How to Conduct a Business Risk Assessment to Avoid the Consequences of Money Laundering

When preparing to acquire another company, hire an executive, form a partnership, or even hire a third party vendor, you need to conduct a full risk assessment so you know what potential dangers your company faces. This allows you to make an informed decision about whether the rewards are worth the risks. Most companies do conduct legal and financial due diligence before an M&A transaction, however only smart companies check there are no skeletons in the closet for the people and businesses they acquire through investigative due diligence.


Make no mistake: as many as 20% of executives hired or acquired in M&A transactions have serious issues in their history, and 35% of businesses globally have corruption related issues. These issues pose risks for your business and may cause reputation damage, large regulatory fines, and possibly loss of business and future customers if the damage is serious.


A legitimately operating US company may inadvertently acquire a company thinking they have good results from the legal due diligence conducted, but not know about hidden or undisclosed issues because they did not conduct investigative due diligence on the people they have acquired. Of the most common ways corrupt companies make their money is through bribery to obtain large contracts, fraud, drug or alcohol trafficking, weapon sales, and even human trafficking. The people and companies involved keep this part of their income and business relationships hidden behind what appears to be a legitimate business. They may use various money laundering operations to make the funds gained via illegal activity appear to come from legal sources. 


It is well known that 90% of third party companies (manufacturers, suppliers, vendors, and agents) in global supply chains are responsible for Foreign Corrupt Practices Act (FCPA) violations that may cost well over $100m average in regulatory fines.


How can you learn whether or not someone you’re considering for an executive position or a company you want to acquire has participated in money laundering schemes? The best way is to conduct a risk assessment that includes doing enhanced or deep dive due diligence. Infortal’s methods of due diligence do more than just basic public records searches—we do a deep dive of open source intelligence records, information from other states and countries, in addition to the database searches and global watchlist checking that are commonly done. With this more detailed information, you’ll be better able to assess the potential risks and decide if you should move forward, and what level of risk your company may be facing. 


Let’s take a further look at what money laundering is, how risk assessment can help protect you from its consequences, and what can be done to assist you.


What is Money Laundering?


According to Investopedia money laundering is the illegal process of making large amounts of money generated by criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source. The money from the criminal activity is considered dirty, and the process “launders” it to make it look clean. 

While the definition of money laundering gives you a good idea of what it is, it may be difficult for companies to identify these issues before an acquisition or business partnership is entered into; this is because illegal activities are often well hidden. In theory, money laundering is fairly basic: money gained from criminal activity is passed off as legitimate funds earned legally. In practice, however, money laundering operations are often a little more complex. Money may be run through multiple shell companies and businesses, and may even have sponsorship by other governments and state-owned enterprises. 


Online banking and third-party money transfer options such as PayPal made money laundering easier, as has the recent growth of cryptocurrency. It's also become easier to transfer money between countries and into other currencies. This makes getting money out of countries where bribery and other crimes are commonplace fairly simple. Individuals, companies, or even entire countries that have been sanctioned and cannot easily do business with the U.S. now have even more ways of filtering the flow of money between countries and business enterprises. 


Most money laundering operations work in three ways. First, the money gained from criminal activities, called “dirty money,” is quietly and carefully injected into a legitimate business. Second, that money is moved through various companies and individuals via financial transactions and careful records manipulation. This is the “laundering” process in which the dirty money is made to appear to be clean, much like dirty laundry becomes clean after washing it. Finally, the cash is placed in a legitimate account where the criminals are able to use it however they want without worrying about being caught. 


Sometimes this process does involve businesses, but other times, it involves buying and selling real estate, using casinos, passing money through bank accounts, and more. Basic money laundering operations may only use one of these options, but complex money laundering often involves several layers. The criminal “bad actors” may invest their money in real estate, then sell the properties and convert the money into another currency before using it at a casino or to buy other goods and sell those elsewhere for legitimate cash. This type of layering makes it much harder to track down the origin of the dirty money. 


How Risk Assessment Protects Against Money Laundering


When we discuss anti-money laundering methods, we’re typically talking about risk assessment and due diligence. Unfortunately, there are businesses that don’t take the time to do proper due diligence into the history of the company or its executives. They only do a basic background check on executives or only check a business against a global watch lists, rather than doing a deeper look into their background and business activities. This reveals only a small part of what the business has done or the executive has been involved in. 


Typically, these quick and cheap searches global watchlist searches only reveal what’s happened that has already been on a country or financial institutions’ radar in the past and may not reflect what is happening currently. There may be numerous red flags that are missed by using this very limited approach. They also don’t identify other names the executive or company has used, consider what business partnerships they have, or really dig into where their funding comes from. 


Here are a few of the ways risk assessment highlights money laundering issues or uncovers hidden corruption.


We look into aliases, DBAs, shell companies, and subsidiaries

Executives could have used aliases when doing business with illegitimate businesses, while companies may use a DBA (Doing Business As), a shell company, or a subsidiary to funnel dirty money through other companies. Infortal will dig deep into any other name or subsidiary an executive or business used to find information about what they have done under that name. Shell companies are often used to move money around from state to state or country to country, while aliases can be used to avoid disclosing conflicts of interest or bribery. You need to know about any other name someone is using so you can fully vet them. Do they have a hidden criminal history or litigious behaviors? Do they have class action lawsuits brought by customers or employee groups?  Of greater concern: have they defrauded other clients through hidden personal or business information where identifying this would prevent you from similar harm? Does the company you are considering acquiring also have a subsidiary that is involved in fraud, bribery or corruption?


We pay special attention to offshore companies

Because they’re based in other countries, offshore companies are often used for hiding assets and laundering money. In this case, “offshore” simply means the company is located in another country and is subject to that country’s laws rather than U.S. law. Many people use offshore banks located in the Bahamas, Switzerland, or other locations, for example. The famed Swiss bank accounts, for example, originally didn’t even have names attached to them. This made it very easy to hide money in the country.  


In addition to offshore bank accounts, some criminals invest money in offshore companies or other countries as a way of supporting terrorists. For example, the island nation of Nauru was known as a money laundering hotspot during the 80s. Russian criminals made use of the country’s incredibly tight privacy laws to move money to the terrorist organization al-Qaida. 


Where is the company’s headquarters?

It’s not always easy to determine where a company’s headquarters is, especially if they have various subsidiaries and shell companies. You may believe you’re working with a U.S. company only to find out that the company is owned by another company that’s owned by a large corporation based in China. Doing basic due diligence may not be enough to discover this, which is why you need to do a deep dive or enhanced due diligence investigation. Don’t trust what you find on sources such as a company website or other online sources. Some companies don’t even have a website, so doing very basic research on them isn’t reliable, however information does exist and can be obtained.


We consider established relationships

Sometimes money laundering is done by hiding relationships between individuals or companies. Funds gained illegally through a cartel or known mobster could be passed through a company owned by a cousin who has a different name. In some countries family members are often involved in businesses together which could represent similar types of issue; these situations can often be identified and explored to determine whether a real problem exists. The two groups may be very careful about never being seen together or being linked in any way. In these situations, without looking into a person’s family and their connections, this link could be missed. 


Free resources are just a start

While resources such as Transparency International’s Corruption Perceptions Index (CPI) do provide information about money laundering and companies that have been involved in corruption in countries, it is only a basic datapoint and they don’t constitute effective due diligence. Yes, you can see that specific countries are ranked as high corruption risks, but how do you know that the business you’re considering working with doesn’t do business there? You can’t without doing your due diligence. Free resources and even low-cost paid resources typically don’t provide enough information to make a truly informed decision. Similarly the global watch lists used by major financial institutions for Anti Money Laundering and Know Your Customer (AML/KYC) only provide a brief snapshot of known issues, and may explain why there are often major fails in due diligence if only these items have been checked..


Risks of Working with a Company that Launders Money


Working with any company that’s engaged in illegal activity, whether it’s money laundering, bribery, trafficking, or anything else, always poses a serious risk. With money laundering, it’s possible any company you partner with could funnel dirty money through your legitimate corporation. This could make you an accomplice, especially if you didn’t do any or insufficient due diligence. Certainly the federal regulators (DoJ and SEC) are well aware of what sufficient due diligence really includes today.  If you merge or acquire any type of business partnership that involves co-mingling funds or signing off on contracts which were based on bribery and corruption or other types of fraud, you may find that you’re laundering money and inadvertently approved of the whole thing.

Even if you aren’t merging with a company, hiring an executive in any sort of financial role can lead to a similar outcome. They may approve a contract with a company they know has transacted business illegally or brought in dirty money and use your company to move that money into or out of U.S. banks. Once this information comes to light, your entire company is likely to be investigated. Even if you can prove that the executive was the only one involved, it’s still going to damage your reputation and likely result in fines and other penalties. For example, FTX founder has been recently indicted for fraud, money laundering, and campaign finance offenses.


If you’re in the financial sector, being embroiled in a money laundering scandal can end your business. Without a strong reputation, many of your customers may abandon you. There are many cases where banks and other financial companies had to close following money laundering charges. For instance, the Miami based financial advisor pleaded guilty to conspiring to launder money relating to FCPA and other offenses in 2019. Another example is Goldman Sachs, which was caught in a money laundering scandal as shown in this video.

Contact Infortal Today to Learn More About Anti-Money Laundering and Risk Assessment


Infortal uses open source intelligence, court records, financial information, dark web information, and more to dive into the executive or company in question. Our goal is to triangulate data we find in order to highlight anything—real estate investments, subsidiaries, aliases, etc.—that could indicate corruption such as money laundering. Without this information, you can’t truly know what kind of risk you’re taking. Contact us today to learn more.


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