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Dealing in Funds

Dealing in funds refers to the process of accepting, transferring, managing, or investing money or monetary instruments on behalf of oneself or another party.

In an AML/CFT (Anti-Money Laundering and Countering the Financing of Terrorism) context, this activity is considered high-risk because it can be exploited for concealing the origin of illicit proceeds, financing terrorism, or bypassing regulatory controls.

The term broadly covers all activities involving the movement of money, whether through banks, payment processors, money service businesses, or informal channels.

Explanation

The act of dealing in funds encompasses both legitimate and illicit financial activities.

Legitimate dealings include commercial transactions, remittances, asset management, and investment services.

Illicit dealings, however, may involve the placement, layering, or integration of illegal funds into the financial system.

Criminals and terrorist financiers use various techniques, such as structuring, wire transfers, offshore layering, or trade-based laundering, to disguise the true source and ownership of funds.

Financial institutions and designated non-financial businesses and professions (DNFBPs) play a key role in identifying and reporting suspicious fund movements.

Because funds can be transmitted instantly across jurisdictions through digital channels, regulators impose strict due diligence and monitoring requirements to ensure transparency and traceability.

Key Components of Dealing in Funds

  • Acceptance of Funds: Receiving cash or electronic money from a customer or third party for storage, transfer, or investment.
  • Transfer of Funds: Moving money domestically or internationally through wire transfers, payment systems, or remittance services.
  • Management of Funds: Administering client funds through investment, portfolio, or asset management services.
  • Conversion of Funds: Exchanging one form of value (e.g., cryptocurrency to fiat currency) or one currency for another.
  • Disbursement of Funds: Paying out or releasing funds to beneficiaries or counterparties.

AML/CFT Relevance

Dealing in funds is one of the primary channels through which money laundering and terrorist financing occur. Regulators require institutions involved in such activities to implement strong AML/CFT frameworks designed to detect and disrupt illicit financial flows.

Key compliance obligations include:

  • Customer Due Diligence (CDD): Establishing the identity of clients and understanding the purpose of fund movements.
  • Transaction Monitoring: Continuously observing patterns of inflows and outflows to identify anomalies.
  • Record Keeping: Maintaining transaction histories, identification documents, and source-of-funds information.
  • Suspicious Activity Reporting (SAR): Reporting unusual or unexplained fund movements to the Financial Intelligence Unit (FIU).
  • Risk Assessment: Evaluating exposure based on the nature, volume, and jurisdictional scope of fund dealings.

Examples of High-Risk Scenarios

  • Frequent International Transfers: Repeated cross-border transactions involving high-risk jurisdictions or tax havens.
  • Third-Party Payments: Transfers made on behalf of unrelated individuals or entities without a clear relationship.
  • Unexplained Wealth: Fund inflows disproportionate to the customer’s known profile or declared income.
  • Layering through Intermediaries: Movement of funds through multiple accounts or intermediaries to obscure origin.
  • Use of Shell Entities: Companies established solely to receive or distribute funds without legitimate business activity.
  • Rapid In-and-Out Movements: Immediate transfers following deposits, often a red flag for layering activity.

Regulatory & Legal Framework

  • Financial Action Task Force (FATF) Recommendations: Require financial institutions to identify, monitor, and report suspicious transactions involving funds. FATF Recommendation 10 (Customer Due Diligence) and Recommendation 16 (Wire Transfers) are particularly relevant.
  • Bank Secrecy Act (BSA – USA): Mandates institutions to maintain records and report cash transactions exceeding USD 10,000, as well as any suspicious activities.
  • EU Anti-Money Laundering Directives (AMLD): Oblige financial intermediaries to implement risk-based approaches to fund transfers and maintain transparency on beneficial ownership.
  • Money Laundering Regulations 2017 (UK): Covers fund transfer services, payment institutions, and money service businesses under AML compliance obligations.
  • UN Convention Against Transnational Organized Crime (2000): Encourages international cooperation in tracing, freezing, and confiscating illicit funds.

Red Flags & Indicators

  • Clients reluctant to provide information about the source or destination of funds.
  • Use of multiple accounts across jurisdictions with no apparent business purpose.
  • Structuring deposits to avoid reporting thresholds.
  • Sudden large transfers following periods of inactivity.
  • Payments inconsistent with a customer’s profile or declared occupation.
  • Frequent transactions with entities located in high-risk or sanctioned regions.
  • Conversions between fiat and digital assets without legitimate explanation.

Controls & Mitigation Measures

  1. Enhanced Due Diligence (EDD): For high-risk customers or complex fund flows, institutions should perform deeper scrutiny.
  2. Real-Time Transaction Monitoring: Automated systems can flag suspicious fund transfers instantly.
  3. Beneficial Ownership Verification: Ensuring the true identity of individuals controlling or benefiting from funds.
  4. Sanctions Screening: Checking parties and transactions against global sanctions lists such as OFAC, EU, and UN.
  5. Periodic Reviews: Conducting regular customer and transaction reviews based on risk category.
  6. Collaboration with FIUs: Timely reporting and coordination with regulatory bodies when suspicious activities are detected.

Role in the Money Laundering Process

  • Placement: Illicit funds are introduced into the financial system through deposits, cash exchanges, or fund transfers.
  • Layering: Complex transactions are conducted to obscure the audit trail, such as multiple transfers between accounts or countries.
  • Integration: The laundered funds re-enter the legitimate economy through investments, asset purchases, or corporate accounts.

Emerging Risks

The rise of fintech platforms, digital payment gateways, and cryptocurrencies has expanded the speed and volume of fund transfers.

While these innovations improve accessibility, they also introduce new AML/CFT challenges.

Pseudonymous transactions, decentralized finance (DeFi) systems, and peer-to-peer transfers can make it difficult to trace fund origins without robust monitoring tools.

Institutional Responsibilities

All entities that deal in funds—including banks, payment processors, digital wallet providers, and remittance agents—must:

  • Register with relevant authorities.
  • Establish internal AML/CFT policies and procedures.
  • Train employees to recognize and report suspicious fund movements.
  • Adopt a risk-based approach tailored to the scale and complexity of operations.

Consequences of Non-Compliance

  • Regulatory Penalties: Hefty fines, license revocation, or criminal prosecution.
  • Reputational Harm: Loss of credibility and trust among customers and counterparties.
  • Operational Risks: Increased scrutiny or severed correspondent relationships.
  • Criminal Liability: For willful or gross negligence in AML compliance obligations.

Importance in AML/CFT Compliance

Monitoring and controlling fund movements is central to any AML/CFT framework. Transparent fund dealings ensure that illicit proceeds cannot easily circulate through the financial system. Institutions that effectively manage fund-related risks contribute directly to maintaining global financial integrity and security.

Related Terms

  • Money Laundering
  • Wire Transfer
  • Cross-Border Transactions
  • Suspicious Activity Report (SAR)
  • Beneficial Ownership
  • Customer Due Diligence (CDD)

References

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