Financial crimes continue to pose a pervasive threat worldwide, underscoring the ongoing need for updated AML laws and regulations and strengthened AML compliance programs in light of them. Across the globe, both local and global AML regulators are committed to combating these illicit activities effectively. Among the key stakeholders in this fight, financial service providers play a pivotal role. Addressing the deficiencies within their systems is crucial, as these weaknesses often enable and perpetuate financial crimes. It is mandatory for companies with financial crime risks to comply with the AML regulations and other relevant regulations. In this article, we will explore the three most vital AML compliance laws that organizations must prioritize in their efforts to combat financial crimes effectively.
1. The Financial Action Task Force (FATF)
The Financial Action Task Force (FATF) was established by the G-7 summit in 1989 due to the serious threats posed by financial crimes. Its primary objective is to combat money laundering and terrorist financing. Comprising 39 member countries that represent significant regions worldwide, including the United States, the United Kingdom, Japan, China, Germany, and the European Commission, FATF functions as a global regulatory body. Its role is to establish international standards for AML compliance programs.
FATF plays a crucial role in providing guidelines to countries and firms in their efforts to combat financial crimes. These guidelines outline AML requirements and offer key considerations for implementation. The FATF recommendations are designed to safeguard countries' financial systems from the risks associated with financial crime. To enforce compliance with AML and Combating the Financing of Terrorism (CFT) obligations, FATF has the authority to impose fines and sanctions on legal entities and individuals who fail to meet these requirements.
The FATF Recommendations:
To effectively combat money laundering and terrorist financing, firms should adopt a risk-based approach. This involves identifying and assessing the specific risks associated with these illicit activities. Based on the identified risks, appropriate measures should be implemented to mitigate the risks and prevent money laundering and terrorist financing.
Financial institutions are required to conduct customer due diligence measures. This process entails verifying the identity of customers as the initial step. Subsequently, the customer's risk level should be assessed through comprehensive checks. Companies must establish an audit process that aligns with the customer's risk level, ensuring appropriate levels of due diligence are applied.
In accordance with relevant laws, financial institutions are obligated to maintain customer records for a minimum period of five years. These records serve as vital evidence in the event of investigations or legal proceedings related to potential money laundering or terrorist financing activities.
To prevent corruption and bribery risks, companies must implement controls to identify Politically Exposed Persons (PEPs) among their customers. PEPs are individuals who hold prominent public positions or have close associations with such individuals. Due to their elevated risk status, conducting thorough checks and monitoring transactions involving PEPs is crucial for firms to mitigate potential risks.
If financial institutions identify suspicious activities or transactions during their monitoring and checks, they are obligated to report such incidents to the competent authorities. This reporting is typically done through the submission of a "suspicious transaction report." Timely and accurate reporting of suspicious transactions aids in investigations and contributes to the overall efforts to combat money laundering and terrorist financing. Reporting is one of the most important components of a comprehensive AML compliance program.
2. The European Union – Sixth Anti-Money Laundering Directives (6AMLD)
The 6th Anti-Money Laundering Directive (6AMLD) is a legal framework implemented by the European Union (EU) to combat money laundering and terrorist financing. Adopted in October 2018 and effective from December 3, 2020, 6AMLD updates and strengthens previous AML directives while introducing new provisions to enhance efforts in preventing financial crimes.
Key features of 6AMLD include a broader definition of money laundering, stricter penalties, mandatory central registers for beneficial ownership, improved cooperation among authorities, and the identification of 22 predicate offenses associated with money laundering. The directive applies to various entities, such as financial institutions, virtual asset service providers, tax advisors, and auditors.
6AMLD represents a significant advancement in the EU's fight against money laundering and terrorist financing, providing a comprehensive legal framework for prevention and detection across the region. However, the battle against money laundering remains ongoing as criminals continuously adapt their methods. Consequently, the regulatory environment is consistently evolving, and future updates and refinements to 6AMLD are expected.
The EU has already begun work on the 7th Anti-Money Laundering Directive (7AMLD) to further strengthen the legal framework and address emerging risks and challenges in preventing and detecting money laundering and terrorist financing.
3. The Bank Secrecy Act (BSA)
The Bank Secrecy Act is a vital anti-financial crime law in the United States, overseen by the Financial Crimes Enforcement Network (FinCEN). Financial institutions operating within the US are legally obligated to comply with this law. One of the key requirements of the BSA is for financial institutions to maintain comprehensive records of their clients' identities and transactions.
Under the BSA, financial institutions are also required to submit various reports, including:
- Customer Identification Program (CIP): Financial institutions are required to establish a Customer Identification Program as part of their AML compliance. This program involves verifying the identity of customers opening new accounts and maintaining ongoing monitoring of their activities.
- AML Compliance Program: Financial institutions must establish and maintain a comprehensive AML Compliance Program tailored to their specific risks. This program should include policies, procedures, and internal controls to detect and prevent money laundering and terrorist financing activities.
- Enhanced Due Diligence (EDD): In certain cases, financial institutions are required to apply Enhanced Due Diligence measures. This involves conducting more rigorous scrutiny of high-risk customers, such as politically exposed persons (PEPs), correspondent banking relationships, or transactions involving high-risk jurisdictions.
- AML Training and Staffing: Financial institutions are responsible for providing regular AML training to their employees. This ensures that staff members are knowledgeable about the latest AML laws, regulations, and industry best practices. Adequate staffing levels are also necessary to effectively implement and monitor AML compliance measures.
- Regulatory Examinations: The BSA empowers regulatory agencies, such as the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, to conduct examinations and audits of financial institutions' AML compliance programs. These examinations evaluate the effectiveness of the institution's AML controls and may result in recommendations or enforcement actions if deficiencies are identified.
Non-compliance with AML requirements or intentional neglect of them carries severe penalties in the US. Individuals or institutions found guilty of intentionally violating the BSA may face penalties of up to $250,000 or imprisonment for a maximum of five years. These strict consequences reflect the seriousness with which the US government addresses anti-money laundering and financial crime.
Comply with Sanction Scanner
Sanction Scanner is a leading software provider that helps financial institutions adhere to AML laws and regulations and streamline their AML compliance programs. It offers features such as risk assessment, customer due diligence, transaction monitoring, record-keeping, sanctions screening, and regulatory updates. By utilizing Sanction Scanner, organizations can streamline their AML compliance efforts, accurately assess customer risk profiles, detect suspicious activities, maintain comprehensive records, ensure compliance with sanctions lists, and stay updated with regulatory requirements. The software provides the necessary tools to combat financial crimes and meet regulatory obligations effectively.
