The term predicate offense is a very important term in the realm of financial regulation and anti money laundering (AML). It is the foundation for detecting and prosecuting acts of money laundering and other related financial crime. Lacking a solid understanding of what constitutes a predicate offense, financial institutions and compliance teams may be unable to satisfy regulatory expectations or identify suspicious activity.
However, by using tools such as PEP screening, organizations can use this knowledge to bolster their defense against financial crime and help protect the integrity of the global financial system.
What Is a Predicate Offense?
Anything that is a criminal activity that produces proceeds which are then laundered is a predicate offense. In other words, the illegal funds are the product of the original crime. When the criminal tries to make the proceeds appear legitimate, these proceeds become the subject of money laundering.
A broad list of predicate offenses are recognized by the Financial Action Task Force (FATF) and other international regulatory bodies, which may vary slightly by jurisdiction, but usually include:
- Drug trafficking
- Human trafficking and smuggling
- Terrorism and terrorist financing
- Tax, securities, and insurance fraud, among others.
- Corruption and bribery
- Environmental crimes
- Arms trafficking
- Organized crime
All of these offenses are capable of producing huge amounts of illicit revenue which are then funneled through intricate financial systems in an effort to launder the money.
Why Understanding Predicate Offense Matters
1. Legal Implications
One of the first steps in prosecuting a case of money laundering is to identify a predicate offense. Under most AML laws, including the U.S. Bank Secrecy Act (BSA) and the EU’s AML directives, money laundering will not be established unless it is linked to a prior criminal act. That’s why predicate offenses are so important, as they are the legal basis for proving money laundering charges.
2. Enhanced Risk Assessment
It is expected that financial institutions and other regulated entities would carry out appropriate customer due diligence (CDD). This includes the risk assessment of the clients based on the likelihood that their funds are linked to predicate offenses. While a customer’s profile may appear inconsistent with a transaction, or the transaction may come from a high-risk jurisdiction, this can be a sign of underlying criminal behavior.
3. Regulatory Compliance
The AML regulations across the world require businesses to set up and maintain compliance programs that will allow them to detect and report suspicious activities. This effort is dependent on recognizing predicate offenses. If not done so, it can lead to hefty fines, reputational damage and sometimes even criminal liability for non compliance.
The Role of PEP Screening
PEP screening is an institution’s way of mitigating risk by identifying Politically Exposed Persons. PEPs are people who are, or have been, in senior public positions including heads of state or government, senior politicians, senior government, judicial, or military officials, or important political party officials. By nature of their roles, these individuals are deemed to be higher risk for involvement in corruption, bribery and other predicate offenses.
Financial institutions can screen for PEPs and closely monitor their transactions to look for red flags that may indicate a predicate offense. For instance, a government official who moves a lot of money from an unknown source of income could be involved in embezzlement or bribery, which are predicate offenses in most AML laws.
PEP screening typically involves:
Reviewing known PEPs and their associates from global databases.
- Ongoing monitoring of customer transactions
- Enhanced Due Diligence (EDD) for high risk individuals
- Best Practices for Managing Predicate Offense Risks
These best practices should be followed by institutions so that they can effectively detect and respond to predicate offenses.
Conduct identity verification (Know Your Customer, KYC) and understand the customer’s background and business activities.
Risk Based Approaches: Risk level customers and transactions based on geography, industry, behavior and PEPs contacts.
Monitor Transactions: set up automated systems to alert of unusual patterns (large cash deposits, rapid fund movement, cross border transfers).
File Suspicious Activity Reports (SARs) promptly with the appropriate financial intelligence unit when red flags are detected.
Train Employees Regularly: Regularly train all employees, but especially those in compliance and front line roles to recognize and respond to indicators of predicate offenses.
Final Thoughts
A predicate offense is a foundational step in being able to understand and identify a predicate offense. It enables institutions to follow the money back to its criminal source and meet their legal and regulatory obligations. Along with other tools such as PEP screening and a robust AML framework, businesses can greatly decrease their exposure to money laundering risks and contribute to the integrity of the financial system.
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