What is Yoked Entities in Anti-Money Laundering?

Definition

In Anti-Money Laundering (AML) terminology, “Yoked entities” refers to two or more legal or natural persons, businesses, or organizations that are linked or bound together (“yoked”) through common ownership, control, or operational interdependence such that their activities and risks are interconnected for the purposes of assessing money laundering and financial crime risk. These connections mean that AML measures must consider the entities collectively, not in isolation, to properly identify, assess, and mitigate risks arising from their combined or coordinated activities.

Yoked entities typically share beneficial ownership, senior management, physical offices, or operational controls, which can obscure the source and destination of funds and create vulnerabilities to misuse for illicit financial activities.

Purpose and Regulatory Basis

The concept of yoked entities matters in AML because criminals often exploit complex corporate structures to disguise illicit proceeds by moving them through affiliated or interconnected entities. Regulators require financial institutions and obliged entities to look beyond single entities to understand these broader networks ensuring:

• Proper Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) cover related entities.
• Risks are assessed holistically rather than fragmentarily.
• Suspicious activities consider cross-entity relationships.

Key Regulations

• Financial Action Task Force (FATF): FATF Recommendations urge countries and financial institutions to identify beneficial ownership and control structures, including related entities that may be part of layering or concealment.
• USA PATRIOT Act (2001): Emphasizes comprehensive due diligence for customers and their affiliates or related entities.
• European Union Anti-Money Laundering Directives (AMLD): Require risk-based approaches including scrutiny of corporate groups and linked entities.
• National laws often extend AML requirements to affiliated companies, subsidiaries, and entities under common control.

When and How it Applies

Real-World Use Cases

• Corporate Groups: Multiple companies under a parent company where money flows between subsidiaries.
• Shell Companies: Entities registered in different jurisdictions but controlled by the same beneficial owner to obscure funds.
• Trusts and Foundations: When associated entities manage assets collectively.
• Business Relationships: Joint ventures or partnerships where operational interdependence affects AML risk.

Triggers for Application

• Identification of common beneficial owners or executives.
• Shared premises or communication channels.
• Transactions occurring between seemingly independent entities that raise red flags.
• Regulatory or internal audit findings indicating interlinked operations.

Types or Variants

Yoked entities may take several forms:

• Parent-Subsidiary Relationships: A parent company and its subsidiary companies acting as an integrated group.
• Affiliate Networks: Entities under common influence but legally separate.
• Joint Ventures or Strategic Alliances: Entities collaborating closely in operations or finance.
• Trust-Entity Structures: Where trusts hold ownership or control in one or more entities.
• Cross-Jurisdictional Entities: Groups of companies registered in various countries but controlled centrally.

Procedures and Implementation

Steps for Compliance

1. Identification: Use corporate registries, public databases, and customer information to identify linked entities.
2. Risk Assessment: Evaluate financial crime risks considering these interconnected entities collectively.
3. Due Diligence: Apply CDD and EDD not only to individual entities but the entire yoked group.
4. Transaction Monitoring: Monitor financial flows across all yoked entities for unusual patterns.
5. Reporting: Flag suspicious activity involving these groups for further investigation.
6. Documenting: Maintain complete records on ownership, control, and inter-entity relationships.

Systems and Controls

• Integration of entity linkage data into Customer Information Systems (CIS).
• Advanced analytics to detect networked transaction patterns.
• Standard Operating Procedures (SOPs) reflecting handling of yoked entities.

Impact on Customers/Clients

For customers, being part of yoked entities implies:

• Enhanced scrutiny: More thorough verification processes.
• Restrictions: Potential limitations on transactions or services if risks are identified.
• Transparency Requirements: Disclosure of ownership and control across all related entities.

Clients must understand that AML obligations extend beyond their own entity to their related companies or entities.

Duration, Review, and Resolution

• AML monitoring of yoked entities is ongoing for the duration of the business relationship.
• Institutions must conduct periodic reviews to reassess risks from changing ownership or control.
• Resolution involves correcting identification issues, enhancing controls, or potentially terminating risky relationships.

Reporting and Compliance Duties

• Institutions must report suspicious activities involving yoked entities to Financial Intelligence Units (FIUs).
• Maintain detailed records of entity structures.
• Non-compliance may result in regulatory penalties, reputational damage, or legal action.

Related AML Terms

• Beneficial Ownership: Identifying who ultimately owns or controls the entity.
• Enhanced Due Diligence (EDD): Applied for higher risk entities including yoked groups.
• Layering: Complex transactions among interconnected entities to obscure illicit origins.
• Gatekeepers: Professionals managing or advising yoked entities in ways relevant to AML.

Challenges and Best Practices

Challenges:

• Difficulty in mapping complex ownership structures.
• Cross-jurisdictional variations in entity transparency laws.
• Risk of incomplete or inaccurate information from customers.
• Sophisticated schemes exploiting these entities for money laundering.

Best Practices:

• Use technology for entity linkage and risk scoring.
• Train staff on recognizing and handling yoked entities.
• Collaborate with regulators and peers for intelligence sharing.
• Apply a risk-based approach, focusing resources where risk is highest.

Recent Developments

• Increased regulatory focus on beneficial ownership transparency laws.
• Advances in AI and network analytics to detect linked entities and suspicious patterns.
• Implementation of global entity identification numbers (LEIs) to simplify entity tracking.
• Emerging regulations enforcing group-wide AML compliance for corporate groups.

Yoked entities in AML refer to connected entities bound by common ownership, control, or operational links that require collective risk assessment and due diligence. Proper identification and management of yoked entities is crucial for effective AML compliance, helping prevent criminals from exploiting complex structures to launder money. Financial institutions must implement robust controls, systems, and ongoing monitoring that encompass these linked entities, aligning with global regulations and evolving best practices.