Anti-Money Laundering (AML) has existed as long as money laundering itself, in a constant cat-and-mouse game. For more than 2,000 years, we have been trying to thwart the individuals and companies who attempt to ‘clean’ illegal money so that it can be seen as legitimate. While policing money laundering has always been a daunting task, the internet and the rise of non-cash payments have only made it more difficult.
Due to the increasing prevalence of fully automated and instant payment systems, traditional anti-money laundering measures are struggling to keep pace. For this reason, various bodies have put regulations and guidelines in place to help financial institutions detect and eliminate money laundering.
To be compliant with these regulations, you need to understand exactly what they are, how they apply to your business, and what tools are available to help enforce them. Let’s take a closer look.
How does money laundering happen in banking?
Just as technology is constantly changing and adapting, so are money laundering practices. Financial institutions, like banks, have to guard themselves against different types of money laundering, including tax evasion, theft, fraud, bribery, and terrorist financing.
Therefore, money laundering is not just one action but a series of offenses. Though there are various ways to launder money, all practices follow a three-step process that attempts to take money from ‘dirty’ to ‘clean’.
1. Placement
Placement involves introducing illegally obtained funds into the legitimate financial system. Criminals often deposit cash into bank accounts, purchase valuable assets, or invest in financial instruments. To avoid suspicion, they may use multiple accounts or small transactions to stay under the radar of suspicious activity monitoring systems.
AML in Banks is critical in detecting suspicious transactions during the placement phase through the Know Your Customer (KYC) check and other AML procedures. KYC is a compulsory process that financial institutions must enforce to identify and verify their clients’ identities when opening accounts. Banks have to be able to ensure that their clients are who they claim to be.
2. Layering
The second stage of money laundering is “layering,” where the goal is to hide the trail of illegal funds further. This is done by creating a complex web of financial transactions. Money launderers may transfer funds between various accounts, institutions, or even countries. These transactions can include buying and selling assets, converting currencies, and creating shell companies.
Layering serves to confuse investigators, making it difficult to trace the original source of the funds. To combat this, banks are required to maintain detailed records of transactions and report any unusual or suspicious activities to regulatory authorities.
3. Integration
The final stage of money laundering is “integration,” where the laundered funds are reintroduced into the economy as apparently legitimate assets. This can involve purchasing businesses, real estate, or high-value goods. Banks may unknowingly play a role in this process by providing financing for these transactions.
Who regulates AML in banks?
Monitoring and regulating money laundering transcends individual countries or regions and has evolved into a global concern. Global organizations such as the International Monetary Fund (IMF) and the World Bank have launched several initiatives to combat money laundering and terrorist financing activities.
The major global anti-money laundering bodies that create AML guidelines and policies are the Financial Action Task Force (FATF), the International Money Laundering Information Network (IMoLIN), the United Nations Office of Drugs and Crime (UNODC), and INTERPOL.
Many countries are leading the way by establishing laws that support these guidelines and regulations, such as:
- The US: USA Patriot Act (2001)
“The purpose of the USA PATRIOT Act is to deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and other purposes.” - Europe: Third European Directive (2003)
“This directive aimed to expand the scope of anti-money laundering by including certain non-financial businesses and professions into its purview, such as legal services or accountancy firms.” - China: Law of the People’s Republic of China on Anti-Money Laundering (2006)
“Refers to the adoption of relevant measures according to the provisions of this Law to prevent any money laundering which is designed to cover up or conceal, by various means, the sources and nature of the criminal gains and proceeds derived from (…) crimes of smuggling, graft and bribery, crimes of disrupting the order of financial management, crimes of financial fraud, etc.” - India: Prevention of Money Laundering Act (2002)
“Was enacted to fight against the criminal offense of legalizing the income/profits from an illegal source. The Prevention of Money Laundering Act, 2002 enables the Government or the public authority to confiscate the property earned from the illegally gained proceeds.”
These are just a few examples of the laws and regulations being put in place to encourage stricter controls and greater global collaboration.
Steps to Achieving AML Compliance
Creating an effective AML strategy that is compliant with regulations and relevant to modern-day practices requires a combination of planning, following best practices, and employing up-to-date technology.
Here are ten steps you can follow to move toward achieving AML compliance in banks and other institutions:
- Appoint a compliance officer:
Designate a qualified AML compliance officer responsible for overseeing and implementing AML policies and procedures. This individual should have a deep understanding of AML regulations and the institution’s specific risks. - Risk assessment:
Conduct a comprehensive assessment to identify and understand your institution’s unique AML risks. Factors to consider include customer types, geographic locations, and product offerings. - Customer due diligence (CDD):
Develop and implement CDD procedures. This includes verifying customer identities, assessing risk, and conducting ongoing monitoring. - Transaction monitoring:
Deploy automated transaction monitoring systems capable of detecting unusual patterns of activity and generating alerts for further investigation. - Record keeping:
Establish a secure system for maintaining accurate records of customer information, transactions, and suspicious activity reports. - Training and education:
Provide ongoing AML training in banks to employees at all levels. Ensure that they understand the importance of compliance and can identify and report suspicious activities. - Internal controls:
Implement internal controls to prevent and detect potential AML violations. These controls should include audit procedures and a clear escalation process for reporting suspicious activity. - Third-party risk management:
Assess and manage the AML risks associated with third-party relationships, such as vendors and correspondent banks. - Reporting:
Develop procedures for filing timely and accurate reports of suspicious transactions with relevant authorities. - Regulatory updates:
Stay informed about changes in AML regulations and adjust compliance programs accordingly.
How Fraud.net can help
Fraud.net helps you pinpoint instances of attempted fraud and money laundering using its award-winning platform that employs artificial intelligence, big data, and live-streaming visualizations. Its innovative AI solutions help strengthen AML in banks. Book a free demo with us today to find out which tools will serve you and your organization best.