Time to reconsider KYC?

Time to reconsider KYC?

Leading Swedish newspaper Dagens Nyheter reports signs of suspected criminal activities in 34 of 43 exchange companies in Sweden. Exchange offices play a central role in the criminal value chain, from arranging payments of illegal labour to laundering proceeds from drugs trafficking.

Louise Brown, Director Financial Crime Prevention at Advisense GRC Advisory was asked to comment on the findings by Dagens Nyheter.

Exchange companies is one of several segments in the financial services industry that are more misused by criminals to launder large sums of money than others. Several cases uncovered recently tell of criminal gangs and drug money passing with ease through small local exchange offices.  

Despite this, things have not improved. According to an article in the Swedish newspaper Dagens Nyheter today, 34 out of 43 exchange offices can be linked to criminal activities or known criminal profiles.  

“This investigation presents some very disturbing facts. The issues are not unknown, but what is at this point quite striking, is how criminal actors can continue to utilise exchange companies at their own convenience and seemingly uninterrupted,” says Brown. 

“If Sweden wants to be serious about fighting financial crime, failing to deal with such blatant money laundering in this particular segment of the financial sector is simply not acceptable. There are tools and systems available. Just like in so many other cases where investigative journalists have uncovered alarming issues, it is obvious that KYC (know your customer) as a fundamental process is nowhere near as good as it should be.” 

The news unveils a representative sample of money laundering schemes, shedding light on the murkiest parts of the illegal economy. Moreover, it shows how legal representatives of exchange companies not infrequently are prosecuted, under arrest or convicted of multiple crimes. 

According to Swedish law (Lag (1996:1006) om valutaväxling och annan finansiell verksamhet 3 §), and requirements concerning owners and management, anyone who has substantially violated obligations in business activities or who has been guilty of serious criminality are prohibited from engaging in activities that are subject to registration.  

A representative from the Swedish FSA interviewed in the article, express appreciation for media and what is uncovered, and refer to limited resources and restrictions on information sharing between government bodies. Earlier this year, the quality of data available in the public register of unique beneficiary owners managed by the Swedish Companies Registration Office (Bolagsverket) was subject to criticism, suggesting that data is incomplete and unreliable which does not help the KYC process.   

As a case in point, the investigation carried out by Dagens Nyheter confirms that there are significant weaknesses and discrepancies between different segments within the financial services sector. Over and above the task at hand on the part of the FSA with regards to continuous inspections, it remains that any financial institute, especially in high-risk segments, should consider:

  • KYC – Financial companies, large and small, are progressively achieving greater maturity with regards to the KYC process, however obviously it is still an inherent challenge and high-risk procedure in its own right
  • Efficacy of fundamental customer risk classification and risk assessment, including network analysis and proper analysis of UBOs 
  • Continuously evaluating the adequacy of established risk scenarios within its systems. Not infrequently, and especially smaller and medium-sized financial companies may rely on limited or suboptimal scenario settings  
  • Training staff and strengthening capabilities in the second line

In total, the black economy in Sweden is estimated at 5 percent of GDP, corresponding to approximately SEK 250 billion. These basic recommendations are worthwhile revisiting at all times. 

Read the full Swedish article here

For further information please contact

Ronny Gustavsson

Director & Head of AML/CTF

Louise Brown