How are gatekeepers used for money laundering?

In this article we will discuss how these intermediaries can be used to launder illegal funds, the legislation regarding gatekeepers and AML, and real-life examples of how they were used for money laundering.

What is a gatekeeper ?

A gatekeeper is a person or entity that controls access to something, often acting as a barrier or filter between different parties. In various contexts, gatekeepers have the authority or responsibility to regulate, manage, or monitor entry, participation, or flow of information or resources.

What are the tasks of gatekeepers in AML ?

The role of a gatekeeper in the fight against money laundering involves a continuous duty of vigilance throughout the entire business relationship, encompassing numerous obligations, including:

• 1

  Know Your Customer (KYC): Thoroughly understanding the client’s identity and background. This is typically done when onboarding new clients to ensure that their activities align with legal and ethical standards.

• 2

  Know Your Transaction (KYT): Monitoring and understanding the nature of the client's transactions. KYT helps identify suspicious or unusual transaction patterns that may indicate illicit activity, such as money laundering, by flagging inconsistencies with expected behavior.

• 3

  Checking the Origin of Assets: Ensuring that the assets involved in transactions are derived from legitimate sources. It becomes particularly critical when a client’s transactions or asset transfers are abnormal or do not align with their financial history.

• 4

  Risk-Based Approach: Implementing measures based on the risk level associated with each client and transaction. Clients or transactions deemed higher-risk, such as those involving high-value transfers or politically exposed persons (PEPs), undergo enhanced due diligence (EDD), while lower-risk clients may face less stringent controls.

• 5

  Complying with Financial Embargoes: Adhering to legal restrictions on financial transactions with certain entities or countries. Compliance is essential to avoid penalties and to prevent the facilitation of illicit transactions.

• 6

  Restricting the Use of Cash: Limiting cash transactions is a critical measure in the fight against money laundering, as cash is difficult to trace and is commonly used in illicit activities.

• 7

  Reporting Obligations: Designated professionals are legally required to report any suspicious activity that may indicate money laundering or other financial crimes to the relevant authorities, such as the local Financial Intelligence Unit (FIU).

• 8

  Ongoing Compliance and Adaptation: Gatekeepers must stay up-to-date on best practices, revising internal protocols, and ensuring that they are well-trained in recognizing and addressing risks related to money laundering and financial crime.

How are gatekeepers used for money laundering ?

Gatekeepers are used in various ways to help conduct money laundering on behalf of criminals. Below are a few examples:

Role of Legal Professionals

Setting Up Shell Companies: Lawyers are often used to create shell companies and complex corporate structures that conceal the ownership and origin of funds. Lawyers may design multi-layered corporate structures with entities in various jurisdictions, making it difficult for authorities to trace the flow of money or identify the true owners.

Real Estate Transactions: Lawyers play a pivotal role in organizing real estate transactions, managing contracts, and ensuring compliance with legal and regulatory requirements. Criminals often exploit this by purchasing high-value properties with laundered money, which allows them to integrate these illicit funds into the legitimate economy.

Role of Accountants and Auditors

Financial Statement Manipulation: Accountants may engage in fraudulent activities by falsifying financial records to obscure the true nature of funds. They can inflate revenue figures by creating fake sales transactions, issuing phony invoices, or recording non-existent sales to misrepresent a company's financial health. Additionally, they may manipulate revenue streams by fabricating income from non-existent products or services.
Tax Evasion Schemes: Accountants may engage in practices such as fabricating expenses and underreporting income to create a misleading financial profile. This manipulation not only reduces tax liabilities but also contributes to a complex layering structure that makes it increasingly difficult to trace the true source of the funds.

What are examples of gatekeepers being used for money laundering ?

In Canada, several lawyers have been implicated in money laundering or suspicious financial activities, highlighting their unintended or deliberate roles in facilitating criminal operations. Prominent cases include:

• Simon Rosenfeld, a Toronto lawyer who was convicted in 2005 after boasting to an undercover officer about Canada’s lax money laundering enforcement. His sentence was increased upon appeal.

• Florence Yen, a Vancouver real estate lawyer, who was suspended for three months in 2021 for handling over $14 million from a client without providing legal services or investigating the funds’ origins.

• Ronald Pelletier, disbarred in 2023, was found to have moved $31 million for clients involved in U.S. securities fraud, using burner phones to obscure his activities.

In Europe, a well-known case of lawyers enabling money laundering is the Danske Bank scandal in 2018. This scandal exposed the role of professionals, including lawyers, in facilitating the laundering of approximately €200 billion of suspicious funds through the bank's Estonian branch between 2007 and 2015. The lawyers abused Estonia’s lenient regulatory control and created shell companies with complex corporate structures that involved cross-border transactions.

What is the AML regulation for gatekeepers ?

Legislation aimed at regulating gatekeepers includes provisions that require these professionals to implement robust anti-money laundering (AML) measures and report suspicious activities. Here are some key legislative frameworks and measures:

European Union
Gatekeepers play a critical role in ensuring that companies maintain accurate records of their ownership structures. They are responsible for facilitating compliance with regulations that require this ownership information to be accessible to competent authorities and obligated entities. The Fifth Anti-Money Laundering Directive further underscores this responsibility by mandating that ownership information be made available to individuals and entities with a legitimate interest.

United States of America

The Bank Secrecy Act (BSA) requires gatekeepers to establish and maintain effective AML programs, conduct customer due diligence (CDD), file Suspicious Activity Reports (SARs), and comply with other reporting requirements. It also imposes penalties for non-compliance.There is also the Gatekeeper Initiative, a government effort to enforce strict anti-money laundering (AML) and counter-terrorist financing requirements on key professionals who act as gatekeepers to domestic and international financial systems.

Financial Action Task Force (FATF)

The FATF recognizes the critical role that gatekeepers play in the fight against money laundering and terrorist financing. They encourage countries to implement its recommendations regarding gatekeepers within their national laws and regulations, aiming to strengthen the overall framework for combating money laundering and terrorist financing.

In the 2024 “Horizontal Review of Gatekeepers’ Technical Compliance Related to Corruption,” it was noted that while many FATF members scored above 80% when it came to applying the FATF’s recommendations on gatekeepers, seven major economies—accounting for over half of global GDP—scored below 50%. Key obligations like customer due diligence remain weak.

Keeping a check and balance on gatekeepers is necessary

Gatekeepers are critical to the financial system, and their roles and expertise can be exploited by money launderers to integrate, layer, and eventually legitimize illicit funds. This is why imposing stringent AML obligations on these professionals is essential.
To prevent gatekeepers from facilitating money laundering requires a comprehensive approach involving regulatory enforcement, robust internal controls, and proactive oversight. By implementing these strategies, we can strengthen the financial system's defenses against money laundering and ensure that gatekeepers fulfil their critical role in preventing financial crime.