Imagine a high net worth individual whose asset portfolio includes four mansions in the English countryside, a British golf course, a villa in Sardinia, and a $42.5 million Gulfstream jet. Now imagine that all of this was achievable on a yearly salary of just $70,650. The figures just don’t add up, unless you are Jahangir Hajiyev, former Chairman of the International Bank of Azerbaijan. Hajiyev used a web of attorneys and advisors to help launder money looted from Azerbaijan and fund an extravagant lifestyle that was significantly beyond his reach.
This jaw-dropping case of criminal wrongdoings brings into sharp focus the importance of establishing sources of wealth when assessing the anti-money laundering (AML) risk of high net worth individuals (HNWIs). We take a look at the HNWI market, the risk involved, and how to establish the legitimacy of wealth.
Who Is a HNWI and What Are the HNWI Risks?
The definition of a HNWI varies between banking institutions but generally refers to someone with a net-wealth of generally $1 million or more. The value of global HNWI wealth in 2020 was nearly $80 trillion, and the population of high net worth individuals increased by 6.3 percent in the same year.
Targets for Scammers
With the increasing population of high net worth individuals, it’s no wonder that the market is prone to exploitation by criminals and imposters. Indeed, the benefits of the wealthy offer a veritable treasure trove of opportunity for fraudsters. They have the ability to utilize offshore bank accounts, avoid tax payments, and transfer funds globally on an anonymous basis. The high levels of liquid assets and global properties add to their appeal for fraudsters. In fact, the wealthy are over 40 percent more likely to experience identity theft. With increasing social media exposure and use of digital transactions, cybercriminals have even greater access to connect with vulnerable hight net worth individuals. As a result, HNWI risks can be incredibly high if not managed and monitored properly.
But there is another side to this — the individual themselves may carry out unlawful business activities or be funded by ill-gotten gains. As politically exposed persons (PEPs), they could be coerced into assisting with financing fraudulent activities or they could be placed in a difficult position as a result of their connections and relationships. The reputational cost to a financial institution for cutting corners when it comes to onboarding a HNWI is high and can have long-term regulatory impacts.
Red Flags for HNWI Risks
There are number of actions that can possibly indicate AML risks of a high net worth individual. While none of these red flags are definite evidence of illicit financial activity on their own, you can use these indicators to perform a surface-level assessment of HNWI risks:
- Providing incomplete, inaccurate, or suspicious documentation or information
- Avoiding recording or record keeping requirements
- Making fund transfers that are erratic, unexplained, and show unusual patterns
- Engaging in financial activity that is inconsistent with the customer’s reported business
- Securing loans pledged by third parties unrelated to the borrower
Establishing AML Source of Wealth
Managing the wealth of HNWIs can pose major risks to banks without a comprehensive AML program and the ability to identify the source of wealth to remain in compliance with the Bank Secrecy Act. The Wolfsberg Principles, established in 2000 and updated in 2012, offer a framework of anti-money laundering guidance specifically for private banks. These principles put forward suggestions for checks required for the onboarding of new private clients, specifically in relation to beneficial ownership and relationships with intermediaries. In order to protect their reputations, financial institutions must establish robust AML best practices for financial risk management for HNWIs that are risk-based and identify the origin and legitimacy of funds.
To fully establish any discrepancies between income, AML source of wealth, and net worth, your AML compliance program components for HNWIs should include:
- Identification of the individual and any political exposure they may have
- Identification of their overall holdings and assets, including inheritances, properties, shareholdings, salary proceeds, bonuses, investments, dividends, and stock transactions
- Research into past and current business affiliations and partners
- Sanctions and watchlist research
- Focused media research
High Net Worth Individuals AML Risk Assessment
Conducting due diligence on HNWIs is challenging. It requires sifting through and analyzing complex holding structures often located in opaque jurisdictions and working swiftly and with sensitivity. Circumstances can change and establishing an ongoing monitoring process that highlights red flags ensures there are no hidden surprises. IntegrityRisk has extensive experience identifying the AML source of wealth and financial risk management for HNWIs, as well as providing actionable intelligence and crucial facts on these same individuals. IntegrityRisk’s solution, with our wide research network, in-house expertise, and unique investigative approach, puts your reputation in the safest of hands.
Get in touch today and discover how we can handle your HNWI risks and establish sources of wealth, even in the most complicated circumstances.