Online transactions it the primary means of conducting business today due to advancements in technology. Although it simplifies business processes, it also leaves the system exposed to criminal acts like money laundering. Basically, anti-money laundering is a set of processes that are put in place to prevent money laundering activities in our technology-driven processes today.
To help you better understand its scope, we have put together this robust content discussing what is anti-money laundering and why it matters. Read on!
What is Money Laundering?
Money laundering refers to the act of trying to make illegally obtained money appear to be obtained from a legitimate source. Usually, it involves passing it through a series of legit commercial transactions to make it appear to be from legal sources, hence “cleaning” the money.
A good example of this would be investing money obtained from selling illegal drugs into a business and disguising it as sales profit of that business just to hide its original source and make it appear clean. Money laundering is an illegal act.
What is Anti-Money Laundering (AML)?
Anti-Money Laundering or AML refers to a series of policies, technologies and procedures that are put in place to prevent money laundering activities. Generally, anti-money laundering is implemented within vulnerable structures like financial institutions and government systems to monitor activities and fish out those with high fraud risk potential, quickly enough to intervene.
Why is AML required?
AML is necessary today because criminals can easily use money laundering activities to make illegal money appear to have legitimate origins. AML regulations are put in place to ensure financial institutions have robust customer due diligence procedures and plan to assess and adequately identify money laundering risks in real-time, and detect suspicious transactions.
The History of Anti Money Laundering
Although it has been in existence long before, the first solid anti-money laundering structure was developed by the Financial Action Task Force (FATF). It expanded to terrorist surveillance after the terrorist attacks in 2001 on the twin tower building.
The structure ensures that international standards and precautions are put in place to prevent money laundering. The history of money laundering dates far back as the 1920s. Today, those efforts have expanded to businesses in other industries, and most recently, cryptocurrencies.
What are the 3 stages of Money Laundering?
The 3 stages of Money Laundering process are:
- Integration/ Extraction
Placement is the primary step in money laundering, in which the money is placed in a financial institution. It then proceeds to layering, where the money undergoes a series of transactions to disguise its original source (hence the name layering). Finally, the money is then obtained from the financial institution after being “cleaned” and integrated into the system. This final stage is referred to as integration.
Read the full article on the 3 stages of money laundering
What are the 5 Basic Money Laundering Offences?
The 5 basic money laundering offences include:
- Tax Evasion
- Terrorist Financing
What Are Some Ways That Money Is Laundered?
Some of the ways that money is laundered include:
- Through associates cash-generating businesses
- Inflating invoices in shell company transactions
- Layering transactions to disguise the source of the illegal money
- Structuring or smurfing i.e breaking up large sums of money into smaller ones to avoid AML scrutiny
Read more - What are the Types of Money Laundering?
What are the 5 Anti-Money Laundering Control Systems?
The 5 anti-money laundering control systems employed by financial institutions include:
The first step to getting money laundering under control is through the criminalisation of the act. Most governments, businesses and financial institutions impose this control to discourage money laundering. International bodies like the United Nations Conventions Against Transaction Organised Crimes have also laid guidelines that government bodies should follow when prosecuting individuals who break the law by participating in money laundering acts.
2. Know Your Customer
Know Your Customer policies helps business prevent money laundering by verifying the identities of customers as well assess the risks surrounding conducting business with them. It also involves monitoring the client's activities and noting suspicious transactions in order to take appropriate actions. Normally, the financial institution is mandated to report such suspicious activities to a financial investigation unit and necessary financial task force bodies.
3. Record-Keeping and Realtime Monitoring
This step involves keeping an adequate record of transactions and possibly implementing software that can automatically detect and flag suspicious activities. It is generally referred to as transaction monitoring. Customer data and activities could also be classified based on different levels of suspicions according to assessed risks and their transactions denied if they satisfy certain criteria.
4. Holding Periods
This is a deposit period in which banks require that the money stays for a certain number of days before being transferred. Holding period is implemented to manage risk associated with money laundering and the quick movement of huge amounts through banks to “clean” it.
5. Monitoring and Compliance Technology
There are available technologies today that could be used to verify the identity of customers, carry out thorough background checks and identify suspicious money laundering activities as the case may be. AI such as Youverify OS could be used to perform this and identify possible money laundering act early on.
What are the 5 Pillars of an AML Program?
The 5 pillars of an AML program include:
- Internal controls
- Having a designated AML compliance officer
- Ongoing training
- Independent testing
- Compliant Customer due diligence (CDD) processes
What is the Difference Between AML, CDD and KYC?
The major difference is that Anti Money Laundering (AML) broadly covers the categories of rules, laws and procedures aimed at preventing money laundering, while Customer Due Diligence (CDD) lists out the scrutiny process financial institutions are mandated to perform to identify and report AML violations. Know Your Customer (KYC) on the other hand, are the rules that apply to customer due diligence process to ensure the adequate screening and verification of potential customers when coming on board.
Anti Money Laundering in Financial Institutions and Banks
Although it cuts across all industries, financial institutions are held to the highest standards when it comes to anti-money laundering. Financial institutions have dedicated departments to track fraud and money laundering and all bank employees are trained to identify and monitor suspicious customer activities.
As the first point of contact, the institutions put a know your customer/client measure in place to help flag suspicious customers and their activities. Their records are also extensively taken to help law enforcement agencies trace crimes back to the source.
By law, financial institutions are obligated to follow global and local anti-money laundering regulations. However, these policies are often costly and some argue, ineffective. This is why many have turned to using reliable identity verification and AML automation tools like YV OS.
YV OS is Youverify’s flagship product that allows businesses to perform digital KYC in a matter of seconds.
Here is a video description of how it works: