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11 August 2021 Supervision Supervision label Q&A

Question:

Must exchange institutions investigate the source of funds in exchange transactions?

Answer:

Yes, the Anti-Money Laundering and Anti-Terrorist Financing Act (Wet ter voorkoming van witwassen en financieren van terrorisme – Wwft) requires that institutions that offer exchange transactions (exchange institutions) investigate the source of funds in an exchange transaction if needed. This requires a risk-based approach. The higher the risk, the higher the probability that an investigation of the source of funds must be carried out. The actual risk will depend on the circumstances of the case. Specific risk indicators can serve as guidance, but ultimately responsibility lies with the exchange institution itself.

Notes:

The Wwft requires that exchange institutions perform customer due diligence in order to prevent money laundering and terrorist financing. The source of the funds must be investigated “if needed”. Based on the wording of the Wwft, the accompanying Explanatory Memorandum and the Fourth Anti-Money Laundering Directive (AMLD4), a risk-based approach must be used. This means that if there is an increased risk of criminal activity, an investigation into the source of the funds is more likely to be needed.

To determine the plausibility that the funds originate from a legal source, the institution must identify specific indicators that determine the depth of the investigation. Examples of such indicators include the amount concerned, the stated explanation for the origin of the funds, the customer's age and occupation or business activities, the country of origin or destination of the funds, and the product or service provided. An exchange institution must document in its policy and procedures when it will investigate the source of the funds.

Subjective indicators that are relevant for exchange institutions

The AMLD4 sets out a non-exhaustive list of risk variables that must be used to determine the depth of customer due diligence. They are i) the purpose of an account or a relationship; ii) the size of the assets deposited by a customer; iii) the regularity or duration of the business relationship.

The Dutch Financial Intelligence Unit (FIU-NL) has published the following subjective money laundering indicators for exchange institutions:

  • Money is repeatedly exchanged from small denominations to large denominations.
  • There is no legal economic explanation for exchanging a euro amount into a foreign currency amount.
  • Large amounts in foreign currencies, divided into small denominations, are exchanged to euros.
  • There is no legal economic explanation for the currencies exchanged and the frequency of the exchange transactions.
  • Several exchange transactions are effected at different exchange offices/banks or at different branches of those exchange offices/banks.
  • Money is delivered uncounted.
  • The suspected person refuses to explain the origin of the money.
  • There is an apparent intention to circumvent the notification limit.
  • Past studies have shown that the exchange of pounds sterling and Scottish pounds in small denominations outside the United Kingdom is often linked to drug trafficking.

The Financial Action Task Force (FATF) also provides subjective indicators of what it considers to be high risks for exchange institutions. These are i) non-resident customers; ii) anonymous transactions, which may include cash.

The FATF also issues warning lists identifying jurisdictions that have deficiencies in their regimes for preventing money laundering and terrorist financing. These lists are updated three times a year (in February, June and October) and published on both the FATF website and a news item on Open Book on Supervision.

Examples

Each transaction requires alertness, and the source of funds must be investigated depending on the facts and circumstances if the risk-based approach should give cause to do so. Below are a number of examples of high-risk situations in which an investigation into the source of resources is appropriate:

  • A Dutch national has EUR 3,000 in EUR 200 and EUR 500 banknotes, which he wishes to exchange to more commonly used EUR 50 banknotes.
    • Note: high-value denominations are not commonly used in everyday business practice, but they are widely used in money laundering. Exchanging high denominations to more commonly used denominations, which are less conspicuous, is therefore an indication of money laundering.

  • A person from a high-risk country wishes to exchange USD 10,000 to euros.
    • Note: high-risk countries designated by the FATF always require additional alertness, all the more so if a rather high amount is exchanged.

  • A person repeatedly requests exchange transactions in excess of EUR 500 within a certain period of time.
    • Note: if a single person makes repeated requests for exchange transactions, this constitutes a risk-increasing component.