AML in Banking

What Is Anti Money Laundering (AML)?

The network of laws, regulations, databases and processes known as anti money laundering (AML) and screening aims to detect and prevent attempts to pass off criminal payments as legitimate revenue. Money laundering aims to cover up offences including minor drug sales and tax evasion as well as public corruption and funding of terrorist organisations.

The introduction of AML law was a reaction to the expansion and misuse of finances in the financial sector and the abolition of international capital restrictions that eased the intricate webs of how financial transactions could be carried out.

According to an analytic research from a high-level United Nations body, money laundering accounted for $1.6 trillion in yearly flows in 2020 or 2.7% of the world’s GDP.

What’s Anti-Money Laundering in Banking?

Understanding Anti Money Laundering (AML)

The 1970 Bank Secrecy Act mandated that banks record cash deposits of more than $10,000, but AML requirements in the US have since grown to include a complex regulatory framework requiring financial institutions to perform due diligence screening on their newly onboarded clients and look for and report suspicious activities. Similar measures have been implemented by the European Union and other governments.

Know Your Customer

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 and confirm that deposited monies are from a genuine source in addition to confirming the customer’s identification.

Furthermore, as part of the KYC procedure, banks and brokers must cross-check prospective clients’ identities against databases of criminal suspects, sanctioned individuals and enterprises, and “politically exposed persons”—foreign public officials, their family, and close associates.

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.
Using ill-gotten gains to buy property, securities, or business ventures.

The main goal of the KYC verification process is to stop such schemes right from when the user is onboarding through the use of AML screening methods.

Customer Due Diligence

Customer due diligence is essential to the KYC procedure, for instance by verifying the veracity and accuracy of the information a potential client submits. However, it is also an ongoing process that includes both current and past clients as well as their transactions.

Continuous examination of each client’s potential for money laundering is necessary for customer due diligence, and those clients who are recognised 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:

Recognising 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 consumer data.

Customer due diligence looks for signs of money laundering techniques including layering and structuring, commonly referred to as “smurfing”—the splitting of 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 that is supervised by a designated AML compliance officer and has written approval from a senior management member. These programmes must have risk-based procedures in place to undertake continuing client due diligence, as well as “ongoing monitoring to identify and report suspicious transactions.”

Financial institutions and people are both subject to some AML rules. Notably, citizens of the United States must submit IRS Form 8300 to the Internal Revenue Service when they receive more than $10,000 in cash. Multiple linked payments made within a 24-hour period or numerous related transactions totalling more than $10,000 during a 12-month period also fall under this criteria.

History of Anti Money Laundering

While there have long been efforts to regulate illegal riches, the word “money laundering” has only been in common usage for roughly 50 of those years and is only about 100 years old.

The 1970 Bank Secrecy Act, which was established in part to combat organised crime, was the first significant piece of American AML law. The Act required banks to identify the persons performing transactions and to keep records of transactions, in addition to forcing banks to disclose cash deposits of more than $10,000. The Bank Secrecy Act was upheld by the United States Supreme Court in 1974, the same year that the phrase “money laundering” became popular in the aftermath of the Watergate scandal.

Additional law was introduced in the 1980s as drug trafficking operations escalated, in the 1990s as financial surveillance was expanded, and in the 2000s as financing for terrorist organisations was cut off.

When the Financial Action Task Force (FATF) was established in 1989 by a number of nations and international organisations, anti-money laundering gained more worldwide importance. Its purpose is to develop and promote worldwide standards to combat money laundering. In the aftermath of the 9/11 terrorist attacks, FATF enlarged its mandate to include the prevention of terrorist financing in October 2001.

The International Monetary Fund (IMF) is a key player in the battle against money laundering. Similar to the FATF, the IMF has pressured its member nations to adhere to global norms in order to stop the financing of terrorism.

When the Financial Action Task Force (FATF) was established in 1989 by a number of nations and international organisations, anti-money laundering gained more worldwide importance. It aims to create and encourage the adoption of global standards to stop money laundering. Following the 9/11 terrorist attacks, FATF expanded its scope to include preventing the funding of terrorism in October 2001.

The International Monetary Fund (IMF) is a key player in the battle against money laundering. The IMF, like the FATF, has pressed its member countries to follow global principles in order to prevent terrorism financing.

What Are Some Ways That Money Is Laundered?

Money launderers sometimes use cash-generating enterprises owned by accomplices to transfer illicit funds, or they may inflate invoices in transactions involving shell companies. Money transfers used in layering transactions are intended to hide the source of illegal payments. The act of separating a large transfer into smaller ones in order to escape reporting requirements and AML scrutiny is known as structuring.

Can Money Laundering Be Stopped?

AML enforcement may at best try to control money laundering rather than eradicate it completely given that projected yearly flows are close to 3% of the world’s economic output. Despite the fact that AML regulations undoubtedly make their life more difficult, money launderers never seem to run out of resources or collaborators.

What’s the Difference Between AML, CDD and KYC?

Customer due diligence (CDD) refers to the examination financial institutions (and others) are expected to do to prevent, identify, and report infractions. Anti-money laundering (AML) refers to the laws, norms, and practises designed to discourage money laundering. KYC standards demand due diligence from customers when screening and verifying new clients.

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