Anti-Money Laundering (AML) includes policies, laws, and regulations to prevent criminals' financial crimes and illegal activity. Global and local regulators are established worldwide to prevent financial crimes, and these regulators build policies. Companies must comply with these regulations, even though compliance can be complex. As a result, financial organizations have compliance departments and buy software solutions.
In Simple Terms, What is Anti-Money Laundering?
In the most general sense, Anti-Money Laundering (AML) refers to the collection of laws, processes, and regulations that prevent illegally obtained money from entering the financial system.
AML targets a wide variety of crimes, from corruption and tax fraud to market manipulation and illicit trade, as well as efforts to mask these activities as the source of money.
Because most criminals and terrorists rely significantly on laundered money for their illegal operations, having effective AML procedures in place has broader crime-reducing consequences.
Many businesses must do extensive customer due diligence under Money Laundering Regulations to prevent money laundering and economic crime. AML checks are an essential aspect of customer due diligence since they screen clients against PEP and Sanctions lists and verify their claimed identities. Failure to comply with AML standards can result in financial penalties and, in extreme cases, disqualification as a business/director.
Who is Using AML?
Financial institutions are the most prominent users of AML legislation, as they are compelled to report any suspicious behavior to authorities. However, financial institutions are not only obligated to report suspicious behavior. Still, they are also at a higher risk of money laundering since they provide credit to consumers who open accounts with the company.
History of Anti-Money Laundering
The Bank Secrecy Act (BSA), adopted by the United States in 1970, was one of the first pieces of anti-money laundering legislation. The BSA, an early attempt to identify and prevent money laundering, has been updated and strengthened by new anti-money laundering regulations. The Financial Crimes Enforcement Network (FinCEN) is currently the BSA's authorized administrator, with the aim of "protecting the financial system from financial crime abuses such as terrorist financing, money laundering, and other illicit activity."
The Global Financial Action Task Force (FATF) was established in 1989 by a group of governments and organizations. Its mission is to create and promote worldwide money-laundering prevention standards. FATF expanded its scope to encompass AML and terrorism funding shortly after the 9/11 attacks on the United States. Another major body is the International Monetary Fund (IMF). Its primary goal, with 189 member countries, is to preserve the stability of the international monetary system. The IMF is concerned about the impact money laundering and similar crimes can have on the financial sector's and the broader economy's integrity and stability.
The European Union also released the first anti-money laundering Directive in 1990 to prevent the financial system's misuse of money laundering. The European Union AML Directives are constantly being revised to reduce the risks associated with money laundering and terrorist financing.
The UK AML laws are imposed by the Proceeds of Crime ACT 2002 (POCA). Several organizations, like NCA, SFO, FCA, and HMT, were established in the U.K. to prevent financial crime. Even though the U.K. has left the European Union, The UK's laws and regulations comply with FATF recommendations and European Union Anti-Money Laundering directives.
Office of Foreign Assets Control (OFAC) is a functional financial sanction organization in the USA. OFAC develops programs to protect U.S. Foreign Policy and national interests.
Many more countries have regulatory bodies dependent on FATF regulations but with different functions. You can review our Guide Page to learn more about them.
Why Is AML Compliance Important?
The amount of money laundered globally in one year is believed to be 2% to 5% of global GDP, or $800 billion to $2 trillion - and this is a low estimate. Money laundering is frequently associated with illegal arms sales, smuggling, embezzlement, insider trading, bribery, and computer fraud schemes. It's also widespread in organized crime, such as human trafficking, weapons or drug trafficking, and prostitution rings.
Counter-funding of terrorism (CFT), which financial institutions utilize to combat terrorist financing, is closely tied to anti-money laundering. Money laundering (source of funds) and terrorism financing are both addressed by AML legislation (destination of funds).
Aside from the moral duty to combat money laundering and terrorist financing, financial institutions use AML tactics for the following reasons:
- Compliance with regulations requires them to monitor consumers and transactions and report questionable activities.
- Protection of their brand's reputation and shareholder worth.
- Avoidance of consent orders and potential civil and criminal fines for disobedience or negligence.
- Cost savings from fines, staff, IT expenditures, and funds set aside for risk exposure.
What Should Required Entities Do To Comply With AML Regulations?
When developing procedures for detecting money laundering activities within their scope, obligated entities (a list of which may be found here) are held to high standards. To comply with primary AML national and international legislation, they must build a complete AML framework that includes the following measures:
- Mechanisms for screening transactions and software filters;
- Strong Know Your Consumers (KYC) methods to verify, identify and check customers or businesses against sanctions and watchlists;
- Identification of ultimate beneficiaries for legal companies through due diligence and enhanced due diligence based on the level of assessed risk;
- Demonstrate that the business took every effort to avoid money laundering-related actions.
- Preserve all documentation pertaining to the identification of its clients and transactions.
Compliance with AML legislation for "chosen obligated entities" posing a high risk will be monitored in the near future by the forthcoming European entity AMLA EU (Anti-Money Laundering Authority of the European Union). As a result, a stronger emphasis on such institutions may significantly influence their requirement for AML compliance.
AML standards vary by country, but in general, financial institutions take the following steps to ensure compliance:
Know Your Customer (KYC)
To maintain authenticity, financial institutions must need sufficient client identity and verification. Higher-risk goods and services necessitate more detailed documentation.
Reporting on Large Money Transactions
Institutions are required to file a regulatory report (known as a "CTR" in the United States) for transactions over a specific threshold made by a single client during a business day.
Monitoring and Reporting of Suspicious Actions
Regulatory bodies issue AML guidelines outlining the types of activity that should be monitored (e.g., making numerous cash deposits or withdrawals over several days to avoid a reporting threshold). If an AML investigator discovers behavior that exceeds reporting criteria and has no obvious business purpose, they must submit a SAR/STR with the FIU in order to meet regulatory obligations.
Compliance With Sanctions
Financial institutions are required by regulatory bodies such as the US Treasury Department, the US Office of Foreign Assets Control, the United Nations, the European Union, Her Majesty's Treasury, and the Financial Action Task Force on Money Laundering to check transaction parties against lists of sanctioned individuals, companies, institutions, and countries.
What Are the Consequences for Businesses That Fail to Execute a Compliant AML Process?
In recent years, there has been an increase in investigations conducted by relevant national agencies for AML standards breaches. As a result, businesses that failed to develop a strong AML program and did not demonstrate adequate monitoring were fined. Their scope and prerogatives may change depending on the authority.
For example, the French institution Autorité de Contrôle Prudentiel et de Résolution (ACPR), which is in charge of supervising bank and insurance activities, has the authority to impose the following sanctions:
- A fine of up to EUR 100 million, or 10% of turnover;
- Withdraw the company's financial license, enabling it to operate on the French market;
- Interdict an individual from working in the financial industry;
- Appoints a non-permanent administrator for monitoring.
Other instances may demonstrate severe penalties for failure to comply with AML rules. For example, the British regulator Financial Conduct Authority (FCA), penalized the German Commerzbank's London branch GBP 37 million in June 2020 “for failing to put adequate AML systems and controls in place between October 2012 and September 2017.”
AML in the Cryptocurrency Industry
Anti-money laundering (AML) in the cryptocurrency industry refers to the measures taken to prevent cryptocurrencies from being used to facilitate money laundering and other illicit activities
To prevent money laundering through the use of cryptocurrencies, exchanges and other companies in the cryptocurrency industry may implement AML policies and procedures, such as verifying the identities of their customers and monitoring transactions for suspicious activity. In addition, some countries have also introduced regulations that require cryptocurrency companies to comply with AML laws and report suspicious activity to the relevant authorities.
What Is the Difference Between AML, CDD, and KYC?
Customer due diligence (CDD) refers to the inspection financial institutions (and others) are expected to carry out to prevent, identify, and report violations. Anti-money laundering (AML) is the general term for the laws, rules, and processes that prevent money laundering. Customer due diligence is applied to screening and validating prospective clients under Know Your Client (KYC) standards.
AML Compliance Solutions
AML compliance solutions are crucial tools in the financial industry. These software tools play a vital role in combating financial crimes and ensuring regulatory compliance. Their importance cannot be overstated. Firstly, they enhance risk management by enabling real-time monitoring and analysis of financial transactions. This helps institutions identify and mitigate risks associated with money laundering and terrorist financing.
AML compliance solutions are essential for meeting regulatory requirements. Financial institutions must adhere to strict AML laws and regulations, such as the USA PATRIOT Act and FATF guidelines. Failure to comply can result in substantial fines and damage to a company's reputation.
Efficiency and automation are another advantage. These solutions automate monitoring and reporting processes, reducing manual work and minimizing errors. Compliance teams can focus on high-priority tasks instead.
CDD and transaction monitoring are core features of AML compliance solutions. It collects and verifies customer information, ensuring that institutions know their customers and can detect unusual behavior promptly. or transaction monitoring, they identify unusual transaction patterns and flag potentially suspicious activities, preventing money laundering attempts.
Sanction Scanner's AML Compliance Software
Criminals find new ways to launder money as technology advances. Businesses should use more advanced tools to fight against financial crimes and terrorist funding. AML compliance software, such as Sanction Scanner's solutions, is developed to protect companies from financial crimes. Compliance software has simplified complex compliance processes for companies.
Sanction Scanner's database consists of over up-to-date global 3000 Sanctions lists, Pep lists, and Adverse Media Data. Therefore, you can integrate Sanction Scanner into your compliance program easily. You can contact us if you need more information about Sanction Scanner solutions.
