ECSH33339 - Complex and unusual transactions Regulation33(1)(f) of the Money Laundering, Terrorist Financing and Transfer of Funds(Information on the Payer) Regulations 2017 (MLR 2017) sets

out that enhanced due diligence(EDD) is required in any case where:

A transaction is complex or unusually large.There is an unusual pattern of transactions, or,The transactions have no apparent economic or legal purpose. Ensure you read the

generaloperational guidance for EDD and the Relevant Requirements section for Regulation33 MLR 2017.

for the business.Use the guidance for understandingbusiness activities to get a good understanding of what you can expect tosee when testing the business’s records.

Ask what the business would consider “complex”.This could be the product or service itself, the number of parties involved ormulti-layered structures, or complicated arrangements for

payment/settlement,used to obscure the true beneficial ownership. Is there a valid reason for thecomplexity?

You may find it helpful to asktheoretical questions to establish what the business would consider “unusuallylarge”. For example, when visiting a high value dealer, you could ask if thereis

an amount in cash which would appear unusual or above which the businesswould be reluctant to accept? If specialarrangements are in place for a small number of customers, you should ask

thebusiness to explain the circumstances. For example, if a business has a policyof not accepting large cash payments or payments from a third party, what ledto the business waiving this

policy?

This will be unique to everybusiness; even though they may operate in a similar way to other businesses inthe same sector, what may be complex and unusually large for one business, maynot be

for another.

You should then ask what additional checks would be performed if atransaction of this nature occurred. When you look at transaction records youwouldn’t expect to see any transactions which

exceed the business’s riskthreshold; if you do, you should select them for testing and ask to seeadditional due diligence carried out. If the business didn’t identify thetransactions, you

will need to discuss the reasons why and if there are anymitigating circumstances. This may highlight that there are insufficientcontrols in place, such as senior manager approval for

transactions above acertain threshold or set criteria for when a transaction should be considered complex.

Unusual pattern of transactions Ask the business what it wouldconsider to be unusual in relation to:

The types of customers it has..Where customers are based.The types of transactions or services carried out.How customers pay.People acting on behalf of customers. You should ask the business

howit monitors customer activity. What management information is produced on adaily, weekly, monthly and annual basis? How and when is this information analysedand by whom? For example, who

in the business monitors patterns of transactionsand identifies peaks (or troughs) in activity, in particular locations, customersor at particular times? Is management information capable

of highlighting activitywhich would be considered unusual for the business or a particular customer? Ifunusual activities cannot be rationally explained, they may involve moneylaundering or

terrorist financing.

For example, when visiting a money service business that says it only dealswith local customers who usually visit once a month to transmit money to family,why do the records suggest there

are customers who travel from outside the areadaily? You could ask questions to establish a mile radius which is considered“local” and then ask the business for further details about the

customer and arecord of the checks carried out, to demonstrate that the pattern oftransactions is unusual.  

Your questioning will always relate to what you have learned about thebusiness and on the records and management information available. How unusualtransactions are classified and handled

should be documented in the business’spolicies, controls and procedures (PCP) as required by regulation 19(4)(a)(i) MLR 2017.If it is not, there’s likely to be a breach of regulation 19 MLR

2017, alongside anybreaches of regulation 33 MLR 2017.

Transactions with no apparenteconomic or legal purpose This means that transactionsdon’t make commercial sense or could be linked to criminality.

For example, a wholesaler who isa high value dealer may explain that all of its suppliers are paid by banktransfers. However, it makes cash payments to a new company who has startedsupplying

it with discounted alcohol, and who make a 600-mile round trip tocollect the cash. You would need to ask the business to explain its rationalefor making such payments and why the new

company can’t be paid in the same way asall other suppliers. You could ask who approved the payments, whether thetransactions are being monitored and if the arrangement is likely to change.

Similarly, there are numerouscase studies which show that cash is received from customers established incountries which limit the amount of cash which can be used or leave thecountry. This

would indicate that the cash doesn’t have a legal purpose. An exampleof this is Chinese underground banking and you can find out more information byreading the NationalRisk Assessment (NRA).

Checking EDD has been carried out If you identify any customers and/or transactions which meet theexplanations above, you shouldcheck that the business has identified them and carried out

additionalchecks. If not, you will need to establish the reasons why. 

Testing EDD measures Check that the business has:

as far as reasonably possible,examined the background and purpose of the transaction, andincreased the degree and natureof monitoring of the business relationship in which the transaction is

made todetermine whether that transaction or that relationship appear to be suspicious The business should be able to evidence thatthese are over and abovenormal transaction monitoring.

Did the business consider submitting a defence against money laundering(DAML) suspicious activity report (SAR)?

You may need to ask the business follow up questions to understand theextent of the EDD measures which have been applied and the reasons for this. Totest whether the EDD measures are

appropriate, see the generalEDD guidance.