Money laundering is the process by which criminals disguise the illegal origins of their money. Anti-money laundering (AML) policies are designed to prevent this from happening and have been used in countries all over the world. These laws are created to stop people from investing, spending or moving money if they know it was obtained in an illegal manner. Those who participate in these activities when they know about the illegal means might be subject to penalties under AML laws.
AML regulations and laws are designed to combat criminal activities such as market manipulation, the trade of illicit products, and political corruption for their own gain. etc., as well as tax evasion.
In this article, we will discuss what AML is and why it has become so necessary in today’s society!
What Is Anti Money Laundering (AML)?
“Anti-money laundering (AML) is the process by which governments and regulatory bodies try to enforce policies and legislation on financial institutions in order to prevent money laundering.”
The AML rules stipulate that any financial infraction reported to relevant regulators by financial institutions. Anti-money laundering laws are enforced to ensure that criminals do not hide their illegal activities and proceeds with these financial institutions.
These rules also help governments detect tax evasion, terrorist financing, fraud and many other forms of illicit activity. Anti-money laundering policies have been in place for decades as a means of combating criminal behavior on a global scale.
The United Nations Office on Drugs and Crime (UNODC) estimates there are between 2-5% world GDP worth distributed through illegal transactions every year; this corresponds around $1 trillion US Dollars last decade alone! Anti-money laundering policies are intended to prevent this from happening.
In order to follow up on such activity, the AML regulations demand that financial institutions be aware of and report any suspicious transactions on their customers’ accounts.! Anti money laundering laws have helped authorities identify millions of dollars worth being laundered through financial institutions.
Objective of Anti-Money Laundering
The goal of anti-money laundering (AML) is to prevent criminals from laundering their illicit money into the financial system. Money laundering is used by offenders to conceal the true source of their funds, which have been acquired through crime. Anti-money laundering laws are intended to ensure that criminals do not use banks, casinos or other financial institutions for this process.
However money launderers often find ways around AML controls and there is a constant race between law enforcement agencies and the criminal world in identifying new techniques for laundering illicit funds. Anti-money laundering policies also exist on an international level and aim to combat money laundering on a global scale as well as locally.
History of Anti-Money Laundering
When the Bank Secrecy Act (BSA) was passed in 1970, the United States was one of the first countries to regulate anti-money laundering activities. The BSA has been modified and strengthened by subsequent anti-money laundering legislation, making it one of the world’s most well known organizations dedicated to fighting money laundering.
As of April 25, 1990, the Financial Crimes Enforcement Network has taken over administration of the BSA. Its aim is to “safeguard the financial system from illicit activity such as terrorist financing, money laundering, and other criminal conduct.”
In the United States, Anti-money laundering policies have been in place for decades. In recent years it has become a high priority due to increased awareness of terrorism financing with September 11th being a turning point for AML policies and procedures.
The FATF, however, expanded its remit in October 2001, immediately after the September 11 terrorist attacks, to include the prevention of terrorist financing. The International Monetary Fund (IMF) is another important force in the war against money laundering. The IMF is responsible for regulating and forcing compliance with international standards to prevent terrorist financing among member nations.
The European Union also followed the first Anti-money laundering Directive in 1990 to keep the financial system from being misused by money launderers. The European Union’s AML Regulations are updated to minimize the dangers of money laundering and terrorist financing.
What are Anti Money Laundering Laws?
Anti money laundering laws are a set of regulations that demand businesses, institutions, and even countries to avoid money laundering and terrorist financing. AML regulations initially targeted financial institutions to curb drug trafficking. The main purpose was to combat drug crime by restricting unlawful money movement. However, as crime became more sophisticated and strict anti-money laundering regulations were put into place.
Anti-money laundering and countering the financing of terrorism have grown to be worldwide concerns. International organizations such as the Financial Action Task Force (FATF) and the World Bank are working closely with national authorities like FINCEN, FINTRAC, FCA, and FINMA to combat money laundering.
There is no single Anti-money laundering law to be found; instead, each nation has its own legislation, but the most of them are bound by the 40 recommendations of FATF. The Financial Action Task Force (FATF) is a worldwide body that offers advice to nations on their efforts to prevent money laundering and terrorist financing.
2019 has been a year of hard work for lawmakers, and AML regulations all over the world have evolved drastically, influencing AML compliance in 2020. Anti-money laundering regulations are continuously evolving to fight against illegal financial activities. Anti Money Laundering policies aim at minimizing the possibility of criminals from utilizing illicit funds for unlawful purposes, such as terrorism financing and money laundering.
In recent years Anti-Money Laundering regulatory bodies have increased their efforts due to heightened awareness about terrorist funding globally . Anti-Money Laundering policies have become a high priority in the US due to September 11th being a turning point.
How does money laundering work?
Financial institutions must have a thorough understanding of how financial crime works in order to find and report potential money laundering and satisfy compliance requirements. Placement, layering, and integration are three stages of money laundering. These are a complicated chain of events that begin with the placement of funds and then progress into what appear to be real assets.
It entails where and how illegally obtained funds are invested. Money is frequently paid to cash-based businesses, fake invoices, and “smurfing.” The result is that small amounts of money are transferred to bank accounts or credit cards, funds are moved into trusts and offshore companies that conceal beneficial owner’s identities. The funds are wired to a foreign bank account and the transactions terminated only after they have been submitted to a lawyer or accountant.
This is the phase in which money from criminals must be identified and separated from its origin. To hide the source and ownership of ill-gotten assets, money launderers create complex layers of financial transactions to convert illicit cash into something else. This approach is used by criminals to disguise their illicit earnings. Which make it more difficult for AML investigators to follow the money.
It means the money laundering has been reversed and the funds have returned to the economy in what appear to be typical, legal commercial or personal transactions. This is one of the most popular methods of obtaining wealth. It may also be accomplished by investing in real estate or high-end assets. It offers money laundering and crime syndicates a chance to grow their wealth.
Why is Anti-Money Laundering so Important?
The worldwide amount of money laundered each year is estimated to be between 2% and 5% of global GDP, or US$800 billion to US$2 trillion – which is a low estimate. Money laundering is frequently associated with criminal activities such as smuggling, embezzlement, illegal arms sales, bribery, insider trading, and computer fraud scams. Organized crime, particularly human, arms, and drug trafficking networks, is another frequent scenario.
Anti-money laundering (AML) is an area of finance that deals with the prevention, detection, and prosecution of money laundering. AML also includes counter-financing of terrorism (CFT), which financial institutions employ to fight terrorist financing. AML policies aim at minimizing the possibility of criminals from utilizing illicit funds for unlawful purposes
Financial institutions employ AML approaches for a variety of reasons, some of them are listed below.
1) Compliance with regulations
As the regulations become more stringent, it does not imply that AML compliance is just another regulatory burden for your company. It has several advantages for your organization, especially in terms of security and financial transparency.
Each country and each organization has their own Anti-Money Laundering Standards, and they all differ in the nature and extent of Anti-Money Laundering compliance. However, we can still group Anti Money laundering policies into three main categories: Know your customer (KYC), Detecting suspicious activity, and Reporting suspicious activities.
Every financial institution is responsible for Anti-Money Laundering compliance. Anti Money laundering policies are not so complicated if you have the right tools. Implementing effective Anti-Money laundering software will help your company detect suspicious activities easily and meet your Anti-Money laundering requirements with no hassle.
Suspicious transactions can be defined as financial activities that indicate that funds may originate from illegal sources, be related to criminal activities or may be intended for use by criminals.
The Anti-Money Laundering Compliance helps organizations detect suspicious activity in real time so they can take action before it is too late. It offers a full range of customer due diligence features to help you comply with Anti-Money laundering regulations.
2) Protection of brand reputation
Criminals are known to use services of financial institutions to launder money, conduct fraudulent transactions or engage in other illegal activities. If you do not have an Anti-Money Laundering compliance program in place, your company could be used as a vessel to support criminal activity, which would lead to serious brand damage, litigation and hefty fines.
On the other hand, if you have an effective Anti-Money Laundering software in place, it will keep your company’s name clear and maintain its brand image. It will also help you comply with Anti-Money laundering regulations so that you can be protected from any legal actions or financial penalties.
Remember, the best way to avoid these expensive risks is to keep your company safe from any illegal activities by having a well-defined Anti-Money Laundering compliance program in place.
3) Safeguard Cash Flow of Financial Institutions
As a business owner, you probably know how much time and effort it takes to maintain an effective cash flow management system. When you have to deal with Anti-Money laundering compliance, it becomes even harder.
Most companies have no way of tracking the sources or destination of a cash transaction. As a result, you could be held responsible for any suspicious activity that occurs in your branch simply because you cannot prove that you received the funds legally.
It is important to highlight here that Anti-Money laundering compliance does not only apply to cash transactions. It also covers funds transfers, cashing checks and making deposits.
The best way to deal with this problem is by equipping your organization’s branches with the latest in Anti-Money laundering software. When you have a reliable AML software in place, it will allow your company to register all transactions and follow your customers’ activities easily.
4) Avoidance of consent orders
In 2010, a consent order was issued to American Express Bank Ltd. because it failed to report suspicious transactions that were deemed as potential money laundering activities.
This case is just one example of the many fines and penalties that your organization could be subjected to if you do not have Anti-Money Laundering compliance policies in place. The best way to avoid these penalties is to implement strong Anti-Money laundering policies and stay ahead of your competition.
Avoiding consent orders, as well as civil and criminal penalties that may be imposed for noncompliance or negligence, is an important legal concern.
You should also be well aware of the fact that any Anti-Money laundering will not make you complacent. It will only secure your business and ensure that your company is not used as a vehicle for criminals to conduct illegal activities.
5) Poor Client Experience
Your clients will be forced to go through a long and complicated KYC (Know Your Customer) process when they want to open an account with you. The process is too time-consuming and costs them money in terms of fees and commissions. To top it all, they are used to having much simpler transactions done online anytime, anywhere.
As a business owner, you should know how important it is to provide a fast and efficient client service. If your company’s KYC processes are too complicated for your clients, they will have no choice but look for other financial institutions that can better meet their expectations.
Financial institutions that fail to facilitate quick transactions may lose out on new opportunities to cross sell their services to new customers. You understand that the true worth of your firm is with its customers, as a business owner. They are the ones who bring in more revenue and help you grow your business.
If you have succeeded in building strong relationships with your clients, they will most likely stick with you regardless of how complex your Anti-Money laundering processes are. However, you should not rest on your laurels when it comes to this matter. Offering better services will help you win new clients and maintain your relationship with existing ones.
6) Fraud is on the upswing
Every day, it becomes more difficult to detect fraud. The shift from paper cash to electronic money and the prevalence of internet payments have vastly increased the danger of fraud. The weaknesses in the AML compliance of banks and enterprises are exploited by fraudsters.
The true cost of fraud is difficult to measure as it consists of many factors such as the loss that the victims experience, investing in security and prevention measures like KYC policies, investigations into money laundering activities and legal costs.
Fraud also has a direct impact on businesses that lose out in the competition when they become victims of scams. The loss in revenue does not only affect their profitability, but it can also shake up their consumers’ trust.
A business owner should carefully analyze all these aspects to get a better understanding of how money laundering activities could adversely impact his/her firm. The best prevention is to make sure that your Anti-Money laundering compliance policies and procedures are top notch and up to date with the latest regulations.
7) Government Intervention to prevent money laundering
In recent years, governments have been taking a hard look at Anti-Money laundering policies. This is because banks and other financial institutions have been used as vehicles for illegal transactions. Only a fraction of this money is ever found by law enforcement agencies, which means that it is almost impossible to trace the original source of these funds.
Money laundering laws vary from one region/country to another, but there are some international norms set by bodies such as the Financial Action Task Force on Money Laundering (FATF). Unfortunately, most countries are lagging behind when it comes to enforcement of these standards.
The failure of the governments increases the risk for businesses operating in an environment where fraud is prevalent and Anti-Money laundering standards are not strictly enforced. These companies will have a hard time building reputations that are based on trust and transparency.
A business owner should choose a partner that has robust Anti-Money laundering compliance policies in place to protect themselves against the risks of fraud. This will help them stand out from their competition and gain more customers, which will translate into more revenue for your company.
There is no clear line dividing legal transactions from fraudulent ones. This is why it is important for businesses to have a firm grasp on the latest Anti-Money laundering developments and their compliance with regulatory requirements.
What Is The Anti Money Laundering Process?
The Anti-Money Laundering Process is the set of laws, internal policies and procedures that an organization implements to prevent money laundering activities.
The primary aim of AML process is to prevent money laundering. Regulators provide a step-by-step guide for achieving this aim. Companies must adhere to these directions. “Know Your Customer” is one of these procedures. Regulators demand businesses to acquire more information about their consumers. Customers’ information can help companies determine whether or not there is a suspicious transaction.
In addition to KYC procedures, organizations may use Customer Due Diligence processes to learn about their consumers’ risks and understand them. CDD can be used to identify and mitigate risks for high-risk customers, such as politically exposed persons (PEP). For individuals with CDD, objective criteria for identification are insufficient to determine if they are at risk. Enhanced Due Diligence measures may be used for this purpose. A higher degree of inquiry is provided by enhanced due diligence, which is a KYC due diligence procedure.
Any transaction is reported to a regulator. The Financial Crimes Enforcement Network (FinCEN) is the government agency in charge of monitoring financial institutions and related parties.. Regulators such as FinCEN look for suspicious activities such as large transactions with no apparent purpose. In addition, the odd transactions which are conducted by firms or collectives that raise suspicions, and wire transfers that do not follow bank requirements.
In addition to risk factors, regulators use transaction monitoring procedures to determine which transactions are suspicious. Regulators also monitor a series of activities including a company’s commercial operations and consumer behavior. By taking this approach, companies can better their chances of avoiding financial penalties for AML non-compliance .
How can money laundering be stopped?
Money laundering can still be reduced though constant vigilance. Financial institutions must verify origin of large amount to determine suspicious expenditures and report cash transactions over $10,000. Financial institution clients can be informed on AML laws by implementing an effective anti-money laundering programme.
One of the rules in place is the duration of the AML holding deposit – required to retain at least five days of trading day in the bank. This holding period will assist in the prevention of money laundering as well as risk management. The holding period also requires deposits to be put in a bank account for up to six months each day for trading purposes.
Otherwise, companies can outsource their anti-money laundering services to a service provider specializing in the field. Such providers will offer training on AML rules and regulations as well as continuous monitoring among other services. In addition, they will have robust Anti-Money laundering compliance policies in place to protect themselves against the risks of fraud.
As a business owner, your primary objective must be to understand the Anti-Money laundering process. As such, it is necessary to implement those procedures that will help you comply with those rules and regulations as well as avoid penalties such as fines.
It is vital for companies to train their staff on AML rules and objectives since this will help them avoid non-compliance. Training reduces the risk of violation because employees will be aware of the practices to follow when handling financial transactions .
Staff training also allows companies to identify the weaknesses in their AML process. When employees are familiar with policies, they can spot areas that might be exploited by criminals.
If you think your company’s anti-money laundering process is not effective enough, you should look for an outside service provider to take care of this for you. Such providers will help your organization become compliant with all AML rules and regulations.