep their reputation safe and counter compliance, and operational, financial, and money laundering risks posed by associated third parties.
Here are some of the tactics companies use as a countermeasure to prevent third party money laundering risks –
Gathering all the relevant information:
The first step of a vendor vetting process is to collect all the relevant information and documents to analyze and evaluate the target third parties’ position. This is the first and foremost step of third-party due diligence.
Documents collected in the process include –
- Incorporation documents
- Line of business
- Geographic locations
- Details on key shareholders and beneficiaries
- Board members
- Leadership teams
- Political connections
- Proof of identity
- Sources of wealth and funds
Validating the collected information
As the next steps, companies are required to implement a validation process on the collected documents and gathered information. These documents are verified against reliable sources, publicly available data, clients, and associate lists, etc.
Note: With technological advancement validation of collected third-party data is now more seamless than ever before. Using software like SignalX Vendor onboarding solution, companies can easily validate all their vendors within 48 hrs.
The validation process is also crucial as it eliminates the majority of the high-risk third-party vendors. For example, if you find some traces of unusual activities by analyzing the documents, you can easily run enhanced due diligence checks on the party and categorize them under different risk categories(High, Medium, or Low-Risk Profiles)
Performing an end to end Risk Assessment
Once you have gone through the collection and evaluation stage, now it’s time for you to run an end-to-end risk assessment on the third party. These risk assessments are based on certain rule engines and are carried out in light of standards set by your company.
In this stage, third parties are segregated into various risk categories based on the –
- Lines of business
- Percentages traded
- Purposes of business transactions
- Previous track records of the third-parties
- Stakeholders involved and their profiles
In recent times, companies have become more cautious when it comes to analyzing the risk profiles of their third parties. That is why companies have taken third-party due diligence to the next level and are performing enhanced due diligence checks perform sanction screening, adverse media screening, transaction monitoring, etc to identify and assess any underlying money laundering activities.
An enhanced due diligence solution implements AI and ML technologies to provide more in-depth reports and run continuous monitoring to identify red flags and identify potential signs of money laundering, financial fraud, drug trafficking, financial terrorism, identity theft, etc.
These data can be generated early on and helps the organization take wiser decisions throughout the third-party life cycle.
Some mandatory ongoing checks for companies to perform are –
Companies should get recurring updates or changes on the PEP status of the individuals who are associated with the third party due to elections and governmental changes.
It is crucial for companies to find out whether the third party or any of their counterparts are associated with individuals and countries that have imposed economic sanctions.
Moreover, companies should also screen third parties against the sanctions and defaulter lists, such as,
United Nations Sanctions (UN), US Consolidated Sanctions (US Sanction Lists), OFAC — Specially Designated Nationals (SDN)Bureau of Industry and Security (US), Department of State, AECA Debarred List (US), etc.
Adverse Media Screening:
Negative media reports can provide a lot of information regarding the reputation of the third party. Whether they are involved or associated with any kind of Money Laundering Activity, unsolicited activity, etc.
Screen your third parties against adverse media stories available from print sources and online sources.
Along with establishing a resilient third-party risk management program, as a company you are required to conduct audits to validate and verify the documentation and information provided by the third party.
Conduct on-site visits, and investigate clients and customers, and business relationships to ensure they have an appropriate internal AML/CFT structure.
Leveraging AI to counter money laundering risks with third parties – the SignalX Solution
Previously it was an extensive workload for companies to identify and mitigate any risk related to money laundering while dealing with third parties. In order to carry out comprehensive third-party due diligence, companies need to collect, analyze and manage a lot of data.
Those are the days long gone when companies needed to create a dedicated team to perform due diligence activities and run manual monitoring procedures to stay compliant with the regulations. With the inception of AI-based technologies, it is now easier than ever to streamline your complete end-to-end third-party due diligence process and stay ahead of risks and threats.
With automated systems like SignalX in place, companies can now keep a regular monitoring system to run risk profile checks on third parties and raise red flags on associated risk factors. With SignalX’s end-to-end automated solutions, companies can –
- Generate 26 Parameter Scorecard & supplier risk rating
- Assess Suppliers of any size and type
- Collect disclosures and data from Suppliers
- Monitor Strategic & Critical Suppliers
- Build a Resilient Supply Chain
- Ensure Compliance in your Supply Chain
- Build Trust and Reduce Onboarding Time
- Identify Red Flags early on and Mitigate Risks
Schedule a call with us to discuss your use case and find out how we can help you mitigate AML risks in your supply chain.
Frequently Asked Questions
What is third party money laundering?
Third Party Money Launderers (3PML) are people or companies that operate outside of the financial sector but provide goods or services that have a significant risk of being misused in terms of money laundering. These people or companies act as gatekeepers to the financial system and serve as a link between the legal and illegal worlds, providing strategic support to criminals and terrorists.
What is the risk of third party transactions?
Third party transactions refer to transactions that involve a third party intermediary between two parties. Transactions such as these carry inherent risks, such as fraud, nonpayment, and errors. A third party transaction’s risk depends on the third party’s trustworthiness and reliability, as well as how much control the parties have over it.
What is the major risk of money laundering?
Money laundering poses a significant risk because it can be used to disguise the earnings of unlawful activity such as drug dealing, terrorism, and corruption. This can allow criminals and other bad players to benefit from their illegal actions and finance further criminal operations. Money laundering can also weaken the financial system’s integrity, making it simpler for criminals to operate and raising the risk of financial instability.