Money laundering is one of the oldest financial crimes in the book. Anti-money laundering (AML) refers to the laws required to regulate financial institutions and other financial bodies, in order to help them track, detect, and prevent money laundering and other illegitimate financial activities. Laws and directives, such as the Bank Secrecy Act (BSA; 1970) and the USA Patriot Act (2001), outline the anti-money laundering policies and procedures to which institutions must comply. Anti-money laundering describes the laws, regulations, and procedures designed to stop money laundering and other illegal fiscal activities. AML intends to convert what is called “black money”, which is income acquired illegally, into “white money”, and place it back into circulation.
With its growing size and complexity, money laundering has become a serious concern for the world. In order to counter the same, international agencies and many governments have come with policies and procedures. Different countries have various rules and regulations in place requiring companies across sectors to monitor for, detect and report suspicious activities to their regulators. Those rules and regulations require firms to develop and implement a written anti-money laundering compliance (AML compliance) program designed to comply with regulatory requirements. It is important that firms should have clearly laid-out AML programs closely tied to their business models and associated AML risks. These firms are more likely to address their compliance risk successfully than those with those who have implemented a generic program.
Anti-Money Laundering Regulations
While most countries have their own national organizations to govern and regulate anti-money laundering policies and procedures, global organizations, such as The Financial Action Task Force (FATF), also set the guidelines for AML governance. Anti-money laundering compliance refers to the measures institutions follow in order to be fully AML compliant. They work seamlessly with the existing processes, procedures, and due diligence when it comes to verifying customers and screening financial transactions. While AML laws were originally used to control drug trafficking alone, with time, crimes have become more complex. As such, governments had to implement strategies to keep up. AML compliance remains a massive global concern with organizations such as the FATF and those working with the World Bank and national authorities in their fight against money laundering.
Though anti-money laundering laws cover a relatively limited number of transactions and criminal behaviors, their implications are far-reaching. Non-compliance is met with hefty fines, which companies want to avoid. It also facilitates the funding of illegal or terrorist activities, which is actively discouraged. In order to do this, most financial institutions appoint an AML Compliance Officer to create and implement an anti-money laundering compliance program within the organization.
What is AML Compliance?
In broad terms, anti-money laundering compliance is the process and procedures for screening a customer’s background and then monitoring his activities on a continuous basis for the purpose of identifying and eliminating money laundering activities. Before and after onboarding, a customer should be screened against global watchlists, sanctions, adverse media and PEPs list. In addition, his or her transactions and activities should be monitored continuously to understand the risk involved and any suspicious activities should be reported to regulators as suspicious activity report (SARs) or suspicious transaction report (STR). While money laundering happens via a large number of industries, there are certain industries which are more susceptible to the risk of money laundering. These industries – banking, financial services, fintech, stock exchanges, real estate, art and precious metals, digital currencies, casinos, gaming, etc. – are mandated to have specific AML compliance procedures.
The digital era has presented the finance industry with a new, unique challenge. Combating financial crime in this age, where avenues for committing illegal financial activities are on the rise and harder to detect, is a massive challenge. Financial institutions across the globe must apply due diligence when it comes to AML compliance: if they are caught facilitating illicit financial transactions, they will be charged for the crime. Not just that, they most often have to pay hefty fines to law-making authorities. So, institutions must practice enhanced procedures to monitor and verify their customers and their transactions. In order to do so, most organizations employ a Compliance Officer to prevent money laundering and terrorist financing from occurring. They also use sophisticated AML compliance software to track and monitor transactions in an efficient manner.
Importance of AML compliance
Estimated between US$800 billion and US$2 trillion per year across the globe, money laundering is detrimental to the growth of the global economy. In addition, the crime also has societal and financial impacts. It hampers the functioning of financial systems in its intended way. There are millions of lives in danger every year due to the predicate crimes of money laundering such as human trafficking and illegal drug deals. By ensuring compliance, companies are therefore helping economies, financial systems and the global society.
In the modern world, increasing digitalization and digital payment options have opened new avenues of money laundering for criminals. Cybercrimes and online scams are on the rise, especially during the COVID-19 crisis. Fraudsters are exploiting the situation and adapting their pitches to capitalize on people’s scare and insecurity. With proper AML checks, banks and financial institutions can prevent these frauds to a large extent.
Non-compliance leads to significant financial and reputational loss for companies, especially banks. According to a study by Duff & Phelps, in the first half of 2020, AML fines across the globe totaled US$ 706 million, compared to US$444 million in the entire 2019. Reputation loss due to fines takes longer to recover as well.
Role of regulation in AML compliance
AML regulations provide clear methods for businesses, institutions and even governments to counter money laundering and terrorism financing. Regional and international legislations and policies are important to develop effective AML compliance programs within financial institutions. A proper AML compliance program, involving skilled staff and effective systems, can adequately address AML/CFT problems.
As key channels of money laundering, only financial institutions had AML regulations initially. Later, other industries also came under the scanner of regulators as the crime became more sophisticated and they were made subject to different AML rules and procedures.
Agencies such as the Financial Action Task Force (FATF), the United Nations Office on Drugs and Crime, and the World Bank are coordinating with member countries to set global procedures and standards in the fight against money laundering. There are also government agencies in different countries that set AML regulations for businesses. For example, FinCEN (US), FINTRAC (Canada), FCA (UK), Finma (Switzerland), AUSTRAC (Australia), and MAS (Singapore).
Who is an AML Compliance Officer?
AML compliance is an ever-changing field. Keeping up with updates in regional, national, and international regulatory law is a must. An AML Compliance Officer must be knowledgeable about compliance regulations, techniques, and processes to ensure compliance, as well as AML software and products that ensure success. The AML Officer is in charge of building an internal AML Compliance Program for the institution, while also training staff and ensuring the implementation of the process. The AML Compliance Officer must be skilled at developing risk management strategies and understanding the methodologies of money laundering, in order to successfully track, detect, and prevent financial crimes from occurring.
What is an AML Compliance Program?
An AML Compliance Program refers to the predefined set of measures and regulations an organization must follow when it comes to preventing money laundering and terrorist financing. Each financial institution has its own unique landscape and challenges that come with it: geographical region, national and state regulations, nature, and the industry of clients are some of the factors to take into consideration when drawing up an AML Compliance Program. Therefore, this is not a one-size-fits-all solution. An AML Compliance Program should be tailor-made to suit the needs of the institution and the industry it operates in. This system should encompass a process for sophisticated reporting and due diligence while verifying customers. The AML Compliance Program is usually designed by the Compliance Officer, who is also responsible for regularly updating and testing the program.
What to focus on when creating an AML Compliance Program:
- Detecting suspicious activity and risky transactions
- Risk assessment of clients based on the industry and nature of business
- Internal guidelines, protocol, and responsibilities to ensure AML compliance
- Training employees regularly to stay up-to-date with money laundering techniques
- Conducting independent audits to review and update the current AML Compliance Program to optimize the outcome
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