According to figures from global anti-money laundering (AML) agencies, criminals launder trillions every year. With the impact of money laundering on the global economy clear, authorities have sought to tighten compliance measures.
Here is a brief take on AML and how it works.
- What’s anti-money laundering?
- Anti-Money Laundering and How it Works?
- Enforcement is key to AML
- How do criminals “launder” money?
- Anti Money Laundering Standards
What’s anti-money laundering?
Anti-money laundering is a set of procedures, laws, policies, and other regulatory principles that banks and financial institutions must apply and enforce to detect, stop, and prevent money laundering.
Money laundering occurs when criminals disguise “dirty” or illegally acquired money as if it is from a legitimate source. Alongside corruption, criminal activities that are most linked to money laundering schemes include cybercrime and fraud; drug trafficking, tax evasion, and terrorism funding. Other criminal activities anti-money laundering laws target are market manipulation and trade in counterfeit goods.
The laundering of funds is a process and criminals are always looking to exploit loopholes to “clean” the money. Success always sees ill-earned money passed through the financial system to arrive back at the source as ‘legitimate income’.
Anti-Money Laundering and How it Works?
Anti Money Laundering laws work by mandating financial institutions to be on the front line in the fight against money laundering. AML aims to prevent criminals from benefiting from the proceeds of their criminal activities. Regulations are in place to make it harder for any money launderer looking to disguise embezzled or illegally-acquired funds.
As established, AML policies require that all financial institutions adopt a proactive approach in monitoring client activity in relation to financial transactions. For instance, it is expected that all financial institutions that offer credit facilities or that allow deposit accounts must adhere to set regulations to ensure they do not abet financial crimes.
What this means is that banks and other financial institutions must have an AML unit whose main role is to monitor, detect and report any suspicious financial transactions and related crimes.
To ensure AML compliance, various institutions have designated officers tasked with overseeing all procedures and policies related to anti-money laundering. Part of their job description involves making sure of regulatory compliance within the banking sector.
The importance of AML comes to the fore if you consider what has happened before regarding some of the world’s most notorious cases of money laundering.
For example, HSBC, one of Europe’s largest banks, was in 2012 indicted for what authorities determined was the use of the bank’s networks to help Mexican drug traffickers to launder close to $900 million. Slipshod security checks at the bank, which has happened at many other banks, allowed the Sinaloa cartel to launder the huge sums of money. It had a far-reaching implication on lives.
Know Your Customer (KYC) and AML
Banks are expected to adhere to strict Know Your Customer regulations. Every bank must undertake a process to verify a customer’s identity to ascertain they are who they say they are. Proper due diligence and KYC checks can help in AML compliance processes.
The Bank Secrecy Act is a good example of how the laws work. For instance, the law is explicit on cash deposits of $10,000 or more. Financial institutions must send a compliance report whenever there’s such a deposit as well as perform an identity check. In the process, the bank has to ensure it isn’t taking deposits related to money laundering.
AML provides for a ‘holding period’ where deposits into a bank account must remain there for a set period as officers undertake anti-money laundering checks. The period- a minimum of five trading days- is for normal risk management but is usually critical to curtailing laundering.
Enforcement is key to AML
Banks and other financial institutions implement and monitor their customers for any suspicious activities. Once they flag an account, it normally calls for law enforcement.
Police and other law enforcement officials or investigative agencies then take up the suspected money-laundering case. Under the law, police can obtain and scrutinize financial records in a reported laundering scheme or if there is suspicious activity involved.
Investigators use the financial records and other details to track suspected criminals. The funds are then seized and in some cases returned to victims if the money came from crimes like embezzlement.
How do criminals “launder” money?
A money-laundering scheme takes three stages: placement, layering, and integration. In placement, the money is sneaked into the financial system. The next step of layering involves multiple transactions and leads to the third stage. Integration seeks to completely ‘lose’ trail of the illicit funds by using them for assets that pass as legitimate.
In most cases, criminals take the money and run it through a cash-based business they own. Usually, the business passes as a legitimate one, allowing criminals to deposit funds into a bank before it’s then withdrawn.
As well, cartels have banked money in very small amounts; most likely the reason some AML teams fail to flag them. They also use ‘dirty’ money to purchase cash instruments or in dishonest investments. Launderers have also been known to slip bags of cash across borders or exploit the few tax havens around the world to open and deposit into accounts.
Anti Money Laundering Standards
In 1989, the G7 countries, seeking to combat money laundering, created the Financial Action Task Force (FATF).
The organization published tens of recommendations that have since set the standards for AML around the globe. FATF itself has since been at the forefront of anti-money-laundering initiatives. As well as proposing and advancing international standards aimed at tackling money laundering, it has increasingly become forceful in its demand for countries to implement proposals.
The International Monetary Fund (IMF) and the World Bank are also key institutions that advance efforts against money laundering. Another organization that is working to support AML efforts is the United Nations Office on Drugs and Crime (UNODC). The UN agency helps countries and institutions in spotting and preventing money laundering, with compliance software for data collection and analysis.
Money laundering is a serious issue across the world, especially given its impact on the economy. At the center of it, all are businesses in the financial and banking industry. Anti-money laundering laws are in place to combat this practice. However, the first line of action is an understanding of how the schemes work. Such knowledge puts you in a better position to act if you suspect your business is aiding it.