Corporate Taxes in Pakistan

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.

  1. What’s anti-money laundering?
  2. Anti-Money Laundering and How it Works?
  3. Enforcement is key to AML
  4. How do criminals “launder” money?
  5. Anti Money Laundering Standards
  6. Frequently Asked Questions – Money Laundering
  7. Conclusion

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’.

It means that if financial institutions do not comply with anti-money laundering legislation and policies, trillions of dollars could easily go through the system and get back to the criminals.

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.

Frequently Asked Questions – Money Laundering

What are the Venues commonly used for Money Laundering?

Most criminals use cash businesses to launder money, because cash businesses make it easy to report dirty money, as proceeds for cash business. Venues and schemes used to launder money include the following:

  • Investing in Casinos and other Gambling business
  • Cash smuggling of large sums of money a cross border
  • Investment in Real Estate
  • Investment in Securities
  • Buying of Life Insurance Policies
  • Use of crypto-currency (virtual currency)
  • Buying of cash instruments like banks.

How can we use technology to combat Money Laundering?

Financial institutions such as Banks have employed AML software to detect suspicious activities. These institutions can also use technologies such as Artificial Intelligence (AI) and big data software, which will allow them to keep and analyze detailed records of all transactions.

Central banks, IMF and World Bank have detailed information on their websites, on how to detect and stop money-laundering schemes.

Effects of Money Laundering

The proceeds of money laundering have been used to fund drug trafficking, arms trafficking, international and domestic terrorism. Criminals can use money laundering to finance other financial crimes like manipulation of financial markets and bribery.

What is the difference between KYC and AML regulations?

KYC regulations guide financial institutions on how to verify and screen customer details, and associated risks. On the other hand, AML regulations provide broader guidance on how to combat money laundering and accompanying financial crimes.

What is the difference between simplified Customer Due Diligence (SDD) and Enhanced Due Diligence (EDD)?

SDD is the lowest form of KYC due diligence, carried out on low-risk customers in money laundering. Financial institutions carry out EDD on customers whose transactions they suspect are used in money laundering.

How do Financial Institutions ensure Enhanced Due Diligence in the KYC Process?

Institutions with customers who pose a high risk in money laundering should do the following as part of their EDD and KYC processes.

  • They collect additional detailed information about their customers.
  • Document the purpose of all transactions.
  • The source of customer funds is verified and documented.
  • Establish continuous monitoring mechanisms.

Can Money Laundering be completely stopped?

It’s not possible to stop money laundering and associated crimes completely. That is because, like any other crime, money laundering keeps evolving daily. However, financial institutions can minimize it with proper policies and international cooperation.

How do institutions ensure AML Compliance?

At a minimum, they should have an AML system that does the following:

  • They should document policies, procedures, and internal guidelines on how to stop money laundering.
  • There should be regular employee training on how to stop money laundering.
  • Financial institutions should appoint dedicated compliance officers, who ensure that they implement the AML program to the latter.
  • An independent testing and review system is in place to monitor the AML program.

Conclusion

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.

 

Automated Data Capture, Extraction & Analysis – Solutions for FinTech