Small Businesses & Money Laundering

Posted by

Matt Green

on 02 Oct 2023

Money launderers target small businesses because they are less likely to be scrutinised. We explain how to spot red flags and prevent financial crime.

Small Businesses & Money Laundering

Additionally, some small businesses may be more susceptible to money laundering due to the nature of their operations, such as those dealing with large amounts of cash or customers from high-risk jurisdictions.

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How money is laundered via small businesses

Money laundering is the process of making illegally-gained proceeds (i.e. "dirty money") appear legal (i.e. "clean"). Money laundering is a serious crime that can have a number of negative consequences, including fines, imprisonment, and reputational damage.

There are five common methods that money launderers exploit to launder money through small businesses:

A. Structuring

This involves breaking down large cash deposits into smaller amounts to avoid triggering reporting requirements.

B. Smurfing

This involves using multiple people to deposit small amounts of cash into different accounts.

C. Mixing laundered & legitimate cash

Small businesses are a popular target for money launderers. They invest in or operate cash-intensive businesses, such as restaurants, bars, and retail stores, in order to mix their illegal proceeds with legitimate income.

D. Invoice fraud

Trade-based money laundering occurs when fraudulent or inflated invoices are used to transfer money between countries.

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How small businesses prevent money laundering

Small businesses need to create an Anti-Money Laundering (AML) policy outlining everything from detecting and preventing money laundering to record-keeping and the frequency of staff training.

There are six simple steps that small businesses need to take to protect themselves from money laundering, each of which needs to be detailed in their AML policy:

1. Conduct a Risk Assessment

This involves assessing risk based on the type of work you do, the types of clients you have, how you are paid and where your clients are.

2. Train staff on AML

Employees should be aware of money laundering risks and how to identify suspicious activity. It is best practice to give refresher sessions and build the training into the induction process for new staff.

3. Create whistleblowing options

Staff need to feel safe in reporting suspicions. If they suspect a customer may be engaged in money laundering, they must know when, how and who to report it to.

4. Monitor Transactions

There are a number of red flags that can indicate that a customer may be engaged in money laundering, such as large cash deposits, complex or unusual transactions, and customers who are reluctant to provide personal information.

5. Conduct Customer Due Diligence (CDD)

It is important to know your customers. You need to understand their businesses and their reasons for using your services. This will help you to identify suspicious activity.

6. Keep Good Records

Keep accurate and up-to-date records of all transactions. This will help you to monitor for suspicious activity and to comply with AML regulations. Regulators may ask to see records if suspicion falls on your company or customers.

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Consequences of money laundering

There are many reasons that money laundering is illegal. It allows drug traffickers, smugglers, and other criminals to keep the proceeds of their crimes and invest them in new criminal activities. This may lead to ever more violence and crime.

The penalties for companies engaged in money laundering are severe. They vary depending on the jurisdiction. In the UK, they typically include:

  • Prison: Individuals convicted of money laundering in the UK can face sentences of up to 14 years and/or an unlimited fine.
  • Fines: Companies convicted of money laundering may face unlimited fines.
  • Confiscation orders: UK courts can impose confiscation orders on individuals and companies. This allows them to seize any proceeds of the crime, even if they are not directly related to the specific offence charged.

The UK authorities are also increasingly using civil sanctions to target money launderers. These sanctions can include asset freezes, travel bans, and disqualification from holding certain positions, such as company director.

However, a business has other negative consequences, from a damaged reputation and lost customers to business failure.

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