‘High risk’ businesses like adult entertainment wrestle with banking options due to AML Compliance and related Risk factors
In what could have as easily come from News of the Weird, the Wall Street Journal more than a decade ago ran a long feature story with the rather sensational headline “Porn proceeds too hot to handle for banks.” In one its more ‘un-Journal-like’ moments, the paper ran a photo of a porn actress and sourced her “they-closed-my-checking-account” story from both the categorically unjournalistic website of Perez Hilton and the feature section of Al Jazeera America. News of the Weird, in and of itself.
Those baffling decisions aside, the story itself got interesting and very CDD/KYC oriented once it got past the largely unrelated porn-star-sob-story angle. Reporters Sam Rubenfeld and Gregory J. Millman detailed the risks that banks often face when transacting business with commercial customers based in the adult-entertainment industry.
It’s nearly a decade later, and “high risk” businesses like these still face challenges in getting traditional commercial bank accounts through which they can run their payments. A KQED story detailed some of the challenges that legal businesses in adult entertain face when they seek out commercial banking.
A big part of the problem was the human trafficking made possible on the internet by sites like Backpage. For banks, identifying Risk and keeping financial crime out of the banking system means that some adult entertainment entities can be operating legally but still remain problematic for financial institutions concerned about AML Compliance and repetitional risk.
The first of two primary risk factors, according to the WSJ article authors, is reputational risk. The Journal reported that according to Accuity executive Hugh Jones, “gentlemen’s clubs, massage parlors, and webcam businesses are considered high risk because they’re fertile areas for human trafficking and money laundering,” concerns that raise major regulatory and reputational risk issues.
The second major risk overall for banks with customers in the adult-entertainment field is financial risk. According to the story, patrons of these businesses have a higher incidence of denying (i.e. usually lying) that the charges made to their credit cards were authorized charges, which can leave the issuing bank financially responsible.
Chargebacks are another problem, and not only for banks with adult-entertainment businesses as customers but also for purchases like travel, custom cabinetry, expensive memberships, and so on where the purchaser of the goods or services of the bank’s commercial customer changes his or her mind and wants the charges taken off the credit card, according to the Journal report.
Banks and money-service businesses that take on these types of higher risk customers can mitigate the risk by establishing terms specific to protecting against these risks. However, they need to have excellent customer due diligence (CDD/KYC) solutions and CDD software in place to identify risk and mitigate against it.
AML Partners’ CEO Frank Cummings extended the analysis and adds that banks with commercial customers in these types of adult-entertainment industries need to be certain that their KYC/CDD software solutions have strong features for recording and screening ultimate beneficial owners during the CDD onboarding process.
“The money-laundering risk spreads across two different layers of money laundering–placement, of course, but CDD/KYC solutions and systems need to determine the ultimate beneficial owners for for integration risk of money laundering in the commercial banking industry, ” Cummings said.
Advances in cryptocurrency options have given adult-entertainment businesses an option today that didn’t exist a decade ago. But how that will shakedown remains unknown, especially given the evolving nature of crypto regulation.
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