Currency Exchange Offices and AML

What is the AML Act and why does it apply to currency exchange offices

Under the legal definition, a currency exchange office (holder of a license to operate as a currency exchange provider) is an obligated entity that falls under the definition of a financial institution according to Section 2(1)(b)(3) of the AML Act. An obligated entity must perform its AML duties, whether it involves client identification, customer due diligence, reporting suspicious transactions, or maintaining and archiving documentation.

A currency exchange office cannot operate without a developed and functional System of Internal Policies (SIP), regular employee training, and knowledge of how to proceed in case of suspicious behavior. We often encounter operators who underestimate this agenda. When an inspection occurs, it is discovered that the internal regulations are not up-to-date or are not followed in practice, leading to high penalties.

Client identification in practice

Client identification is the first and most fundamental obligation. It is not just a matter of formal recording, but of consciously ascertaining and verifying the client's identity. In practice, it often happens that currency exchange operators only glance at the document. However, this is not enough. Identification must be carried out in the manner prescribed by law, and any deviation from the standard may later be assessed as a violation of the law during an inspection.

When and how to perform identification

Identification must be performed at the moment it becomes clear that the value of the transaction (i.e., the currency exchange transaction) will reach at least EUR 1,000, as stipulated in Section 7(1) of the AML Act. Note that this obligation also applies in the case of a suspicious transaction, regardless of the limit.

In practice, this means you request a valid identity document from the client and record their identification data, including the document number and its validity period.

Under Czech legislation, currency exchange offices are allowed to make copies of identity documents for AML purposes even without the client's explicit consent (Section 8a of the AML Act). The data (or copies) must be securely stored for 10 years from the date of the transaction, according to Section 16 of the AML Act. It is also a matter of course to check whether the client is on sanctions lists (international sanctions, EU lists).

If an inspector finds that the documentation is incomplete, illegible, or chaotic, it will be considered a failure to comply with the obligation.

Customer due diligence and risk assessment

While identification is about finding out "who is who," customer due diligence (Section 9 of the AML Act) is the process where you ascertain the origin of funds and the purpose of the transaction. You must perform customer due diligence before any transaction of EUR 15,000 or more. Furthermore, it is required for politically exposed persons (PEPs), for transactions with a person from a high-risk country, or whenever you suspect money laundering.

More than just recording data

Due diligence includes ascertaining the purpose and intended nature of the transaction (e.g., exchanging a salary, savings for a holiday, a business transaction) and identifying the beneficial owner if the client is a legal entity. It also includes reviewing the source of funds. If a client is exchanging a large amount that does not match their profile (e.g., a student exchanging hundreds of thousands), it is a signal for more thorough checks.

All due diligence steps must be recorded. If you cannot prove to the CNB or FAO during an inspection how you concluded that a transaction was not risky, you face penalties. The argument that you performed the check "in your head" will not hold up.

Transaction monitoring and detection of suspicious behavior

A suspicious transaction is one that shows signs of an attempt to launder the proceeds of crime or finance terrorism. The law and related decrees define a number of indicators, but in practice, it often comes down to the intuition and experience of a trained employee. You can also learn more in our Why Arrows section, where we describe our approach to handling high-risk situations.

How it works in practice

Examples of suspicious behavior:

• The client conducts transactions just below the EUR 1,000 or EUR 15,000 limit to avoid identification or due diligence (so-called smurfing/structuring).

• The client is nervous, refuses to disclose the source of funds, or provides implausible reasons.

• The client is from a high-risk third country or is on a sanctions list (in this case, suspicion is automatic).

• The volume of transactions does not correspond to the client's economic situation.

The lawyers from the ARROWS law firm help currency exchange offices set up internal indicators so that the system automatically flags risky behavior.

Reporting suspicious transactions

Once you assess a transaction as suspicious, you must report it to the Financial Analytical Office (FAO).

Obligation and deadlines

The report must be filed without undue delay, no later than 5 calendar days from the detection of the suspicious transaction, according to Section 18 of the AML Act. If there is a risk of delay (e.g., the money could disappear), it must be reported immediately. The report is submitted in writing, typically via a data box using the FAO's form.

At the same time, the currency exchange office has an obligation to postpone the execution of the client's order (a so-called freeze) for 24 hours from the FAO's receipt of the report, as per Section 20 of the AML Act, if executing the transaction could thwart the seizure of proceeds. The FAO can extend this period further.

System of Internal Policies and documentation

The System of Internal Policies (SIP) is the "bible" of your currency exchange office for AML matters, required by Section 21 of the AML Act. It must be in writing and must be sent to the Czech National Bank (CNB) within 60 days of the operating license becoming legally effective or of any change in data.

What the SIP must contain

The SIP contains procedures for identification and due diligence, risk assessment (types of clients, countries, products), procedures for suspicious transactions, and rules for archiving and training. You must also designate a contact person for communication with the FAO and notify the office of this person according to Section 22 of the AML Act.

If you do not have a designated contact person, you face a fine of up to CZK 1,000,000. If you do not have a developed SIP or fail to update it, the penalties can reach millions of crowns.

Inspections and sanctions

Inspections are most often carried out by the Czech National Bank (in terms of the system and processes) and the FAO. They may conduct on-site investigations or request documents remotely.

How an inspection is conducted

Inspectors often conduct so-called test purchases (mystery shopping), where they pose as clients. They test whether you perform identification, whether you ask about the source of funds for larger amounts, and whether you issue the correct receipt. Subsequently, they check the archiving and the SIP.

Amount of fines

Fines are graded according to severity. Failure to perform identification or due diligence can result in a fine of up to CZK 10,000,000 under Section 35 et seq. of the AML Act. Failure to report a suspicious transaction can lead to a fine of up to CZK 5,000,000, with maximum limits being even higher for serious systemic failures. Repeated errors lead to the revocation of the currency exchange license.

How to prepare for an inspection – prevention

The best defense is prevention. Regularly check that employees are following procedures, that documents are copied legibly, and that the SIP is up-to-date. Ensure that lists of sanctioned persons are accessible.

The lawyers at the ARROWS law firm have extensive experience with AML issues. Our portfolio includes many financial institutions and currency exchange offices, which means we know what inspectors focus on.

Conclusion

Anti-money laundering rules are a complex set of obligations on which the existence of your business depends. Identification, due diligence, reporting, and archiving are not just bureaucracy, but legal requirements under the threat of business-ending fines.

Laws change, and the interpretations by the CNB and FAO evolve. The lawyers at the ARROWS law firm deal with this agenda daily, and thanks to our high liability insurance, you are assured of a professional background when you work with us. 

If you want to minimize the risk of fines and be sure that your currency exchange office operates legally, contact the ARROWS law firm at consultation@arws.cz.