What is Anti-Money Laundering (AML)?

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 criminal activities, 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 AML?

In the most general sense, Anti-Money Laundering (AML) refers to the collection of laws, law enforcement, 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 and financing of terrorism, 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 essential to 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 AML

The Bank Secrecy Act (BSA), established in the United States in 1970, was a pioneering piece of legislation in the fight against money laundering. It has been continually updated and strengthened, with the Financial Crimes Enforcement Network (FinCEN) currently in charge of its administration.

In 1989, the Global Financial Action Task Force (FATF) was formed by a group of governments and organizations. Its mission was to develop and promote international standards for preventing money laundering. After the 9/11 attacks, the FATF expanded its focus to include anti-money laundering (AML) and terrorism financing.

The International Monetary Fund (IMF), with its 189 member countries, also plays a crucial role in maintaining the stability of the global monetary system. It is particularly concerned about the impact of money laundering and similar crimes on the integrity and stability of the financial sector and the broader economy.

In 1990, the European Union introduced its first anti-money laundering Directive. This directive, which is regularly updated, aims to prevent the misuse of the financial system for money laundering. 

In the UK, anti-money laundering laws are enforced under the Proceeds of Crime Act 2002 (POCA). Several organizations, including the NCA, SFO, FCA, and HMT, work together to prevent financial crime. Despite leaving the EU, the UK's laws and regulations still align with the FATF recommendations and the EU's Anti-Money Laundering acts.

The Office of Foreign Assets Control (OFAC) in the USA develops programs to safeguard U.S. foreign policy and national interests. Many other countries have regulatory bodies that adhere to FATF regulations.

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.

What are the Stages of AML? 

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 must 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;
• Appoint 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.”

Key AML Acts

At the heart of the anti-money laundering efforts are several pivotal AML Acts that have been adopted worldwide to ensure a robust defense against the laundering of illicit funds. Here's a breakdown of key legislations:

• The Bank Secrecy Act (1970), USA: Often considered the original AML legislation, the Bank Secrecy Act (BSA) requires financial institutions in the United States to assist U.S. government agencies in detecting and preventing money laundering. 
• The Money Laundering Control Act (1986), USA: This Act established money laundering as a federal crime independent of the underlying criminal activity generating the money. It emphasized the importance of knowing the customer to prevent these illicit activities.
• The Patriot Act (2001), USA: Enacted after the September 11 terrorist attacks, the Patriot Act expanded the scope of the BSA to include terrorist financing. It introduced stricter regulations, including the requirement for financial institutions to develop AML programs and enhanced the due diligence processes.
• The Proceeds of Crime Act (2002), UK: POCA provides the legal framework for the recovery of proceeds from crime in the UK. It includes provisions for the confiscation of assets in criminal cases, civil recovery of the proceeds of crime, and the imposition of money laundering offences.
• The Sixth Anti-Money Laundering Directive (6AMLD), EU (2020): 6AMLD represents a crucial step forward in the EU's fight against money laundering and terrorism financing. It broadens the scope of existing laws, clarifying and standardizing the definition of money laundering across member states. Furthermore, it extends criminal liability to legal persons (e.g., corporations), enhances cooperation between EU countries, and lists 22 predicate offenses associated with money laundering, ensuring a more comprehensive approach. Notably, it imposes tougher penalties, with a minimum of four years of imprisonment for money laundering offenses, thus signaling the EU's intensified resolve to combat financial crimes.

Each of these acts contributes to a global infrastructure aimed at making it increasingly difficult for criminals to launder money and finance terrorism. They reinforce the need for financial institutions to establish robust compliance programs that include CDD, transaction monitoring, and the reporting of suspicious activities.

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 are vital 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.

Compliance solutions are essential for meeting regulatory requirements. AML in financial institutions must adhere to strict AML laws and AML 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 institutions know their customers and can promptly detect unusual behavior. With transaction monitoring, they identify unusual transaction patterns and flag potentially suspicious activities, preventing money laundering attempts.

Sanction Scanner's AML Solutions

Criminals find new ways to launder money as technology advances. Businesses should use more advanced tools to fight against financial crimes and terrorist funding. Sanction Scanner's solutions are developed to protect companies from financial crimes. Compliance software has simplified complex AML 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.