Anti-Money Laundering (AML): What Is It?
The network of laws, rules, and processes known as anti-money laundering (AML) aims to expose attempts to pass off criminal payments as legitimate revenue. Money laundering aims to cover up offenses, including minor drug sales, tax evasion, public corruption, and funding of terrorist organizations.
The introduction of AML law was a reaction to the expansion of the financial sector, the abolition of international capital restrictions, and the ease with which intricate webs of financial transactions could be carried out.
According to a high-level United Nations body, money laundering will account for $1.6 trillion in yearly flows in 2020 or 2.7% of the world’s GDP.
Anti-Money Laundering (AML) Understanding
The 1970 Bank Secrecy Act mandated that banks record more than $10,000 cash deposits. Still, AML requirements in the U.S which have grown to include a complex regulatory framework requiring financial institutions to perform due diligence on their clients and look for and report suspicious activities. The European Union and other governments have implemented similar measures.
Identify Your Client
Compliance for banks begins with confirming the identification of new customers, a procedure frequently referred to as Know Your Customer (KYC). Banks are expected to know the nature of a client’s activity, confirm that deposited monies are from a genuine source, and confirm the customer’s identification.
Additionally, as part of the KYC procedure, banks and brokers must check new clients’ names against databases of criminal suspects, people and businesses subject to sanctions, and “politically exposed persons”—foreign public officials, their relatives, and close allies.
Three stages can be used to separate money laundering:
Illegal money transfers into the financial system
- Layering transactions are those intended to hide the funds’ nefarious source.
- Utilizing ill-gotten gains to buy property, securities, or business investments
- The KYC procedure aims to thwart such scams at the initial deposit window.
Due diligence on the customer
Client due diligence is essential to the KYC procedure by verifying the integrity and accuracy of the information a potential client submits. However, it is also an ongoing process that includes current and past clients and their transactions.
Continuous examination of each client’s potential for money laundering is necessary for customer due diligence, and clients recognized as having higher non-compliance risks should receive a more thorough investigation. Customers who are added to sanctions and other AML lists must be identified.
The four main criteria for client due diligence in the United States are, according to the Financial Crimes Enforcement Network of the U.S. Treasury:
Recognizing and confirming the client’s identity
Identification and confirmation of beneficial owners of a company establishing an account who owns a share of at least 25%
To create client risk profiles, one must comprehend the nature and purpose of customer interactions.
maintaining continual surveillance to spot unusual transactions, report them, and update customer data
Customer due diligence looks for signs of money laundering techniques, including layering and structuring, commonly called “smurfing splitting big transactions into smaller ones to get around reporting requirements and escape detection.
The AML holding period, which mandates that deposits must stay in an account for at least five trading days before they may be moved elsewhere, is one regulation in place to prevent stacking.
Financial institutions must create and execute a documented AML compliance policy supervised by a designated AML compliance officer and have written approval from a senior management member. These programs must include “risk-based procedures for conducting ongoing customer due diligence” and “ongoing monitoring to identify and report suspicious transactions.
- Anti-Money Laundering (AML) initiatives aim to make it more difficult to conceal proceeds of crime.
- Money laundering is a technique used by criminals to make unlawful money seem to have a legitimate source.
- Financial institutions are required by AML legislation to create sophisticated client due diligence strategies to evaluate the risks of money laundering and identify shady activities.