Anti Money Laundering (AML): Ideal Scenario
In 2015, the US Government made a move ahead in the game of Anti Money Laundering by implementing new rules for financial institutions. It required the FIs to collect and verify information about the beneficial owners of legal entities like corporations and LLCs. The information was collected at the time of account opening. In this way, the US Government actually halted numerous ongoing Money Laundering activities and caught many of the criminals.
In 2022, the top 10 actions in Anti Money Laundering in the world included the Danske Bank case the top. In this article, we shall explain AML in detail and what are the related concepts to it.
Anti Money Laundering: An Overview
What is Anti-Money Laundering?
Anti Money Laundering (AML) is a set of rules and regulations focused on the prevention of Money Laundering and Counterfeiting Terrorism Financing. Also, it allows law enforcement to catch criminals before they commit a crime.
Money Laundering: Impact on Global Economy
Money Laundering is a universal crime and is growing like cancer. Different ways of injecting illegal funds into the legal financial circle have shaken its foundations. Indeed, Money Laundering has caused serious damage to the global economy. Here are 5 negative impacts of Money Laundering on the economy worldwide:
Firstly, Money Laundering is the best hideout for corrupt individuals like PEPs (Politically Exposed Persons) and SIPs (Special Interest Persons). Mostly bribes and illegal confiscation of properties and assets facilitate corrupt and powerful people. This weakens the just legal system and brings economic instability.
2 Organized Crime
Secondly, organized crimes like drug trafficking, human trafficking, murders, and terrorism are funded through Money Laundering. This causes social unrest, violence, and political instability in the country and hinders economic development.
3 Decreased Foreign Investment
Investors will always refuse to invest in an economy where Money Laundering is a threat. Although Anti Money Laundering laws deter the normalization of Money Laundering and the risk is there. If foreign investment is reduced due to financial crimes, the country’s economy might collapse.
4 Reduced Tax Revenue
Similarly, Money Laundering is a shelter for tax evasion. Actually, people who refuse to pay taxes confiscate the right to social equality. Poor people who can benefit from government-funded facilities will not receive their rights in case of Money Laundering. Tax Havens hinder social services such as healthcare, education, and infrastructure.
What are the 3 Stages of Money Laundering?
Money Laundering is a complex criminal activity and difficult to identify and combat. But once the whole process is clear and easy to understand, anyone will be able to sense the suspicious activities. So, here’s a descriptive table on 3 stages of money laundering.
Money Laundering RegulationsThe following Money Laundering Regulations are implemented in the UK by Financial Conduct Authority (FCA). These regulations are directed by the EU’s 5th Money Laundering Directive included in the AML directives. The standards are set by the Financial Action Task Force (FATF).
- High-Risk Factors
- E-Money and Customer Due Diligence (CDD)
- Reporting the discrepancies to Company House
- Compliance Under MLRs
- Cryptoasset Regulations
Furthermore, the regulated entities by the AML authorities can be viewed in the linked article above.
Money Laundering checks in Anti Money Laundering
The AML checks are carried out to ensure the identification and prevention of Money Laundering at all levels. If the AML system is weak then anyone can bypass these checks if the loopholes are exposed in an AML system. Therefore, strong Money Laundering checks are required for KYC Process and Anti Money Laundering compliance.
Red Flags for Money Laundering
Commonly, Red Flag is a term used in Money Laundering that refers to suspicious activity or a warning sign. It suggests that a high risk of Money Laundering or other Financial crime is evident in a transaction. So it is a mandatory requirement for banks and financial institutions to file SAR (Suspicious Activity Report). In this case, they are vigilant and alert to Red Flags and the SAR is filed to the FinCEN in the USA. For other countries, the SAR is submitted to the relevant regulatory body. Red Flags include:
- High-Risk Transactions, Countries, and Individuals identified through Ongoing Monitoring.
- Unusual and suspicious transaction patterns including large cash deposits and withdrawals.
- Unclear and undeclared sources of funds and beneficial ownership of bank accounts.
- Suspicious behavior like reluctance in proving identity or having multiple accounts.
It can be said that Red Flags are a Risk-Based Approach to prevent Money Laundering. KYC Process includes Customer Due Diligence and Enhanced Due Diligence that supports the same cause. Hence, both KYC and AML have the same motive which is to prevent Financial Crime. According to the compliance officers, raising Red Flags is the best way to identify Money Laundering and other financial crime.
Accordingly, Anti Money Laundering compliance is a measure taken by businesses and FIs to detect and prevent Money Laundering. A compliance officer has the core duty to ensure KYC and AML compliance which entails the following key areas:
- Customer Due Diligence (CDD)
- Transaction Monitoring
- Risk Assessment
- Suspicious Activity Reporting (SAR)
- Staff Training
- Compliance Program
While explaining AML compliance, we should also understand the two interconnected concepts of AML and CFT. Below is a compare and contrast point-wise explanation of both concepts
|AML (Anti Money Laundering)||CFT (Combating Financing of Terrorism)|
|Regulations, Policies, and Procedures for the detection and prevention of Money Laundering.||Measures aimed to detect and prevent Terrorism Financing.|
|AML compliance is internationally regulated.||CFT compliance is regulated by national bodies.|
|AML detects and reports the Money Laundering risk.||CFT detects and reports the terrorist financing risks.|
Moreover, AML CFT has some common grounds too. Both AML and CFT are focused on the firm’s compliance with illegal activities. Also, both are necessary requirements for a robust KYC.
AML verification is required for a foolproof and secure financial system. For this purpose, Identity verification & Authentication is carried out through digital identity management.
AML Audit is the process of reviewing and evaluating the Anti Money Laundering program. Its effectiveness and weaknesses are checked through an AML audit for further improvements. The following points illustrate the AML Audit and its link to KYC/AML compliance.
- The scope of the Audit defines the areas where an AML audit needs to be performed.
- Risk Assessment is carried out for the AML risk profile of an organization.
- Compliance with Regulations ensures the AML regulations are strictly adhered to by the USA Patriot Act and BSA (Bank Secrecy Act)
- Policies and Procedures need to be communicated to all relevant parties
- Customer Due Diligence, Transaction Monitoring, Training, and Reporting activities should also be included in AML programs.
- Regular follow-ups shall be carried out by the AML Auditor for ongoing improvements in the system.
Conclusively, Anti Money Laundering is imperative for firms and everyone involved in the monetary business. Globally, AML compliance is carried out through updated AML solutions. It is also recommended that strong AML compliance requires comprehensive knowledge of the industry and regulatory requirements. Lastly, making the financial sector safe and secure for everyone is the responsibility of everyone connected to it. So, reporting any suspicious activity at all levels is necessary in this case.
Frequently Asked Questions
Particularly, for the Anti Money Laundering checks, the following documents are required:
- Valid Passport with Machine Readable Zone
- Valid Photo Card Driving License
- Valid National Identity Card
- Valid Firearms certificate/ shotgun license
The AML Standards are the AML compliance practices focused on performing Anti Money Laundering. The AML Standards discourage and prevent Money Launderers and other financial crime.
The Department of Treasury is the prime federal regulatory agency charged with the implementation and enforcing the AML laws. It is a designated authority of FinCEN.