Several individuals use different typologies and techniques to lauder the proceeds of crime. The below is a non-exhaustive list of red flags which could serve as possible indicators that money laundering activities are taking place.

Whilst it is important to be pointed out that in the case of a red flag, it does not automatically mean that money laundering or terrorism financing activities are taking place, however a more rigorous due diligence must be carried out on that customer.

Some of the most common red flags identified in AML are:

• Cross-Border Money Transfers to Different Accounts to avoid detection from authorities – This could be in the form of rapid transfers to and from different accounts in different countries; funds received from foreign accounts with no clear explanation of its source; payments with no apparent link to a legitimate business.

• Secretive new clients – when new clients avoid meeting in person and when they refuse to answer any questions or even provide false identification details or documentation when carrying out the Know your client (KYC) and customer due diligence (CDD) processes.

• Unusual Payments by clients and unusual source of funds – when payments are inconsistent with the clients profile, such as for example large cash payments, the use of multiple foreign accounts, unexplained payments made by a third party on their behalf, and the use of cryptocurrency.

• Clients holding high positions – typically related to political exposed persons (PEPs) such as head of states, members of parliament, members of the judiciary, senior executives of stated owned corporations. Officials involved in political parties and senior officials appointed by the government, amongst others.

• Unclear Ultimate beneficial ownership – such as when the identity of the individuals owning the company are not clear due to complex ownership structures or the use of shell companies.

• Countries classified as high risk – Clients deriving from countries subject to financial sanctions or else those countries identified by the FATF or by the EU Commission as being suspected to be involved in corruptive practices, having unstable governments or known as tax or money laundering havens.

• Sanctioned customers – when clients are sanctioned by the UN, EU or even nationally. Such customers are to be considered as high risk of money laundering and terrorism financing.

• Adverse media – the clients are subject to adverse media in any part of the world and linked with criminal activities which could be related with possible predicate offences, which are the criminal offences generating the illegal proceeds of crime.

• Suspicious clients activity – when it results that the clients are living a lavish lifestyle which could not be supported with their declared income.

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Considerable progress has been made in fighting money laundering and terrorism financing in real-world financial environments, particularly with the introduction of stronger anti-money laundering /counter-terrorism financing (AML/CTF) legislative regimes and increased levels of inter-state co-operation and support. The regulatory framework in Malta, for instance, comprises the Prevention of Money Laundering Act (‘PMLA’) and the Prevention of Money Laundering and Funding of Terrorism Regulations (‘PMLFTR’). These pieces of legislation are in alignment with European Union legislation and lay down the obligations of subject persons (i.e. persons from sectors which are prone to be used for money laundering and funding of terrorism activities).

There are three phases to money laundering: placement, layering and integration. In the placement stage, the funds generated from crime are brought into the financial system. At this point the proceeds of crime emanating from predicate offences, are most apparent and at highest risk of detection. Money launderers ‘place’ the illegally obtained funds using a variety of techniques, which include the deposit of cash into bank accounts and the use of cash to purchase high value assets such as land, property and luxury items. Once the proceeds of crime have been placed into the financial system, there is an attempt to conceal or disguise the source or ownership of the funds by creating complex layers of financial transactions. The purpose of this is to disassociate the illegal funds from the predicate offence by purposefully creating a complex web of financial transactions aimed at concealing any audit trail and the source and ownership of funds. Integration of the ‘cleaned’ money into the economy is the final stage of the process and is accomplished by the money launderer, making it appear to have been legally earned. It is extremely difficult to discern between legal and illegal wealth at the integration stage.

Terrorism financing, on the other hand, occurs when the primary motivation is not financial gain but, rather, the use of funds to “encourage, plan, assist or engage in” acts of terrorism. In terms of sub-article (3) of Article 328B of the Maltese Criminal Code, the crime of funding of terrorism is the process by which a person receives, provides or invites another person to provide, money or other property intending it to be used, or which he has reasonable cause to suspect that it may be used, for the purposes of terrorism. The definition of funding of terrorism, therefore, cares little about the source of the funds (contrary to money laundering), but it is what the funds are to be used for that defines its scope. In fact, the primary distinction between the two crimes lies in the fact that terrorism financing funds can also derive from legitimate sources, not merely criminal acts. In the case of money laundering however, there is always an underlying predicate offence and it therefore always involves an illegal source of funds.

While there can be a number of different motivators and drivers for money laundering and terrorism financing activity, they are inextricably linked. Terrorist groups usually have non-financial goals: publicity, dissemination of an ideology, the destruction of a society or regime and simply spreading terror and intimidation. By contrast, money launderers seek financial profit. The sole purpose and motivation behind money laundering is to give a legal existence to assets emanating from illicit sources.

Therefore, although the two phenomena differ in various ways, they often materialize through the same vulnerabilities of the financial system. Both terrorists and money launderers use anonymity techniques to evade the attention of the authorities and to protect the identity of their sponsors or beneficiaries. However, transactions associated with terrorism financing tend to be carried out in small amounts. That is why, when terrorists raise money from legitimate sources, it becomes very difficult to trace the origin of these funds.

The result obtained however is intrinsically similar, that is both crimes involve an element of reward and satisfaction. Once money passes through the money laundering cycle, the launderer is rewarded with ‘clean’ funds which can be used to such person’s satisfaction. Similarly, the terrorist financers are rewarded with ensuring that the plan they financed is eventually carried out.

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Money Laundering is the process of illegal movement of money to hide its original source.  Subject Persons such as Banks, other financial institutions, gaming platforms, real-estate agencies amongst others could be used by individuals with the aim to launder money deriving from illicit sources.

Anti-Money Laundering (AML) compliance is a process where subject persons carry out background checks and ongoing monitoring on their clients to identify and eliminate suspicious activities which could be related to money laundering. This type of procedure is part of the Know Your Client (KYC) verification and is mandatory for all subject persons as per AML regulations which regulations were implemented to eliminate money laundering and terrorist financing activities.

It is imperative for all subject persons to have in place an effective AML program, for them to protect their business from money laundering activities. An effective AML compliance program should be structured in a manner that it meets AML compliance norms such as internal policies and procedures, training to employees, adequate monitoring on new clients, ongoing monitoring on existent clients, detection of suspicious activities and efficient AML reporting system.

Article 5 of the Prevention of Money Laundering and Funding of Terrorism Regulations (Subsidiary Legislation 373.01) provides that every subject person shall have an effective AML compliance program to define the potential risk of their business including their legal obligations.

Same article further provides that all subject persons, must use a risk-based approach which is that subject persons must understand the money laundering and terrorist financing risk to which they are exposed to and take the appropriate mitigation measures as per the following:

• By identifying money laundering risks relevant to the business.
• By carrying out of a detailed risk assessment of the business focusing on customer behaviour and delivery channels.
• By carrying out risk assessment of customers.
• By designing and to put in place, controls to manage and reduce the impact of the potential risks.
• By monitoring the controls being adopted and to improve their efficiency.
• By keeping records of all measures adopted.

Regulation 5(5) of S.L. 373.01 further provides that subject persons shall:

• Have in place and implement customer due diligence measures, recording keeping procedures and reporting procedures.
• Implement risk management measures.
• Take appropriate and proportionate measures from time to time for the purpose of making employees awareof the measures, policies, controls, and procedures being adopted.
• Appoint, where appropriate and depending on the nature and size of the business, an officer at a managerial level with the aim to monitor and make sure that AML measures, policies, controls, and procedures are being implemented within the business.
• To carry out independent AML audits in order to certify that the business is in line and is implementing correct AML measures.
• Employees to be kept up to date with the recognition and handling of operation and transaction which may be related to proceeds of criminal activities, money laundering or funding of terrorism.
• Monitor and enhance the measures, policies, controls, and procedures adopted to better achieve their intended purpose.

Article 21 of S.L 373.01 which regulates the administrative penalties for subject persons provides that when a subject person is not compliant with the regulations could be subject to a fine amounting to a maximum of five (5) million euro. Hence, “if you think that compliance is expensive: try non-compliance”.

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Regulation 5 of the Prevention of Money Laundering and Funding of Terrorism (PMLFTR) provides that each subject person shall take necessary measures to be able to identify and assess any risks of money laundering and funding of terrorism which could arise out of their professional activities.

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Who are considered as Subject Persons?

The definition of subject person is found in Regulation 2(1) of the PMLFTR. The PMLFTR define subject persons as those persons, legal or natural, ‘exclusively’ when carrying out any activity which is listed under the definition of ‘relevant activity’ and ‘relevant financial business’.

The PMLFTR provides that the term ‘relevant activity’ includes the activity of the following legal and natural persons when acting in the exercise of their professional activities:

• Auditors, External accountants and Tax advisors;
• Real Estate Agents; Notaries and other independent legal professionals when they participate, whether by acting on behalf of and for their client in any financial or real estate transaction or by assisting in the planning or carrying out of transactions for their clients;
• Trust and Company Services providers;
• Nominee Companies holding a warrant under the MFSA Act and acting in relation to dissolved companies registered under the said Act;
• Casino licensees;
• Gaming licensees;
• Any Natural and Legal person trading in goods but only where a transaction involves payment in cash in an amount equal to ten thousand (10,000) euro or more whether the transaction is carried out in a single operation or in several operations which appear to be linked;
• Any natural or legal person trading in works of art or as intermediary;

‘Relevant Financial Business’ is defined in the PMLFTR as:

• Any business of banking carried out by a person or institution as regulated under the provisions of the Banking Act;
• Any activity carried out by a person or institution as regulated under the provision of the Financial Institution Act;
• Any long term insurance business or insurance intermediary activities carried out by an insurance intermediary or by a tied insurance intermediary related to long term insurance business as regulated under the Insurance Distribution Act or the Insurance Business (Captive Insurance Undertaking and Captive Reinsurance Undertakings) Regulations, by a cell company in accordance with the provisions of the Companies Act (Cell Companies Carrying on Business of Insurance) Regulations or by an incorporated cell company and an incorporated cell in accordance with the provisions of the Companies Act (Incorporated Cell Companies Carrying on Business of Insurance) Regulations;
• Investment services carried out by a person or institution as regulated under the provisions of the Investment Service Act; Administration services to collective investment schemes provided by a person or institution as regulated under the Investment Services Act; Collective investment scheme marketing its units or shares, licensed, recognised or notified under the provisions of the Investment Services Act;
• Any activity other than that of a retirement scheme or a retirement fund, carried out in relation to a retirement scheme, by a person or institution as regulated under the Retirement Pensions Act;
• Activities of a regulated market and that of a central securities depository as regulated under the Financial Market Act;
• Safe custody services provided by a person or institution;
• Activities carried out by VFA agents or VFA services carried out by a person or institution as regulated under the Virtual Financial Assets Act;

The PMLFTR further provides that subject persons shall have in place the necessary measures, policies, controls and procedures to address the risks of money laundering and funding of terrorism.

These procedures mainly consist of the following:

• Customer due diligence measures;
• Record keeping procedures;
• Reporting procedures;
• Training and Awareness.
• Risk management measures as provided under regulation 5(5) of the PMLFTR.

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