AML challenges for the luxury and jewellery market in the European Union

Money laundering as such and the illegal nature behind it usually involves several steps of actions that are mostly very well camouflaged. It can also involve cross-border transactions, which surely increases the level of difficulty. Therefore, money laundering is very difficult to detect and not easily distinguishable from everyday business and transactions. Due to its complex nature, supervisory authorities are dependent on the cooperation of a variety of businesses for better money laundering prevention measures. In this category, retailers which trade with high value products are listed, since they are in the position to accept transactions from end consumers, and therefore, act as transmitting agents. These industries have been defined as more likely to place money from unlawful sources. If successfully managed by launderers with a single transaction, a high outcome could be received. Therefore, these industries are playing a key role for both reasons. Firstly, in order to prevent unlawful actions and report suspicions actions to authorities, and secondly, to prevent businesses from fraudulent actions and possible monetary loss. 

For example, gold, diamonds and jewellery, in general, might be considered as a ‘suitable’ way to launder money. Gold, in particular, has reportedly been used for international money laundering actions by criminals since the beginning (cf. Herzog et al. 2018 Herzog, F. / Figura, J. / Achtelik, O. C. (2018) Geldwäschegesetz (GwG). The advantage of gold is that it is also a currency – Gold is internationally accepted without the need for any conversion and this makes its cross-border use easier and more convenient. These kinds of actions, for instance, exchanges via valuable metals, can also frequently be detected in Europe. Furthermore, diamonds also allow in for the transfer and legitimatizing of dirty money due to their quite compact size and have been used for financing terrorist activities -   therefore the term “blood diamonds” has been established. Nowadays, the international diamond market is being guarded through the Kimberley process (certification commitment aimed at prevention of conflict diamond sales) which is represented by World Diamond Council. The law act defines these businesses – the acquiring of high value goods – as “not being an everyday purchase”. 

Understanding and meeting the regulatory challenges 

With each release of new directives from European Parliament and the implementation thereof into country laws, obliged parties are entitled to be informed and inevitably adjust their processes to the new requirements. As the latest updates show, the list of obliged parties is not expected to decrease in the foreseeable future. For instance, in May 2019, the German Federal Ministry of Finance has released the draft bill which resulted from the 5th AML Directive from European Parliament. Two months later, in July 2019, this draft was passed in the German Parliament. With this new bill, the threshold value of cash transactions for particular industries is lowered to only EUR 2,000 instead of previously EUR 10,000. This adjustment alone points out several new obligations on the retailer’s end, especially for the ones who are dealing with high value products. 

Therefore, the question of this topic’s relevance for one’s business must be re-evaluated. Money laundering in small or big sums reflects the reality and can at any time affect businesses negatively. In order to protect themselves, establishing tailored prevention mechanisms must be a priority for those who are or might be the target of such unlawful acts. 

Process-oriented in-depth researches at retailers highlight that customer-initiated bank transfers for purchased items before shipment – prepayment – could be identified as one of the riskier, and thus, triggering problematic solutions in these retailers’ payment portfolio – not because of the nature of the payment method, but rather due to the internal handling procedures. Therefore, extensive improvement measures are highly recommended, which may be realized either through employee awareness or through an automatic prevention mechanism – preferably both. 

If there is no match happening between the payment data from the original booking and the address of the refund payment, a potential for fraudulent use could occur. In case of returned items for refund, this instance may create a triangular situation for instance between the original payer's bank account and the bank account given for refund. 

Following that, limitation and eventually abolition of cash acceptance is needed at retailers in the luxury and jewellery market. As a last resort, it is necessary to implement a customer identification process for transactions exceeding EUR 15, 000 as well as in- and outgoing payment source’s match for prepayment transactions. Once these process-based improvements are made, implementation of a general, automated transaction monitoring system is recommended. This will allow companies and their employees real-time access to transaction activities as well as enable precocious detections of suspicious activities. In order to receive a full scope prevention in-house next to the automated mechanism, a high involvement of employees, through training sessions and offering continuous AML awareness is needed.

About Isil Ugurlu

Isil Ugurlu is currently working as Head of payment at elumeo SE and has also taken over an additional role at the group and become Money Laundering Reporting Officer in 2019. She is also an active part of EWPN (European Women Payment Network) since 2018 to foster network’s presence in German Fintech industry. She is initiating partnerships with leading organizations and holds Meetups which cover not only hot industry topics but also focus on important matters like diversity. After completing her bachelor’s degree at Freie University Berlin specializing in Business & Managerial Economics, she pursued her academic career during her Master degrees at Berlin School of Economics and Law, focusing on Anti-Money Laundering regulations and the recent developments in Europe

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