Under the Hood: Uncovering the Threats of ML and TF in the Automotive
Updated: Jan 20
Understanding the Risks and Challenges of Money Laundering and Terrorist Financing in the Automotive Industry and Analysis of the Best Strategies to Prevent Them
Money laundering and terrorist financing are serious risks in the automotive sector. They can have significant consequences for businesses and individuals. In fact, Luxembourg's latest national risk assessment report states that the car dealership sector is particularly vulnerable to money laundering and terrorist financing. This is because of the vehicles' high value and the ease with which they can be bought and sold. In fact, criminals can use car dealers and private sales as a means of laundering money by purchasing expensive vehicles with illegal funds and then reselling them at a profit. Moreover, terrorists can exploit the car industry to buy vehicles for their attacks or finance their operations.
A variety of operations must be implemented, and attention must be paid to different factors to combat and prevent these criminal actions in the automotive industry.
Knowing the risks
Proper awareness of the risks is essential to define the mitigation measures to be put in place.
Primarily, money laundering aims to legitimize criminal proceeds, i.e., large sums of money that must be justified by economically appropriate means. The high value of vehicles is, therefore, suitable for the industry's exploitation.
Secondly, criminals also take advantage of the difficulty of objectively assessing the value of used or restored cars. For this reason, albeit unknowingly, the car dealer industry meets the needs of money launderers and terrorists.
Be aware of the indicators
Other than the risks of money laundering and terrorist financing, some indicators can help detect a real threat situation.
In particular, AML/CFT measures should be applied if a buyer wishes to pay cash for a used car priced below 10,000 euros. Indeed, the amended Law of November 12, 2004, on Combating Money Laundering and Terrorist Financing provides a payment threshold of 10,000 euros, below which customer identification is not required. However, regardless of the specific law, as a general rule, the intensive use of cash for purchases should always alert the professional.
Customer identification is essential when dealing with large payments and is also crucial as a preventive measure. One must be very careful about buyers' IDs, mainly if they are foreign documents (whose verification can be challenging) and so-called international driver's licenses. In addition, attention should also be paid if the payment or receipt of the vehicle is made by a third party, which is not mentioned in the sales contract. Indeed, not knowing the third party's identity is a wake-up call indicating that it may be a straw man.
Finally, a further red flag is represented by that client who refuses to provide extra information. Refraining from disclosing information, data, or documents that a car dealer needs may indicate money laundering. Plus, if the buyer uses atypical networks for payment, such as a foreign bank outside Luxembourg or EU territory, or financing out of traditional channels, it is always best to ask additional questions to fully understand the transaction and thus identify some potential risks.
Taking preventive action
Among the measures and obligations to be taken to actively combat money laundering and terrorist financing and protect dealerships, we essentially list three.
First of all, verification of the identity of customers/beneficiaries and information on the origin of funds for car financing are key elements of the supervisory obligation. Indeed, according to the amended Law of December 19, 2020 on the Implementation of Financial Restrictive Measures, anyone is obliged to search and verify the identity of the client/beneficiary on the United Nations and European Union sanctions lists.
Afterwards, any suspicious transaction must be reported to the Financial Intelligence Unit via the goAML portal. Likewise, any detection of a client/beneficiary on a sanctions list must be reported to the Ministry of Finance.
Lastly, as the AED points out, providing ongoing training to sales and administration teams on professional obligations regarding AML/CTF and restrictive financial measures is essential. This way, they remain up to date on the latest developments and news.
Although good awareness of all these factors is significant, effective implementation of measures can often take time and effort. Not only does this highlight the need for continuous vigilance and cooperation among stakeholders, but it also underscores the importance of turning to professionals who can guide companies and dealerships in correctly implementing preventive measures.
In this regard, our AML/CTF team offers detailed and elaborate solutions for each case.