The Anti-Money Laundering Guide for Leasing

Leasing companies are not financial or banking institutions but provide resources like factoring and financing in the same way these institutions do. Leasing falls within the scope of financial services and is subject to AML regulations and specific regulatory practices, as are any businesses participating in the leasing system. The US Department of Treasury’s Financial Crimes Enforcement Network aims to change legal requirements related to identifying beneficial owners and legal requirements for businesses in the equipment leasing and financing industry, while ever-evolving anti-money laundering laws will likely impact leasing businesses across Europe shortly.

Leasing has come under extreme pressure as digital transactions and the number of customers onboarded by leasing companies has increased dramatically. Manual customer scans have become too time-consuming for businesses to carry out and are prone to human error, opening leasing management businesses to greater risk.

What is Leasing?

A lease is a form of incorporeal right typically referring to a contract that outlines the terms under which one party agrees to rent an asset owned by another party. The lessee or tenant gains the right to use the property and guarantees the lessor or landlord regular payments for a predetermined period to uphold the contract terms. The right of ownership may also pass to the lessee at the end of the lease agreement. 

Leasing is preferable for many businesses as it allows them to access resources without long-term fixed capital investment. 

How does Leasing work?

The leasing system is simple. The lessee that chooses to invest contacts the business providing financial leasing services. Alternative payment plans are prepared according to the lessee’s income and investment. After the documents are delivered, the contract is concluded along with the leasing loan process. The financial leasing company purchases the goods within the framework of the agreement and grants the right of usage to the lessee (while retaining their ownership rights). Upon expiry of the lease term, the property right may transfer to the lessee. The lessee remains responsible for the insurance and maintenance of the asset during the rental period.

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Money Laundering and Leasing

The leasing and rental industries are considered lower risk from a money laundering perspective as customers do not receive cash but rather assets to use, and payments are easily traceable. However, the European Commission continues making significant and stringent changes to the existing AML framework to harmonise rules and standards across the European Union. Leasing businesses must remain cognizant of current and upcoming changes as they are vulnerable to penalties imposed by regulators within the scope of leasing regulations, especially as leasing contracts, loans, and transactions continue to digitise and the volume of leases continues to soar. 

Like every other financial institution, leasing businesses need to be fully aware and compliant with FATF recommendations, regulations and supervisory bodies in their country of origin. 

Customer Identification and Know-Your-Customer Requirements for Leasing

The Know-Your-Customer (KYC) process is one of the most important anti-money laundering steps a leasing business can take to safeguard its company and prevent illegal financial transactions. KYC enables businesses to distinguish between favourable and unfavourable clientele, including clients with criminal or political connections or a risk that may put your business at risk. Before opening a customer account and providing a leasing loan, it’s important to collect the necessary information and documents from the customer and verify their accuracy. 

While KYC is the reality for many international businesses, there are still leasing companies that are unsure how to acquire or analyse customer information. At a minimum, leasing organisations are required to document the nature of a client’s business, their source of funding, the purpose of specific transactions and the nature/level of their transactions. Failure to do so comes with significant risks, including reputational damage, lost business, and judiciary consequences. 

The KYC process can be conducted manually or using free sources of information (such as public databases and search engines), but it’s time-consuming, expensive and inefficient. It’s also essential that sources of information are verifiable and trustworthy. 

In general, the process involves four critical steps: 

Customer identification: During this step, the business should carefully verify and scrutinise information pertaining to the potential customer, particularly to ensure that they are not listed on sanctions or PEP lists. 

Customer Due Diligence: Due diligence includes collecting all available data related to the customer from trusted third-party sources, including determining the key beneficiaries of the relationship and the purpose of the relationship. It also involves monitoring ongoing activity related to the customer to ensure that it is consistent with their stated intentions and expected business operations. 

Enhanced Due Diligence: If your customer is deemed as higher risk, including politically exposed people, people originating from high-risk third countries, or customers with an existing relationship with competitors, enhanced due diligence measures may be required. This typically involves intense monitoring of the customer relationship and deeper research into the customers themselves. 

Improve the Anti-Money Laundering Compliance Policy

Building the collection and analysis of information into existing processes (including client onboarding) is the most efficient way of becoming compliant. Automation can reduce the time and manual labour required to execute these processes in a convenient and error-free way. Utilising software to cross-reference customer information and detect counterfeit documentation is more efficient and more accurate than manual checks. 

Secondly, it’s important to remain informed. AML legislation is constantly evolving, and it’s important to remain up to date with new developments. Partnering with the right firms can ensure that the company remains compliant. The right consultancy can also assist leasing companies with building a culture of ethical practices and regular training to ensure that AML policies and processes are across the entire business. 

Conclusion

Widespread KYC and AML compliance is becoming part and parcel of international transacting and leasing companies, and many others are deemed obliged businesses. To avoid possible financial penalties and reputational damage, leasing companies must adopt the right tools and processes, including KYC and customer due diligence activities. Speak to sanctions.io or sign up for a free trial if you require further assistance or support.