Definition
In the context of Anti-Money Laundering (AML), an Under-the-table Payment refers to any transaction conducted secretly and unrecorded in official financial or accounting systems. These payments are typically off the books, undisclosed, and intended to evade taxes, regulatory scrutiny, or legal oversight. Such payments may be used to conceal illicit proceeds, facilitate bribery, or bypass AML controls, thereby posing significant risks of money laundering and financial crime.
Purpose and Regulatory Basis
Role in AML
Under-the-table payments are a major concern in AML because they undermine transparency and traceability in financial transactions. By operating outside formal channels, these payments facilitate the layering and integration stages of money laundering, making it difficult for authorities and financial institutions to detect and trace illicit financial flows.
Effective AML frameworks aim to identify and prevent such hidden payments to block the flow of illegal money and uphold the integrity of the financial system.
Key Global and National Regulations
Several international and national AML laws and regulatory bodies address the risks associated with under-the-table payments:
- Financial Action Task Force (FATF): Sets international standards for AML and combating the financing of terrorism (CFT), emphasizing transparency, customer due diligence (CDD), and record-keeping to combat unreported payments.
- USA PATRIOT Act: Mandates financial institutions to implement strong AML programs, suspicious activity reporting (SAR), and enhanced due diligence to identify concealed money flows.
- European Union Anti-Money Laundering Directives (EU AMLD): Requires EU members to enforce robust AML controls, including transparency of transactions and beneficial ownership information, making under-the-table payments more difficult.
- Other national AML laws mandate financial institutions, businesses, and professionals to maintain records and report suspicious transactions, indirectly prohibiting under-the-table payments.
When and How it Applies
Real-World Use Cases
Under-the-table payments commonly appear in scenarios such as:
- Bribery and corruption, where unofficial payments are made to influence decisions.
- Tax evasion, where businesses pay employees or contractors off the books to avoid payroll taxes.
- Procurement and contract fraud, involving hidden payments to secure or manipulate contracts.
- Money laundering schemes where illicit money is disguised through non-official transactions.
Triggers and Examples
Triggers for suspicion include:
- Transactions lacking formal documentation or invoices.
- cash payments or informal transfers.
- Inconsistent accounting records.
- Unusual payment patterns or payments to unknown third parties.
Example: A company paying subcontractors in cash without receipts to avoid regulatory reporting can signal under-the-table payments.
Types or Variants
Different Forms or Classifications
Under-the-table payments can manifest in various forms, such as:
- Cash Payments: Unreported, untraceable physical cash transfers.
- Kickbacks: Secret commissions paid for preferential treatment.
- Off-the-books wages: Payments to employees outside official payroll.
- Fake invoices or contracts: Used to disguise payments as legitimate expenses.
- Third-party payments: Using intermediaries to hide the true recipient of funds.
Each type poses unique AML risks and challenges for detection.
Procedures and Implementation
Steps for Institutions to Comply
- Customer Due Diligence (CDD) and Know Your Customer (KYC): Rigorous identification and verification of clients to prevent anonymous or fictitious accounts used for hidden payments.
- Transaction Monitoring Systems: Automated tools to detect anomalies such as unexplained cash flows, repeated small transactions, or payments lacking supporting documents.
- Record-Keeping: Mandatory documentation of all transactions above regulatory thresholds.
- Employee Training: Educating staff on spotting and reporting suspicious under-the-table payments.
- Internal Controls: Implementing policies to prevent off-the-books payments, including segregations of duties and approval protocols.
Impact on Customers/Clients
Rights and Restrictions
From the customer’s perspective:
- Customers have the right to transparent financial dealings and expect their transactions to follow regulatory norms.
- Engaging in under-the-table payments puts customers at legal risk, including penalties and loss of access to financial services.
- Customers are subject to AML screening and may face inquiries or restrictions when suspicious transaction activity is detected.
Duration, Review, and Resolution
Timeframes and Ongoing Obligations
- Financial institutions must retain transaction records for specified periods (commonly 5-7 years) to facilitate audits and investigations.
- Regular AML program reviews help ensure controls remain effective against under-the-table payments.
- Suspicious Activity Reports (SARs) related to hidden payments must be promptly filed with regulatory authorities.
- Remediation measures may include forensic audits or enhanced due diligence on flagged clients.
Reporting and Compliance Duties
Institutional Responsibilities
- Mandated by law to report suspicious transactions potentially involving under-the-table payments.
- Maintaining a compliance culture with robust AML governance frameworks.
- Documentation duties include maintaining audit trails, client records, and SAR reports.
- Severe penalties, including fines and criminal charges, apply for failure to detect or report such payments.
Related AML Terms
- Money Laundering: Under-the-table payments often facilitate the layering and integration stages of laundering.
- Suspicious Activity Reporting (SAR): Key reporting tool to flag potential illicit under-the-table payments.
- Customer Due Diligence (CDD): Essential preventive mechanism.
- Beneficial Ownership: Identifying the true owners behind hidden transactions.
- Bribery and Corruption: Closely linked to off-the-books payments.
Challenges and Best Practices
Common Issues
- Difficulty tracing cash-based and informal payments.
- Complex schemes using false documentation.
- Limited resources or expertise in smaller institutions.
- Customer resistance to transparency demands.
Best Practices
- Employ advanced analytics and AI in monitoring.
- Foster cooperation across regulatory, compliance, and law enforcement entities.
- Continual staff training and awareness.
- Strengthen whistleblower mechanisms.
- Adopt a risk-based approach for focused due diligence.
Recent Developments
- Increasing use of technology such as blockchain analytics to trace illicit payments.
- Regulatory tightening around transparency and beneficial ownership registries globally.
- Enhanced international cooperation to address cross-border under-the-table payments.
- Evolving typologies involving cryptocurrencies and alternative payment platforms.
Under-the-table payments represent a critical risk area in Anti-Money Laundering, as they facilitate illicit financial flows hidden from regulatory oversight. Effective detection, prevention, and reporting of these payments are foundational to AML compliance, protecting financial institutions and the broader economy from abuse. Compliance officers and institutions must implement robust controls, maintain vigilance, and adapt to emerging trends to mitigate the risks posed by such clandestine transactions.