Anti-Money Laundering

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21 Aug, 2024

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Table Of Contents

What Is Anti-Money Laundering (AML)?

Anti-Money Laundering (AML) is a set of laws, regulations, and processes to prevent illegally gained money from entering the financial system. It aims to restrict criminals from disguising the origins of illicitly obtained funds. The primary objective of anti-money laundering measures is to identify and deter money laundering activities.

AML aids in disrupting the financial support to illegal activities like drug trafficking, terrorism, and corruption. Financial institutions, including banks and other entities, implement these programs to identify and report suspicious transactions to relevant authorities. It is a significant global effort to combat financial crimes and maintain the transparency and legality of financial transactions.

What Is Anti-Money Laundering (AML)?

Anti-money laundering is a framework comprising rules, regulations, and processes that help prevent illegally acquired money from entering the financial system. It aims to restrict financial support to unlawful activities such as drug and weapons trafficking, terrorism, human trafficking, fraud, and corruption.
This framework aids in identifying and impeding financial crimes. It allows financial institutions like banks and other establishments to monitor and report suspicious activities.
The law requires such institutions to file reports if they notice any unlawful activity. The reports enable the regulatory agencies to probe into and terminate money laundering cases and other illicit pursuits.

Anti-Money Laundering Explained

Anti-Money Laundering (AML) is the comprehensive framework of laws, rules, and processes that aims to battle against the illegal practice of money laundering. Money laundering is the process through which individuals or entities attempt to hide the illicit origins of funds obtained from criminal activities, including drug trafficking, terrorism, corruption, tax evasion, and fraud. The anti-money laundering measures help impede this process. The methods make it challenging for criminals to integrate illegal gains into the legitimate financial system.

Financial institutions, including banks, credit unions, and other entities, are crucial in maintaining anti-money laundering compliance. They implement robust tracking and reporting mechanisms to detect and report suspicious transactions. Financial institutions must submit suspicious activity reports to relevant authorities if they detect suspicious activities. The reports aid law enforcement agencies in investigating and discontinuing money laundering cases.

History

The Bank Secrecy Act (BSA), which the United States adopted in 1970, was one of the initial cases of an anti-money laundering policy. The BSA, formulated to detect and prevent such crimes, has been renewed and strengthened by the AML regulations. The Financial Crimes Enforcement Network (FinCEN) is the BSA's authorized administrator. It aims to protect the financial system from illicit activities and financial crimes like terrorist financing and money laundering.

A cluster of organizations and governments set up the Global Financial Action Task Force (FATF) in 1989. It aimed to formulate and promote money laundering prevention guidelines worldwide. FATF extended its range to include AML and terrorism funding following the 9/11 terrorist attacks on the United States.

The International Monetary Fund (IMF) is another significant body that steers the AML regulations. It comprises 189 member countries and aims to maintain the solidity of the international monetary system. The IMF addresses the impact that money laundering and similar crimes have on the fairness and stability of the financial sector and the global economy. It works toward establishing and monitoring guidelines to prevent such illegal activities and financial crimes.

Stages

Their stages of money laundering are as follows:

#1 - Placement

The illegal funds are placed in the financial system through direct or indirect methods. Some of them are:

Adding the cash obtained from illicit activities and crimes to legal businesses
False invoicing or over-invoicing for fictitious or pseudo goods and services payment
Smurfing or dividing a large sum into small amounts within the AML reporting threshold and depositing them to bank accounts or credit cards
Betting and gambling
Cash purchasing securities or insurance
Purchasing foreign currencies

#2 - Layering

In this process, illegal money is separated from its source, and layers of transactions are created to complicate the audit. The target is to conceal the origins of the illegally acquired assets.

#3 - Integration

This is the final phase in the process. Its primary objective is to merge illicit money without arousing any suspicion of law enforcement.

Examples

Let us study the following examples to understand the anti-money laundering policy:

Example #1

In 2015, the Federal Reserve directed the Deutsche Bank to mend its AML policies. Two years later, the German investment bank drew attention from the United States regulator due to its failure to comply with the AML laws. In 2023 the bank faced its most significant penalty as the Fed declared its AML policies ineffective and insufficient. The Federal Reserve penalized the Deutsche Bank with $ 186 million, along with the previous penalties of $ 58 million in 2015 and $ 41 million in 2017.

Example #2

Kyndryl, the world's largest IT infrastructure services provider, declared its selection by Gras i Wspolnicy, an eminent law firm in Poland, to employ an AML platform. The suggested platform will assist the company in strengthening its customer identification and verification process. It will also evaluate the risk potential of financing illegal organizations. The forum will help the law firm implement and monitor its AML compliance.

Rules And Regulations

The anti-money laundering rules are as follows:

Know Your Customer (KYC)

Financial institutions must ensure sufficient client recognition and verification process to maintain the authenticity of the system.

Report Large Money Transactions

Institutions must file a regulatory report for transactions exceeding a specified threshold by a single client.

Track and Report Suspicious Transactions

Regulatory authorities generate AML regulations guiding the activities and transaction types that require attention. If there is non-compliance with those regulations, the activities must be reported to the concerned authorities.

Importance

Money laundering is related to unlawful activities such as embezzlement, illegal weapons sales, smuggling activities, bribery, corruption, and fraud schemes. It is also responsible for criminal activities, like human trafficking, arms or drug trafficking, and prostitution. The AML legislation helps prevent such actions. Moreover, counter-funding of terrorism (CFT), a process financial institutions employ for combatting terrorist financing, is associated with and addressed by AML policies.

Furthermore, the anti-money laundering regulations are implemented for the following reasons:

Compliance with the AML regulations aids in tracking consumer transactions and reporting suspicious activities.
It helps protect the brand's reputation.
It saves costs from penalties, IT expenses, and funds assigned for risk exposure.

Anti-Money Laundering vs Customer Due Diligence vs Know Your Customer

The differences are:

Anti-Money Laundering: This is a structure of laws, regulations, and processes designed to obstruct criminals from hiding the origins of illegally obtained funds. It helps in recognizing and preventing money laundering activities. The process assists in ceasing financial support to illegal activities such as drug trafficking, terrorism, and corruption. Financial institutions, including banks and other regulated entities, use AML programs to identify and report suspicious transactions to the relevant authorities.
Customer Due Diligence: Customer Due Diligence (CDD) is a crucial part of the anti-money laundering rules. It involves conducting comprehensive background checks on customers before establishing a business relationship. CDD aims to discover the identity of customers, understand their financial activities, and evaluate their potential risk for involvement in money laundering or other financial crimes. These procedures usually involve collecting customer identification documents, verifying the source of their funds, and understanding the nature of their transactions. Financial institutions may apply enhanced due diligence measures to higher-risk customers based on the risk assessment to ensure accurate monitoring and reporting.
Know Your Customer: Know Your Customer (KYC) is similar to CDD and critical to anti-money laundering compliance. The KYC procedures require financial institutions to gather specific information about their customers to assess their suitability in providing financial services. This information includes the customer's identity, occupation, source of income, and purpose of the account. KYC helps to build an extensive customer profile. It enables institutions to identify and prevent fraudulent activities, financial crimes, and money laundering attempts.

Frequently Asked Questions (FAQs)

1. What transactions are covered by anti-money laundering law?

AML laws generally cover a wide range of financial transactions to prevent illegally acquiring funds or disguising the origins of money. These transactions include cash deposits and withdrawals over a specified threshold, wire transfers, international transactions, buying and selling securities, real estate deals, and activities conducted by financial institutions like banks and other financial service businesses.

2. When should the anti-money laundering risk assessment be updated?

The AML risk assessment must be regularly updated to ensure its effectiveness in addressing new and emerging risks. The frequency of updates may vary depending on the organization's risk exposure and regulatory requirements. However, generally, it should be conducted at least annually. Moreover, any significant changes in the business operations, customer base, regulatory environment, or internal controls must require an update to the AML risk assessment. It helps assess the current risk scenario accurately and enables the implementation of appropriate risk mitigation measures.

3. What is the risk assessment in Anti-Money Laundering?

The risk assessment in AML identifies, evaluates, and understands the potential money laundering risks a business or financial institution faces. It involves analyzing several factors, including customer types, services offered, and geographical locations, to evaluate the possibility and impact of money laundering activities. Risk assessment in AML helps organizations build compliance measures and allocate resources effectively to minimize the identified risks and meet regulatory obligations.