Written by in Business on June 30, 2021
If you’ve ventured into the foreign exchange market in any capacity, you may have heard the term compliance on more than one occasion. Forex compliance is a complex and careful practice that doesn’t often need to be considered by individuals or businesses apart from those who offer foreign exchange services. This user-friendly guide breaks down the concept in its simplest form. Here’s what you need to know:
What is Compliance?
Generally speaking, compliance is the act of following a rule; this includes regulations, policies, laws, and everything of the sort. To be compliant means that you are operating in accordance with an established set of guidelines, both within the industry and as dictated by the government. When it comes to business, compliance simply means following all of the relevant regulations and laws in your industry. Each industry has different compliance implications, therefore some businesses face more complex regulations that may significantly impact their operations. This is the case in the foreign exchange industry.
Compliance in Regards to Foreign Exchange
Foreign exchange companies face a wide range of Anti-Money Laundering (AML) and Anti-Terrorist Financing requirements due to the simple fact that money is being traded across borders. Strict compliance procedures and regimes are mandatory. Requirements differ for every company as the rules and laws are different in each jurisdiction and industry segment. Regardless, things like carefully crafted processes for account creation, reporting, security, and operations are key. Appropriate licencing and insurance must be obtained and ongoing procedures for audits and reviews must be set in place.
Forex compliance regulations work to protect the user (or client) as well as the organization itself. In a grander sense, they are also necessary to minimize suspicious activity such as money laundering. When building a compliance regime, it’s important for a company to first understand the compliance risks they are facing while transacting on a global scale.
The key set of risks that forex companies face often have to do with AML. A number of the AML risks involved with foreign exchange come from the fact that international transactions are carried out in different jurisdictions. Therefore, there are differences between laws and regulatory standards from one country to another. People seeking to carry out unlawful transactions may look to exploit discrepancies between jurisdictions. Some places are considered higher risk because they have more lenient or non-existent laws or regulatory structures for cross-border transactions. Forex companies can mitigate this type of risk through careful monitoring and reporting of transactions.
Another risk comes from account creation and identity verification. Things like two-factor authentication for account creation are key to ensure no transactions are carried out anonymously or under a fake identity.
There is also a risk if money launderers use a tactic called structuring. This is when someone carries out multiple transactions through multiple service providers. Again, careful tracking and identity verification procedures are essential to mitigate this risk.
Compliance Red Flags
There are some common compliance red flags that forex providers may watch out for. These red flags include especially large transactions, unusually high amounts of transactions that are uncharacteristic for a specific client, larger transactions than usual for a client, several exchanges in different currencies, several exchanges using different service providers, or customers refusing to carry out multi-factor authentication to verify their identity. These are just a few examples of things that may notify a provider of suspicious activity.
Forex providers use AML compliance programs to suit the unique needs of their business and their clients. These programs include a set of policies and procedures that must be followed by all employees and all clients. It focuses on things like internal systems that are used to flag and report suspicious activity, audits carried out internally and by third-party entities, and AML training for all relevant employees. In its simplest form, an AML program is a set of systems and procedures to ensure your clients are who they say they are, are conducting themselves lawfully, and that your business is operating in accordance with all applicable laws and regulations.
Many forex providers employ a Compliance Officer whose job is to ensure they are up to date with the laws and regulations of all applicable governing bodies, keeping the team informed, performing audits, conducting audits, and updating policies and procedures based on internal and external audits. These professionals are experts in compliance requirements, potential sources of risk, and AML programs.
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