AML Compliance and Classification of Vehicle Dealers
Per AML guidelines, dealers and intermediaries may fall under various categories, depending on their size and location. These categories include high-value dealers, financial institutions, and non-financial businesses. All of these categories are obliged to follow AML requirements, which include customer due diligence, record-keeping and suspicious activity reporting. The extent of their AML compliance may differ from entity to entity, which is why familiarising themselves with AML guidance is critical for all businesses within the automotive industry.
- Non-bank financial institutions refer to a US categorization and encapsulate any business engaged with the sale of cars, planes or boats. This categorization requires that these businesses must comply with AML requirements on par with banks.
- Non-financial businesses refer to a European categorization that states that individuals trading in goods belonging to so-called non-financial businesses must comply with European AML directives when they receive cash payments over €10,000.
- High-value dealers include any business (or sole trader) that makes or accepts cash payments above a specific threshold. Both the United Kingdom and Australia have adopted this categorization of vehicle dealers.
Why Criminals Use Luxury Vehicles
The automotive industry has been used as a conduit for money laundering for some time. According to a 2019 report on money laundering and the luxury vehicle industry, criminals are attracted to a lifestyle of consumptive wealth which make luxury vehicles a particularly appealing means of investing their profits. Vehicles are either purchased with cash to conceal the origin of their wealth or rented to make seizures more difficult for law enforcement.
The luxury vehicle industry also affords criminals the opportunity to legitimize significant amounts of money in a single transaction. If dealers accept cash as payment for vehicles, the funds are deposited into the mainstream financial system, removing footprints of the transaction and complicating the ability to trace the source of wealth at purchase.
The grey market of export vehicles provides another entry point for money launderers. The grey market is unregulated, and the source of the purchasers and methods of payments are difficult to track.
But perhaps the most significant factor contributing to the rise of money laundering schemes through luxury vehicle purchases lies with vehicle dealerships themselves. Dealerships are subject to less regulatory oversight than financial firms, and dealers may not be as aware of AML requirements as other institutions.
How Does Money Get Laundered?
Money laundering through vehicle sales is a simple process. Criminals purchase a vehicle with illegal cash and sell it elsewhere as a legitimate asset in another country. In the UK, the 2017 McMenamy report discovered that the Spanish Kinahan cartel set up entire networks of garages that sold cars acquired through criminal proceeds to launder drug money. Criminal dealerships also occasionally exchange vehicles to launder money, falsifying sales documents or even failing to deliver the vehicles to camouflage illicit funds.
In other instances, criminals will avoid detection by well-regulated formal banking systems by paying for vehicles through cash, mobile apps, prepaid cards or even straw buyers and seemingly legitimate front businesses.
How to Avoid a Money Laundering Scheme
A robust AML compliance program is a company’s best defense against becoming an unwitting participant in a money-laundering scheme. This typically comprises:
Implementing processes to verify customer identity
Dealerships and other parties should adopt a risk-based approach to verifying the customer’s identity, i.e. determine how great the risk of money laundering is with the associate customer. This can include the identity of the customer, their activity profile and the complexity/volume/value of the transaction.
Enhanced Due Diligence
If a customer poses a higher risk of money laundering, the business should then follow a more rigorous verification procedure known as Enhanced Due Diligence (EDD), including requesting proof of the source of funds/wealth.
Sanctions lists/UBO Information
Dealerships should also check whether or not a customer has been sanctioned or otherwise involved in criminal activity, such as terrorism. Automated software can use the information provided by the customer to determine whether or not they appear on OFAC, UN, EU or Interpol lists. The company can also perform an adverse media check to see whether or not the client was involved in a negative, publicized incident. If the vehicle is being purchased by a company, the dealership should determine its Ultimate Beneficial Ownership (UBOs), as criminals may use shell companies to distinguish their identity.
Appointing an AML team and conducting training
Dealerships should turn to specialists who can execute and determine the required AML policies and procedures for their business. All employees should be regularly and thoroughly trained by this team regarding current AML regulations and the company’s internal AML policies.
Reporting cash and suspicious activities
Dealerships should always report large payments in cash (or traveller's cheques), in any currency, per their country of origin’s reporting thresholds. If dealers note that a buyer is acting suspiciously, they should file a Suspicious Activity Report (SAR). Red flags which may provide cause for suspicion include:
- Seemingly altered documentation
- Straw buyers that are unable to explain anomalies in documentation
- Evasive buyers that refuse to provide complete information when requested
- Overly eager buyers that do not attempt any negotiation on high-value luxury cars
- The same buyers show up repeatedly to purchase multiple vehicles during multiple transactions
Dealerships should collect, record and continually maintain the information obtained during the customer verification process.
Dealerships and other parties involved with vehicle sales need to implement AML frameworks within their businesses to combat money laundering. Money laundering not only puts dealerships at risk of reputational damage and penalties but cheapens the entire industry as luxury vehicles often re-enter the secondhand market at low prices as criminal parties attempt to convert their assets to cash. Suffice to say, it is in the best interest of all vehicle dealerships and their intermediaries to familiarise themselves with AML best practices to preserve their hard work and the trust of their legitimate customers.