Money Laundering: How Software Firms Can Protect Themselves

This sanctions.io guide will reveal the risks and how to protect your software business. But before that, let's quickly complete a quick money laundering 101.

Money Laundering 101: Get Up to Speed

Many software companies not involved in - for example - banking, financial technology, crypto, and digital assets don't always prioritize money laundering (and also sanctions violations) risk. 

After all, they aren't regulated, and there are more exciting things to deal with, such as securing new funding, boosting those MRR figures, and posting engaging content on social media.

But the following is imperative to understand: Money laundering is a global problem associated with some of the most heinous crimes. And it's something all companies must avoid getting entangled in.

Interestingly, law enforcement agencies don't only shoot out communication campaigns to organizations such as banks about the strategies to combat the problem. Do you know who they also target? You and me - our children, too.  

For example, research from The Conversation reveals how money launderers aggressively target the UK's university student population to act as money mules.

The bottom line is this: Money launderers - who can be very creative - are always looking for new avenues to layer their ill-gotten, dirty money.

And do you know who that includes? Software companies with weak anti-money laundering (AML) controls.

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Money Laundering Techniques Targeting Software Companies

You may wonder how software businesses that don't provide financial services could unwittingly get snared into a money launderer's slippery financial trap. 

But it's easy to fall into - and may cause your company severe legal, financial, and reputational damage. 

In many cases, it happens in what is known as the layering stage of money laundering (click the link to read a sanctions.io in-depth explanation). It's when dirty cash has already been placed into the legitimate financial system, and criminals create a multi-layered web of financial transactions to throw potential investigators off the trail.

But how could this manifest itself within your company's financial systems? Here are some examples:

• Overestimating Usage: Criminals can intentionally overestimate usage for your software and later seek refunds when they don't use it, creating a legitimate paper trail and financial transaction with your company's name all over it.
  

• Overpaying for Services: Criminals may intentionally overpay for software services, creating a surplus of funds in their account. They can then request a refund for the excess amount, effectively "cleaning" their illegal money through your legitimate financial systems.
  

• Exploiting Upgrade Paths: Criminals may start with lower-tier software products and progressively upgrade to more expensive versions, each time paying with illicit funds and requesting refunds for the previous purchases.
  

The above examples provide an insight into the opportunities that money launderers may identify in your financial systems. Ultimately, they will likely find an opening to layer ill-gotten funds at software companies with poor Know-Your-Customer (KYC) and AML procedures. 

Money Laundering Risks for Software Companies

Software businesses that make it easy for money launderers put unnecessary risks on their operations and future success. Here are the most significant ones:

• Devastating Financial Penalties: Global AML fines surged 50% in 2022. Although financial institutions are mostly hit, non-regulated businesses should take notice of the increasing scrutiny by governments on all company's AML practices.
  

• Expensive Legal Quagmires: Companies involved, even unknowingly, in money laundering operations may face costly legal difficulties with law enforcement.
  

• Tremendous Reputational Damage: If it enters the public domain, potential clients will discover "money laundering" stories about your company when they research it, even years after the event. They may not even make it down to the part that says you were also a victim. In the software industry, this is particularly damaging because potential customers research online and seek partners that appear trustworthy.
  

It's also worth adding that money launderers can additionally be involved in frauds and scams. By taking action to mitigate the risk of money launderers infiltrating your company, you can also fortify your defenses against fraudulent activities and schemes.

And the question now is: What actions should you take?

Take Action: Ways To Mitigate Money Laundering Risks

In this section, we'll examine what tangible actions your software business can take - right now- to mitigate money laundering risks and the damaging consequences that can follow.

But before that, it's also important to remember this: Not all software companies, especially smaller ones, have a dedicated employee to deal with AML. It's highly plausible that many of you reading this article have different primary roles - but dealing with AML risk is part of your remit.

With that said, here are three actions you can take right now (and you don't need to be an AML expert) to mitigate the risk of money laundering in your software company:

Start AML Screening

One of the most effective actions supported by governments, regulators, and law enforcement globally is AML screening. It involves cross-checking customers (new and current) and business partners against sanctions lists, politically exposed persons (PEP lists), and criminal watchlists. 

To get started is easy.

For instance, as of October 2023, sanctions.io's Basic Package is priced at just $359 and is often enough to last smaller software companies an entire year.

Perform a Basic AML Risk Assessment

Performing a basic AML risk assessment is a wise move if you haven't already. You can learn more here: 6 Steps for Completing an AML Risk Assessment. The tremendous benefit of completing one is identifying risk areas within your business. 

Employee Training

Training your employees is critical to your AML efforts. And it's fundamental that your staff, even those in non-compliance roles, understand the money-laundering risks associated with the software business (this article is perhaps helpful for them).

Also, associations such as the Association of Certified Anti-Money Laundering Specialists (ACAMS) offer courses designed to provide general AML awareness to employees. 

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Next Steps To Take

If your company is concerned about money laundering risks, sanctions.io's simple, reliable, and cost-effective solutions are already helping software companies worldwide with their screening needs. 

To learn more about how our sanctions, PEP, and criminal watchlist screening service can support your organization's AML program:

Book a free Discovery Call

We also offer a free 7-day trial (no credit card is required) and will be delighted to walk you through our service. sanctions.io is a highly reliable and cost-effective solution for sanction checking. AI-powered and with an enterprise-grade API with 99.99% uptime are reasons why software customers globally trust us with their sanctions screening needs. 

Recommended reading: SaaS Companies - Here Is Why Sanctions Screening Is Non-Negotiable.