Financial institutions have specific compliance obligations for which they are responsible for combating financial crime and terrorism financing. Local and global authorities regulate these obligations with different scopes but similar goals. Financial institutions must comply with both regulations to ensure AML and CTF compliance; otherwise, they might face crucial fines and loss of reputation and money. This blog mentions the most essential AML regulations in different regions of the world by stating the authorities of related jurisdictions.
The Most Important AML Regulations
Globally, financial systems are more intertwined than ever. Combating money laundering and terrorist financing has gained importance in recent years. The effort has become a top priority for governments, regulatory agencies, and financial institutions worldwide. Money laundering, in essence, entails the manipulation of unlawfully acquired funds to give the appearance of legitimate origins, while terrorist financing involves providing financial assistance to support the activities of terrorist organizations or individuals. In order to properly address these significant problems, a global framework of Anti-Money Laundering (AML) regulations has been put in place. These regulations serve as vital tools to safeguard the integrity of financial systems, protect legitimate economic activities, and curtail the funding of illicit operations.
Amidst the evolving landscape of financial crime, certain AML regulations stand out as crucial pillars in the fight against money laundering and terrorist financing. These regulations aim to enhance transparency, deter illicit activities, and foster collaboration among key stakeholders. Understanding and upholding these fundamental AML regulations is not only required by law, but it is also crucial to preserving the reliability and trustworthiness of the financial industry.
AML Regulations in European Union
The EU has implemented the EU's Fourth-Fifth-Sixth Anti-Money Laundering Directive (AMLD4, AMLD5, AMLD6), which requires member states to establish a comprehensive AML framework and establish a central register of beneficial ownership information for companies. Financial institutions are required to conduct customer due diligence, report suspicious transactions, and establish internal AML controls.
EU 5AMLD and 6AMLD
The European Union publishes directives to prevent money laundering and the financing of terrorism globally and contribute to the financial system's integrity and growth. Periodically published directives provide information on current money laundering, terrorist financing, and criminal risks faced by financial markets. The EU's Fifth Anti-Money Laundering Directive (5AMLD) was published on 9.08.2018 and will affect 10.01.2020. The 6AMLD draft was published in late 2018 and will come into effect in June 2021.
5AMLD includes instructions on cryptocurrency and crypto-wallets. It also includes new legal requirements for risky customers and PEP lists in payment transactions.
6AMLD includes the criminal liability of persons associated with money laundering. It contains provisions stating that more stringent penalties will be imposed on those convicted of money laundering. It aims to improve the transparency of financial transactions and increase the accountability of financial institutions and other entities that are considered to be at high risk of money laundering or terrorism financing. It includes measures such as the creation of centralized bank account registries, the expansion of the definition of "politically exposed persons" (PEPs), and the requirement for financial institutions to conduct enhanced due diligence on PEPs and high-risk third countries. Additionally, AMLD6 has provisions for virtual currency exchanges and custodian wallet providers to comply with AML/CFT regulations and register with the relevant authorities.
MiFID (Markets in Financial Instruments Directive)
The Markets in Financial Instruments Directive (MiFID) is a European Union directive that was initially implemented in 2007 and later revised as MiFID II in 2018. The purpose of MiFID is to harmonize and regulate the financial markets within the EU, promoting transparency, investor protection, and fair competition. MiFID introduces a comprehensive framework for the provision of investment services, including rules for the organization of financial markets, the conduct of business obligations for investment firms, and disclosure requirements for trading venues. The directive also aims to enhance market integrity by setting standards for pre-and post-trade transparency, reporting of transactions, and best execution practices. By establishing a level playing field and reinforcing investor safeguards, MiFID seeks to foster confidence in the EU financial markets and ensure their efficient and orderly functioning.
GDPR (General Data Protection Regulation)
AML Regulations in the UK
The UK has implemented the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), which implements the EU's 4th Anti-Money Laundering Directive. It includes many similar points like customer due diligence measures, the creation of suspicious activity reports (SAR), and the appointment of a Money Laundering Reporting Officer (MLRO) in certain organizations.
Proceeds of Crime Act (POCA)
In 2002, the United Kingdom passed an important act known as the Proceeds of Crime Act (POCA). POCA's primary goal is to combat money laundering and retrieve illicit earnings. It provides law enforcement agencies with extensive powers to investigate and seize assets derived from criminal activities. POCA establishes various offenses related to money laundering and imposes reporting obligations on designated businesses, including financial institutions. The act also establishes the Asset Recovery Agency, which works to recover and return the proceeds of crime to victims. Overall, POCA serves as a powerful tool to disrupt the financial activities of criminals, deter money laundering, and help dismantle criminal networks.
AML Regulations in America
Proceeds of Crime ML/TF Act (PCMLTFA)
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is a key legislation in Canada against money laundering and terrorist financing. It was enacted in 2000 and has undergone subsequent amendments to align with evolving international standards and emerging risks. The PCMLTFA imposes obligations on various entities, including financial institutions, money services businesses, and casinos, to implement comprehensive AML measures. These measures include customer identification and verification, ongoing monitoring of transactions, reporting of suspicious activities, and recordkeeping. The PCMLTFA further established the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) as the nation's financial intelligence organization in charge of gathering, processing, and distributing financial intelligence to law enforcement authorities. The PCMLTFA's main purpose is to protect Canada's financial system from illegal gains and to limit the dangers presented by money laundering and terrorist financing operations.
Bank Secrecy Act (BSA)
The Bank Secrecy Act (BSA) was adopted in the United States in 1970. It is a response to rising concerns about money laundering and other financial crimes. The primary purpose of this act is to prevent illicit financial activities. To do this, financial institutions are required to set up effective AML processes. Following the implementation of these tools, any suspicious transaction would be reported to the Financial Crimes Enforcement Network (FinCEN). The BSA mandates various compliance measures, such as customer identification programs, recordkeeping, and reporting requirements. The BSA imposes these obligations in an effort to increase financial transaction transparency and prevent illegal activities within the U.S. financial system.
USA PATRIOT Act
As a reaction to the 9/11 terrorist attacks, the United States Congress passed the USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act) in 2001. The overall goal of the legislation is to improve national security by boosting intelligence sharing, extending surveillance capabilities, and countering fraudulent activities. Financial institutions are mandated by the USA PATRIOT Act to build effective AML processes, conduct enhanced due diligence on high-risk customers, and report suspicious activities to FinCEN. In order to better identify and stop terrorist financing operations in the United States, the legislation also grants law enforcement authorities greater access to financial information and the ability to follow illegal financial transactions.
FATCA (Foreign Account Tax Compliance Act)
The Foreign Account Tax Compliance Act (FATCA) is an American legislation that was passed in 2010. Its purpose is to prevent tax evasion by U.S. citizens and residents who have overseas financial accounts. FATCA's primary goal is to improve tax transparency and information exchange between the Internal Revenue Service (IRS) of the United States and foreign financial institutions (FFIs). FATCA requires FFIs to report information about their U.S. account holders to the IRS or their respective tax authorities. Non-compliant FFIs may face significant penalties or be subject to withholding taxes on certain U.S. payments. FATCA also introduces obligations for U.S. taxpayers to report their foreign financial assets on their annual tax returns. By imposing these requirements, FATCA aims to reduce offshore tax evasion, ensure greater compliance with U.S. tax laws, and improve international tax cooperation. FATCA has had a substantial global impact, as many countries have entered into intergovernmental agreements with the United States to facilitate compliance and information sharing.
Global AML Regulations
FATF (Financial Action Task Force) Recommendations
The Financial Action Task Force (FATF) is an international entity that is established in 1989. Its primary goal is to combat money laundering and terrorist financing. Other threats to the integrity of the international financial system are under the spotlight of FATF as well. The FATF Recommendations are a set of international standards and measures that provide a comprehensive framework for countries to strengthen their AML and counter-terrorist financing (CFT) regimes. The recommendations cover a wide range of areas, including legal and institutional frameworks, customer due diligence, reporting suspicious transactions, international cooperation, and the freezing and confiscation of assets related to money laundering and terrorist financing. The FATF regularly reviews and updates these recommendations to address emerging risks and evolving money laundering and terrorist financing methods. Compliance with the FATF Recommendations is crucial for countries to demonstrate their commitment to combating financial crime and to avoid being subjected to reputational risks or international sanctions. The recommendations serve as a global benchmark for AML/CFT efforts and foster cooperation among countries to create a more robust and effective global AML/CFT framework.