Anti-Money Laundering (AML) in 2023: A Guide for Banks and Fintechs

11 mins

Anti-money laundering (AML) are regulative measures and procedures to detect and prevent money laundering and making it difficult for financial criminals to hide their illegal origin. Money laundering has potentially devastating socioeconomic effects as laundered money can be used to gain control of large sectors of the economy through investment. It can also transfer economic power to criminals.

By hiding the source of their funds, criminals evade government tax. As a result, we have to pay more taxes because of those who evade taxes. It also increases government expenditure on increased law enforcement and health care (for example, for treatment of drug addicts). Therefore, AML has become a key area of action for governments across the globe.

As the lifeblood of a country’s financial system, financial institutions such as banks and fintechs have a major role to play in preventing money laundering. Governments prepare AML norms policies for them, periodically check the institutions’ compliance with the norms and punish them in case of lapses or shortcomings.

In this article, we will discuss the key concepts and terms in AML compliance and explore how banks and fintechs ensure AML compliance at a time when regulators change regulations and criminals use sophisticated financial crime strategies to evade detection.

What is money laundering?

Most of the illegal or criminal activities such as illegal arms sales, smuggling, and the activities of organised crime, including, for example, drug trafficking and prostitution rings, generate millions of dollars in cash. The individuals or groups involved create ways of “laundering” the money to obscure the illegal nature of how it is obtained.

Money laundering has been addressed in the UN Vienna 1988 Convention Article 3.1 describing Money Laundering as:

“The conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions”.

According to the United Nations Office on Drugs and Crime (UNODC), the estimated amount of money laundered globally in one year is 2 – 5% of global GDP, or $800 billion – $2 trillion in current US dollars.

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What is Anti-Money Laundering (AML)?

The social consequences of money laundering are far-reaching and potentially highly destabilizing for a state. To prevent, detect and combat money laundering from criminal enterprises, drug dealers, corrupt public officials, and terrorists both financial institutions and governments adopted a counter-move – defensive regulatory Anti-Money Laundering (AML) policy.

Anti-money laundering (AML) is a combination of laws, regulations and procedures used by a financial institution to prevent money laundering. Effective anti-money laundering regulations and procedures are of great importance to protect the integrity of markets and the global financial framework. AML policies help banks and other financial institutions combat a mutitude of financial crimes.

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What is an AML Compliance Programme?

The AML compliance programme is everything an organization does in relation to compliance: be it built-in internal operations, user-processing policies, accounts monitoring and detection, or reporting of money laundering incidents. The main agenda of an AML compliance programme is to expose and react accordingly to inherent and residual money laundering, terrorist financing, and fraud-related risks.

An AML compliance programme involves a set of measures and regulations an organization must follow when it comes to preventing financial crimes. Each financial institution has its own unique landscape and challenges when it comes to the prevention of money laundering. Geographical peculiarities, international, national and state regulations, and the nature of clients are some of the factors that an institution should take into consideration while drawing up an AML compliance programme.

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Key processes within an AML compliance programme

In general, AML regulations mandate financial institutions to collect customer information, verify their identities to avoid risk, monitor and screen their transactions and report suspicious activity to regulators. We will look into each of these processes in detail in the below section.

Know Your Customer (KYC)

Know Your Customer or KYC is defined as the process that institutions use to verify the identities of their customers and come to a conclusion on the financial crime risk they may pose. In some countries, KYC is expanded as Know Your Client.

KYC is a fundamental process in any financial institution’s anti-money laundering programme. This greatly helps financial institutions to adequately assess the risk associated with each client. For example, all customers of a bank must be verified before they can use services such as checking accounts and credit cards. Fintech companies are mandated to gather ample, verifiable information on their client and their identity in order to determine their legitimacy before beginning any business activities.

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Customer Due Diligence (CDD)

Customer Due Diligence is the process of evaluating customers’ backgrounds in order to identify their identification and risk level. This is accomplished by analysing a customer’s name, official document photograph, and home address. CDD authenticates a client’s identification and the business in which they are involved to have enough trustworthiness.

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Name Screening

Name screening is the process of determining if a financial institution’s existing or future customers (both individuals and entities) are named in any blacklists or regulatory lists such as sanction lists. Customers need to be screened against a number of watchlists at the time of onboarding and at specific intervals to identify the risk they pose and stop doing business with them.

Financial institutions are required to have enhanced due diligence procedures for certain customer categories who may pose a higher risk from a money laundering perspective. They include Politically Exposed Persons (PEPs) and customers located in high-risk jurisdictions. Further, adverse media checks or negative news checks allow the financial institution to screen their customers, party, or entity with other published news articles or prosecutions.

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Transaction Screening

The transactions enabled by banks and other financial institutions are not limited to their own customers. For example, one customer of Bank A can transfer money or make payments to Bank B’s customer. A large sized bank mediates millions of such transactions on a daily basis.

If a financial institution mediates a transaction to or from a sanctioned person or entity that will lead to regulatory action and severe damage to reputation. In order to avoid this, they have transaction screening systems in place. These systems monitor all customer deposits and other transactions to ensure they are not part of a money laundering scheme. Regulators normally set thresholds for different types of transactions (For example, cash transactions exceeding $10,000 in the US). Financial institutions need to verify the origin of large amounts dealt in and report to regulators if they prove to be abnormal.

Transaction Monitoring

The transaction monitoring process involves scanning transactions manually or electronically based on numerous characteristics such as customer and beneficiary identities, volume, amount, country of origin, and destination. This assesses if the information matches the bank’s current understanding of the customer. The goal of AML transaction monitoring is to notify the bank of any odd business contacts or activity so that it may report money laundering and suspicious transactions.

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Suspicious Activity Reporting

To combat money laundering and the financing of terrorism, it is the duty of financial institutions to report any suspicious transactions or activities to authorities following a thorough investigation. For most countries, this takes the form of a document submitted by a financial institution to the appropriate authority, according to compliance regulations for that country.

Documents filed are known as suspicious activity reports (SAR), or sometimes suspicious transaction reports (STR). These documents help law enforcement agencies to trace a financial crime and bring the perpetrators in front of the law. In order to investigate and report suspicious activities effectively, it is important for financial institutions to have a clear audit trail, which would also help regulators for their scrutiny.

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Record Keeping

Every stage of the AML process should be recorded and stored for future use as part of due diligence. Financial institutions should periodically reassess customer risks based on these records. They should include essential information from the time of onboarding to screening, monitoring and SAR submissions.

AML Training

AML training forms a key component of an AML compliance programme. Periodic training programmes should be conducted for the compliance staff to identify emerging suspicious activity that leads to money laundering. These programmes should also help employees to be familiar with the latest compliance regulations.


Who is an AML Compliance Officer?

It is imperative that financial institutions and banks hire an AML Compliance Officer to oversee internal anti-money laundering policies and ensure compliance with important criteria. Anti-money laundering (AML) compliance officers operate as guardians of regulatory compliance within financial institutions and are frequently viewed as the last line of defence against financial crime. An AML Compliance Officer supervises the development and implementation of their institution’s anti-money laundering policy in order to achieve compliance.

The officer also provides oversight for the AML compliance program and acts as a liaison for the financial authorities. The AML compliance officer should be a senior employee with the expertise and authority to carry out their role effectively.

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Adverse impacts of AML non-compliance

While financial institutions are legally bound to adhere to the AML regulations within their country, not all of them seem to be keen in following these norms. Some institutions think that implementing AML compliance programmes is costly, time consuming and cumbersome.

However, financial regulators are strictly scrutinising the compliance programmes of financial institutions for any irregularities especially after the 2001 financial crisis. They are also handing out hefty fines to those institutions who are found to have lacklustre compliance and have violated AML regulations intentionally or unintentionally.

In addition to the adverse impacts to profitability, regulatory fines lead to severe damage to reputation and loss of customers. It is important to note that financial institutions take several years to build their reputation and a single lapse would damage it entirely.

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Best AML Compliance Solutions for 2022

An award-winning regulatory technology (RegTech) company, Tookitaki is revolutionising financial crime detection and prevention for banks and fintechs with its leading-edge solutions. A game changer in the space, we improve risk coverage by democratising AML insights via a privacy protected federated learning framework, powered by a network of AML experts.

We provide an end-to-end, AI-powered AML compliance platform, named the Anti-Money Laundering Suite (AMLS), with modular solutions that help financial institutions deal with the ever-changing financial crime landscape. The below graphic shows the four modules that make up the end-to-end operating system and how they support the AML onboarding and ongoing diligence process.

Tookitaki AML Compliance Solutions

The key features of our compliance solutions are given below:

Tookitaki Smart Screening

Our Smart Screening solution provides accurate screening of names and transactions across 18+ languages and a continuous monitoring framework for comprehensive risk management. Its key features include:

    • Ongoing and on-demand screening for names and payments
    • Detects alerts based on complex combinations of rules
    • Watchlist integration

Tookitaki Customer Risk Scoring

The solution features a dynamic customer risk scoring engine which adapts to changing customer behaviour to build a 360-degree risk profile thereby providing a risk based approach to client management. Its major features include:

    • 360-degree customer risk profile
    • Continuous, on-demand and accurate Customer risk scoring
    • Perpetual KYC for ongoing due diligence
    • Actionable insights based on Customer risk score

Tookitaki Transaction Monitoring

Our Transaction Monitoring solution provides comprehensive risk coverage and suspicious activity detection via a one-of-a-kind typology repository and automated threshold management. Its key features include:

    • Scalable community-driven typology library
    • No code, drag-and-drop developer studio for creating new typologies
    • Auto-generated risk indicators and thresholds
    • Identify high-quality alerts using machine learning and risk scoring

Case Manager

The Case Manager provides a centralized investigation workflow for alerts from all AML modules - Smart Screening, Customer Risk Scoring and Transaction Monitoring. Its features include:

    • End-to-end case management solution from investigation to reporting
    • Single integrated platform for alerts from all AML stages
    • Supports the needs of everyone involved in four-eyes checks
    • Supports operations to meet compliance requirements

Apart from necessary human resources, banks and financial services should have technological resources to carry out their AML compliance activities and duties effectively. Tookitaki’s modern software solutions based on artificial intelligence and machine learning can manage the end-to-end of AML compliance programmes. Our solution can improve the efficiency of the AML compliance team and better mitigate compliance risk.

Speak to one of our experts today to understand how our solutions help your compliance teams to effectively detect financial crime and ensure future-ready compliance programmes.