Why do you need to assess every party in a transaction for AML?

Your AML obligations don’t stop at your direct client because every party in a transaction can introduce money laundering, terrorist financing or proliferation financing risk. FATF Recommendation 10 requires client due diligence (CDD) to be completed on all relevant parties before a business relationship is established. 

Your risk assessment needs to reflect the full picture of the transaction, not just the client you’re directly acting for.

What the regulations require

FATF Recommendation 10 sets out the core due diligence obligations that most major jurisdictions have embedded into domestic law. It requires regulated firms to identify and verify clients, understand the purpose and intended nature of the business relationship and conduct ongoing monitoring. 

Where a client is a company or other legal entity, that obligation extends to understanding the ownership and control structure and identifying beneficial ownership.

But many transactions involve more than one party. A property sale involves a buyer and a seller. A corporate restructure may involve multiple entities, each with their own ownership structure and risk profile. A trust arrangement can bring in settlors, trustees and beneficiaries.

Recommendation 10 makes clear that understanding these business relationships includes understanding who all the relevant parties are and what their involvement means for the overall risk picture. Assessing your direct client in isolation, without considering who they are transacting with, leaves gaps that a sound risk-based approach is designed to close.

Why a transaction-level view matters

Your direct client may present as relatively straightforward: clear identity, transparent ownership, plausible source of funds. But if a counterparty in the same transaction has a complex or an opaque structure, connections to a high-risk jurisdiction or unexplained wealth, the risk profile of the transaction as a whole is different from the risk profile of your client alone.

FATF Recommendation 1 requires firms to apply a risk-based approach that reflects the actual risks they face. A risk assessment that looks only at your direct client, and ignores the broader transaction context, may not reflect those risks accurately.

Beneficial ownership and connected parties

One of the most common points of failure in transaction-level due diligence is beneficial ownership. Where a counterparty is a corporate entity, a trust or another layered structure, understanding who ultimately owns or controls it is essential to forming an accurate view of the transaction’s risk.

FATF Recommendation 10 requires firms to take reasonable measures to verify beneficial ownership. That obligation applies to all relevant parties. Where beneficial ownership is unclear or difficult to establish, that itself is a red flag that warrants closer attention. Most major jurisdictions translate this into a mandatory enhanced due diligence trigger in their domestic AML legislation.

The practical consequence of missing a party

If one party in a transaction is subject to financial sanctions and you have not screened them, you may be in breach of sanctions law, regardless of how thoroughly you assessed your direct client. FATF Recommendation 6 addresses targeted financial sanctions and requires regulated firms to screen all relevant parties, not just the lead client.

If the proceeds of crime are moving through the transaction via a counterparty you haven’t considered, you may have handled criminal property without knowing it.

Supervisors reviewing AML compliance look at the full picture of a transaction. If the transaction carries elevated risk and your file only covers your direct client, supervisors will notice the gap.

Final thoughts

For each party, the questions are the same as for your direct client: who are they, who controls them, where does their money come from and does anything about their profile or behaviour raise concern?

Where a party’s profile increases the overall risk of the transaction, that should feed into your CDD decisions. It may mean applying enhanced due diligence where you might not have done so based on your direct client alone. It should always be documented clearly, so that your reasoning is visible if the transaction is ever reviewed.

The goal is a complete and accurate picture of the transaction’s risk, with each party assessed on their own merits and the combined picture considered as a whole.

AMLCC’s Client Linking feature allows you to connect separate client profiles to a single transaction, giving you a consolidated view of the risk presented by all parties involved and a single report you can produce for your supervisor or for law enforcement if required.