Money laundering used to be very easy, but thanks to anti-money laundering laws and regulations first introduced in the year 1970 through the Bank Secrecy Act. Since 1970, there has been an impressive and rapid advancement in AML laws, rules, regulations, and compliance. For key and active figures in the financial services industry, such as FIntechs and digital banks, AML laws, and regulations may seem hard to keep up with, especially with the constant change. However, it is important for key players or intending key players in the financial industry to be ascertained with such processes.
So, this “ABCs of AML Compliance for Fintech” is a simple guide that addresses the essential aspects of AML compliance for Fintech companies.
What Are The Components of AML?
The rise of money laundering (AML) regulations globally has led to corresponding changes in anti-money laundering (AML) regulations in recent years. Governments and financial institutions around the world have implemented increasingly stringent measures to combat the flow of illicit funds. This trend has been driven by several factors, including:
1. Global Expansions:
The increasing interconnectedness of the global financial system has made it easier for criminals to move and conceal their assets across borders.
2. Technological Advancements:
The creation of new technologies, such as cryptocurrencies and digital payments, has created new opportunities for money laundering and other types of financial crime.
3. Increased Public Awareness:
There has been growing public awareness of the problem of money laundering and its negative consequences, such as the funding of terrorism and crime.
In this article, there are three components to identify to understand the basics of AML compliance for Fintech. These include:
#3 Components to Understanding AML Compliance for FinTech
1. AML Laws
2. AML measures
3. AML tools
1. AML Laws
Anti-Money Laundering (AML) laws are created to prevent and reduce money laundering, terrorist financing, and other financial crimes. These laws establish the legal framework and standards that financial institutions, as well as other regulated entities, are required to follow to detect and prevent illicit activities.
Key components of AML laws typically include requirements for customer due diligence, record-keeping, transaction monitoring, and reporting of suspicious activities. We have compiled a simple guidance on how to conduct customer due diligence.
Significant AML laws and regulations are discussed below:
i. Bank Secrecy Act (BSA) - United States
The Bank Secrecy Act of the USA, which is also referred to as the Currency and Foreign Transactions Reporting Act, was enacted in 1970 to combat money laundering and other financial crimes.
It mandates financial institutions to keep records of significant cash transactions, file currency transaction reports (CTRs) for transactions over $10,000, and report suspicious activities through suspicious activity reports (SARs). The regulatory body, FinCEN, enforces this law.
ii. USA PATRIOT Act
Enacted in 2001, the USA PATRIOT Act strengthens AML laws by expanding the scope of BSA and enhancing measures to prevent terrorism financing.
Key provisions include enhanced due diligence (EDD) requirements for high-risk customers, information sharing between financial institutions and government agencies, and stricter verification of customer identities. These provisions are enforced and regulated by various bodies and agencies, including FinCEN and the Office of Foreign Assets Control (OFAC).
iii. Fourth and Fifth Anti-Money Laundering Directives (4AMLD and 5AMLD)
These directives by the European Union aim to standardize and strengthen AML efforts across EU member states. They include stricter customer due diligence (CDD) requirements, enhanced transparency for beneficial ownership, an expanded scope to include virtual currencies and stronger cooperation between financial intelligence units (FIUs).
National regulators within EU member states, coordinated by the European Banking Authority (EBA), enforce the Fourth and Fifth Anti-Money Laundering Directives.
iv. Proceeds of Crime Act (POCA)
POCA was enacted in 2002 in the United Kingdom; it provides a comprehensive legal framework for dealing with money laundering and the recovery of criminal assets. It includes reporting requirements for suspicious activities, powers to seize and confiscate criminal proceeds, and obligations for regulated sectors to implement AML controls. The Proceeds of Crime Act is enforced by the Financial Conduct Authority (FCA) and the National Crime Agency (NCA)
v. Financial Action Task Force (FATF) Recommendations
FATF, an intergovernmental organization, collaboratively set international standards to combat money laundering and terrorist financing. The 40 Recommendations provide a comprehensive framework for AML measures, including risk assessment, CDD, reporting of suspicious transactions, and international cooperation. FATF recommendations are adopted and implemented by member countries, influencing national AML laws and regulations worldwide.
vi. Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act)
This Act was enacted in Australia in 2006, and it aims to detect and prevent money laundering and terrorism financing. The Act mandates obligations for reporting entities to conduct CDD, keep records, monitor transactions, and report suspicious matters.
The Australian Transaction Reports and Analysis Centre (AUSTRAC) enforces this Act.
vii. Money Laundering (Prohibition) Act 2011 (as amended in 2012)
This Act allows for the primary legal framework for combating money laundering in Nigeria.
It prohibits the laundering of proceeds from crimes and states penalties for such actions. The Act also requires financial institutions and designated non-financial institutions to verify customers' identities and report suspicious transactions. It mandates record-keeping and the submission of currency transaction reports (CTRs) and suspicious transaction reports (STRs) to the Nigerian Financial Intelligence Unit (NFIU). The Economic and Financial Crimes Commission (EFCC) and the Nigerian Financial Intelligence Unit (NFIU) enforce this law.
viii. Central Bank of Nigeria (CBN) AML/CFT Regulations
These sets of regulations provide specific guidelines and regulations for financial institutions to prevent money laundering and terrorist financing in Nigeria. It requires financial institutions to implement robust customer due diligence (CDD) processes, including Know Your Customer (KYC) requirements and mandates continuous monitoring of transactions and reporting of suspicious activities, as well as the implementation of risk-based approaches to AML/CFT compliance.
AML laws provide the basic or essential legal framework to control money laundering and protect the integrity of the financial system. Compliance with these laws is mandatory for financial institutions and other regulated entities, and regulatory bodies enforce them through audits, penalties, and legal actions. These laws are continually updated and strengthened to address emerging threats and vulnerabilities in the global financial landscape.
2. AML Measures
Anti-money laundering (AML) measures encompass the practical actions, policies, and procedures that financial entities and other regulated entities implement to comply with AML laws and regulations. These measures are designed to detect, prevent, and report money laundering activities.
Significant AMl measures include:
1. Customer Due Diligence (CDD)
Financial companies must verify their customers' identities and understand the nature of their business. This includes collecting and verifying personal information and monitoring customer transactions on an ongoing basis.
2. Know Your Customer (KYC)
KYC is a critical component of CDD. It entails collecting and verifying information about customers to ensure they are who they claim to be. This process helps identify and mitigate potential risks.
3. Suspicious Activity Reporting (SAR)
Financial institutions are required to report any suspicious transactions or activities that may indicate money laundering or other financial crimes. These reports are typically submitted to a designated authority, like the Financial Crimes Enforcement Network (FinCEN) in the United States.
4. Transaction Monitoring
Institutions that provide financial services and facilitate transactions should use sophisticated software and analytical tools to monitor transactions for unusual or suspicious patterns that may indicate illegal activities. This includes setting thresholds and alerts for specific types of transactions.
5. Record Keeping
Financial institutions must maintain records of transactions and customer information for a specified period, usually several years. This documentation is crucial for investigations and audits.
6. Risk Assessment
Financial institutions should conduct frequent risk assessments to identify and evaluate the potential risks of money laundering and terrorist financing associated with their customers, products, services, and geographic locations.
7. Internal Controls and Compliance Programs
Organizations must implement comprehensive AML programs, including policies, procedures, and internal controls, to maintain and enhance compliance with AML regulations. This often involves appointing a dedicated compliance officer and conducting regular audits.
8. Employee Training and Orientation
Ongoing training programs are essential to educate employees about AML laws, regulations, and their role in preventing money laundering. This helps ensure that staff can recognize and respond to suspicious activities appropriately.
9. Reporting and Cooperation
Financial institutions must cooperate with regulatory authorities and law enforcement agencies by providing information and reports as required. This cooperation is vital for effective enforcement and prosecution of financial crimes.
10. Enhanced Due Diligence (EDD)
For higher-risk customers, institutions must apply stringent verification and monitoring processes. This might involve a more in-depth investigation of the customer's background, source of funds, and ongoing transaction activity.
3. AML Tools
Anti-Money Laundering (AML) tools are technological solutions and software applications that help financial institutions and other regulated entities comply with AML regulations and implement effective AML measures. These tools are made to detect, prevent, and report money laundering and other financial crimes by automating various compliance tasks and providing advanced analytical capabilities. Youverify, a software company, is dedicated to providing simple software compliance solutions to businesses of all sizes. Compliance or AML tools offered by Youverify include:
i. KYC Products/ Tools
KYC, Know-Your-Customers tools are essentially software solutions developed to aid commercial companies, especially financial companies, in obtaining credible and necessary information about their customers. KYC entails the identification and risk assessment of a customer, ensuring that customers offered financial services are credible people and can easily be held accountable in the face of an anomaly perpetuated through their account.
KYC tools help businesses stay compliant with AML regulations, which require the collation and verification of customer information. Youveriy offers a host of products that are simple to administer and perform simple AML processes that are easily scalable. These tools are essentially a comprehensive cluster capable of providing the compliance team of a variety of businesses with simple compliance solutions.
KYC Youverify Tools include:
8. Phone intelligence and verification
10. Fraud check
14. Country Coverage
ii. KYB Tools
If KYC tools help to verify a customer's identity and assess their risk, KYB performs the same function with businesses; however, it also helps ascertain if they. Know Your Business (KYB) is a verification process that ensures a company's legality and compliance with Anti-Money Laundering and other relevant regulations. This aims to ascertain an organization's legal status and compliance with established regulations as a standard.
KYB tools include offered by Youverify include:
iii. KYE Tools
Know Your Employee differs from KYC and KYB. It ensures that credible employees are hired to prevent internal fraud. About 75% of employees admitted to having stolen from their employers, and 90% of all significant theft losses are the fault of deliberate action by employees.
Know Your Employee (KYE) tools are technologies and mediums used to ensure that companies hire credible and reliable employees and reduce the risk of internal fraud and misconduct.
Standard KYE tools that are very much necessary for every organization, offered by Youverify, include:
2. Credit Check
4. Professional Certificate Verification
iv. KYT Tools
Know Your Transaction simply entails thorough and meticulous observation and monitoring of transactions to determine the proceeds and destination of funds. Because of this principle, KYT Tools are effective means of preventing money laundering and are a critical part of AML procedures.
Know Your Transaction (KYT) tools monitor and analyze financial transactions to detect suspicious activities and prevent fraud. They are necessary for financial institutions, businesses, and other entities dealing with large volumes of transactions to ensure compliance with anti-money laundering (AML) regulations and other financial crime prevention measures like CFT.
KYT Tools or products offered by Youverify include:
v. Risk Intelligence Solution
Risk Intelligence Solutions are vital components of Anti-Money Laundering (AML) measures or strategies. These solutions integrate advanced technologies and procedures to identify, assess, and reduce risks associated with money laundering and financial crime.
Youverify's Customer Risk Assessment tool uses AI to monitor and manage customer risks in real-time. It builds dynamic risk scores from various data sources, reducing false positives and enhancing compliance with global coverage. The solution includes features like alerts and reporting, full audit trails, and seamless integration with existing tech infrastructures. It aids businesses in proactively identifying and mitigating risks, ensuring informed decision-making and robust fraud prevention.
Bottom Line
Key figures in the financial industry must stay up to date on AML laws, measures, and tools to stay compliant and free of sanctions and losses. An inadequate understanding of the basics of AML can lead to complicated or serious repercussions or consequences.
Most importantly, it is important to use the right tool, which is backed by highly developed technology and less likely to give high false positives.
AML tools, like those offered by Youverify, can significantly enhance a company's compliance efforts by automating processes and providing advanced analytical capabilities in the simplest way possible. Book a free demo to see how it works.