Fighting Money Laundering with AML Regulations

Dirty Money, Terrorism Financing, Money Laundering & The Link In-Between

Illegal funds are introduced into the economy as clean money. The financial institutions have been turned into doorways for illicit funds. Terrorism is being funded, and weapons of mass destruction are being acquired. All of these were being aided by something called money laundering. This type of financial crime casts a shade on financial institutions’ integrity and threatens many nations’ peace. 

The financial crime called money laundering is the process of whitewashing illegal funds and reintroducing them into the economy as legitimate funds. These funds could result from drug trades, human trafficking, corruption, bribery, tax evasion, and more. In some cases, the aim is to cover the illicit acts mentioned above, while in other scary situations, it is to finance terrorism or to purchase weapons of mass destruction.

Global financial regulators do not see money laundering just as a way of shrewdly transmitting illegal financial proceeds to cover possible traces. Instead, they see it as the enemy of the global economy and the sole untraceable financier of terrorism in many parts of the world. Money laundering is a battle that must be won to safeguard the world economy and bring peace to our nations. This fight against money laundering has lasted for decades, and there is no end in sight. This is why Anti-Money Laundering (AML) regulations were created. This article has been written to help you understand the rationale of AML and how you can be AML-compliant as a company or an organization.

What is AML?

Anti-Money Laundering (AML) policies and procedures are activities or processes to prevent money laundering through financial transactions and financial institutions. AML procedures monitor potentially fraudulent activities that seek to disguise criminally obtained proceeds as money from legitimate sources. Money laundering is a financial crime, and AML is the “technology” that fishes out this crime and the people behind it for proper punishment according to the law.

History of AML

The establishment of the Bank Secrecy Act (BSA) in 1970 was the beginning of the fight against money laundering in the USA through anti-money laundering legislation — the goal was to detect and prevent money laundering as early as possible. The Bank Secrecy Act has been amended and strengthened over the years, with the Financial Crimes Enforcement Network (FinCEN) being its designated administrator.

“The mission of the Financial Crimes Enforcement Network is to safeguard the financial system from illicit use, combat money laundering and its related crimes, including terrorism, while promoting national security through the strategic use of financial authorities and the collection, analysis, & dissemination of financial intelligence.”

In 1989, the Financial Action Task Force (FATF) took the fight to a new level by starting a movement that has turned into a global regulatory body against financial-related crimes. Other bodies fighting money laundering include the International Monetary Fund (IMF), consisting of 190 member countries with a primary focus on ensuring the stability of the international monetary system. The IMF believes that money laundering threatens the strength and integrity of the financial sector and the general world economy.

Countries That Require AML

Through AML rules, the regulatory bodies keep tightening the cracks in the wall of the financial system that criminals exploit. Many countries have no option but to comply with these regulations for their safety against terrorism, the integrity of their banking institutions, and the global financial system. In all of these events, some countries are still high-risk zones and are at the peak of non-compliance with the BSA or AML standards. Below is the list of high-risk countries according to schedule 3ZA of the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2022:

Albania, Barbados, Burkina Faso, Cambodia, Cayman Islands, Democratic People’s Republic of Korea (DPRK), Haiti, Iran, Jamaica, Jordan, Mali, Malta, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Turkey, Uganda, United Arab Emirates, Yemen

Recently, Zimbabwe was removed from this list because the country recorded measurable progress in AML compliance. At the same time, the United Arab Emirates was added for lack of due diligence towards AML.

Stages of Money Laundering

Financial institutions are expected to implement AML rules for their customers, financial partners & business associates to ensure they are not accomplices in the processes that lead to money laundering. While banks and other enterprises will mainly comply with these rules, there is no assurance that their customers & business associates will keep their side of the bargain by adhering to AML rules. Knowing this, banks and other financial institutions must properly know the steps and stages of money laundering that criminals employ.

Below are the three stages of Money Laundering:

1. Placement

This is the initial stage where the “dirty money” is placed into the financial system while ensuring that the source remains unknown. In general, this is done by breaking large sums of money into smaller amounts that can be deposited directly into banks or purchased as checks or money orders that can be deposited elsewhere. Other approaches to placement include false invoicing and adding the fund from the illegal activity to the legitimate takings of other businesses. Smurfing is another popular method to break down a large sum of money into smaller amounts that are usually below the AML reporting threshold. These smaller amounts are then deposited or moved to credit cards for electronic purchases or payments.

2. Layering

This stage is made possible after the illegal money has found its way into the financial system with the source untraced. The layering process involves moving funds around to isolate them from their source and make tracing the funds more difficult. These funds could be used in different investment schemes, and the money is scattered across various accounts and banks worldwide.

Layering in Cryptocurrency

This layering strategy is in use for crypto money launderers. The most common method is depositing fiat from one bank account to buy and sell cryptocurrencies and then withdrawing the funds from another. In chain-hopping, one cryptocurrency can be converted repeatedly into different types of cryptocurrencies on different blockchains. This makes following the money by a compliance officer a back-breaking pursuit. Mixing or tumbling is using the funds to perform several transactions across other exchanges and blockchains, making the transactions difficult to trace to a specific exchange and account owner. The goal is to make the money transaction so sophisticated that the complexity of tracking it exceeds the time and resources to do so.

3. Integration

This is the final step in which “the dirty money” is reintroduced into the economy as “clean money.” This money could be used to buy luxurious assets and invest in real estate and business ventures like legitimate investors without attracting the attention of authorities. Other methods to make money appear legitimate include paying fake employees in cash, giving out loans to shareholders, and paying dividends to shareholders who previously purchased the company.

These three stages of money laundering help compliance officers trace laundered funds systematically, but this doesn’t mean these three stages will be followed theoretically by a criminal. In some cases, only two of these processes are carried out. In others, these three processes are repeated over a long period to perfect the act and make tracing the fund a near-impossible mission.

Who Is Required To Have An AML policy?

The lack of compliance by concerned entities can attract various sanctions and monetary fines (ranging from $25,000 to $100,000 per transaction), including negative media publicity. This can affect the public perception of the indicted financial institution and damage its brand image. Financial institutions mostly grow their influence based on earned trust over many years of relationships with customers and the public. It won’t be wise to lose these earned social currencies over a lack of compliance with AML regulations. Below are some of the sectors that are expected to be AML-compliant:

• Banks: banks are the most common financial institution criminals use to move dirty money around. The first stage of money laundering, placement, starts mostly from bank deposits before other laundering stages are activated. This places banks on a high alert to be AML compliant to the highest level, including continuous KYC and Customer Due Diligence (CDD).
• FinTech: this is arguably a branch of the traditional financial institution that leverages technology and the internet to make financial transactions easier globally, but criminal actors have continuously used digital means of transactions to simplify their money laundering activities. One of the advantages of FinTech to the financial world is the ease of borderless transactions just with “a tap of a button on a mobile device”. Criminals have been reported to be misusing this, and these are more reasons why the government expects compliance and detailed KYC processes from FinTech startups.
• Cryptocurrency: cryptocurrency a powerful technology due to its uniqueness to the world, but the anonymity feature of this technology is believed to have aided money laundering. This has made cryptocurrency to be under strict scrutiny by regulatory bodies. However, more regulations keep targeting the industry even as significant cryptocurrency exchanges have no option but to do detailed KYC of users, which enables proper AML compliance.
• Capital Market Firms: market-based money laundering approaches have exposed capital markets to fraud over the years. This behavior misuses the financial market for exploitation and casts shade on the system’s transparency. Seeing this, capital market firms need to be AML-compliant.
• Insurance Firms: criminals use insurance companies to launder money by purchasing insurance packages over time, then making claims to get the insurance funds, indirectly making money return from a legitimate source. Situations like these are part of the reasons insurance companies are expected to do more diligence on customers & their claims and to be AML compliant.
• Real Estate Agencies:  criminals usually select real estate because of its high value. A few real estate transactions can make laundering large sums of money more straightforward and faster. It is usually done through credit and mortgage, third parties, manipulation of property values, and disguised improvements and renovations to the property. Sometimes, real estate is used for the last stage of the money laundering process, known as integration. This requires the real estate industry, firm, or agents to do more background checks on potential clients (KYC) while remaining AML compliant throughout the process.
• Gaming Sector: the government has started paying attention to the gaming industry over the past few years. FinCEN talked about how it is currently looking into the money transmission going on in the gaming industry; this means more regulations in this direction should be expected. The gaming industry is an unregulated industry that experienced massive growth in 2020 due to the close of traditional gambling stores and the repeal of PASPA. Money launderers have heavily focused on this growing industry because it is relatively unregulated, and they use it for their illicit money transactions. The gaming industry is categorized under the traditional gambling industry, so the gaming sector is expected to abide by AML compatibility programs.
• Public Sectors: criminals or organized crime groups take advantage of different public sectors to perform transactions to whitewash illicit funds’ proceeds. The traces of these in recent years means public sectors must pay attention and seek to be AML compliant starting from the most basic measure.

The Bank Secrecy Act (BSA) and FINRA Rule 3310

According to the Bank Secrecy Act (BSA), financial institutions, including national banks, federal savings associations, federal branches, agencies of foreign banks, insurance firms, broker-dealers, and other public establishments, are required to develop and implement AML compliance programs. Institutions or individuals like broker-dealers are also under the anti-money laundering rule in FINRA Rule 3310. FINRA is the Financial Industry Regulatory Authority, a private corporation that acts as a self-regulatory organization that regulates brokerage firms and exchange markets in the USA. In line with the Bank Secrecy Act, FINRA Rule 3310 requires firms to at least, do the following:

1. Implement policies and procedures that enable suspicious transactions to be detected and reported.
2. Ensure compliance with the Bank Secrecy Act and its regulations by developing policies, procedures, and internal controls.
3. Annually conduct independent testing carried out by a qualified third party. Independent testing can be performed every two years if the organization has yet to transact with customers.
4. Assign a person or a team to be in charge and identify the same to FINRA (by name, title, mailing address, e-mail address, telephone number, and FAX number). This person or team is responsible for implementing and monitoring the day-to-day operations and internal controls of the AML program and providing updates to FINRA about any change in the assignment or delegation.
5. Provide ongoing training for appropriate personnel; and add proper risk-based procedures for conducting continuous customer due diligence, including:
   • Developing a customer risk profile by understanding the nature of customer relationships
   • Monitoring suspicious transactions continuously and reporting them
   • Maintain and update customer information, including information regarding the beneficial owners of legal entities, on a risk basis.

What are the Five Pillars of AML?

The first step towards developing an effective AML program is first to analyze and characterize your potential risk as a company and the needed legal requirements. A company’s money laundering risk depends on the niche of the financial sector it operates in; for example, a casino’s peculiarities differ from an insurance company’s. Developing an effective AML program also involves looking into the applicable local & global regulations alongside the penalties for defaulting or non-compliance.

To simplify the creation of AML compliance procedures and prevent compromises, businesses should develop detailed recommendations. Below are the five AML compliance pillars that can further help in achieving this:

1. Designate A Compliance Officer (AML Officer)

The foundation of your firm’s AML compliance journey must be set up with the help of a compliance officer. Employ the service of an experienced compliance officer to evaluate your current exposures and the needed measures to put in place. This compliance officer oversees the day-to-day implementation and maintenance of the Internal Control Procedure to ensure continuous compliance.

The compliance officer must be experienced and familiar with your industry, enabling proactiveness to avoid exposures that bring about non-compliance and fines. Your compliance officer should be a communicator who can easily connect with staff, teach them the importance of compliance, and easily detect when things are not how they are supposed to be.

2. Develop and Implement Effective Internal Controls

Jointly develop internal policies and procedures with your compliance officer. These policies and procedures should detect and report financial crimes or suspicious activities to regulators like FinCEN. Your team should follow documented policies and procedures and not just take actions per case or situation. To accomplish this, all employees must know their roles in the company’s AML-compliance mission and learn how KYC procedures, due diligence, and other necessary procedures work. All of these will enable continuous compliance.

These developed policies and procedures should be reviewed periodically to ensure continuous compliance. In addition, the documentation of transactions, customers’ identity, currency transaction reporting, monetary instrument tracking, and preservation of records generally should be well accounted for in these internal control procedures.

3. Create Periodic Training For Employees

Your compliance officer and the team should periodically train other employees to ensure continuous adherence to BSA standards. All employees should understand AML compliance. Some staff (compliance team) monitor and enact the set guidelines. This training should be based on current trends in the financial industry and new development that can aid criminals to outplay the bank or your firm. It is not necessary for your compliance officer and/or compliance team to train your employees. Therefore, it is wise to bring in professional organizations to educate your employees on keeping AML standards top of mind and relevant to new trends & new government regulations.

4. Ensure Independent Testing & Auditing

An external eye can save you from an exposure that no one sees within your team; this makes independent testing and auditing crucial to the success of the AML program. While internal training and continuous monitoring are vital, a credible third-party testing and auditing service would achieve constant alignment with the BSA standards.

An independent audit should be performed yearly but more frequently if your firm operates in a high-risk sector. The purpose is to see if the AML program is working and if the internal controls are in place to protect you from any weak points in your policies.

5. Carry Out Customer Due Diligence

The Customer Due Diligence (CDD) rule mandates companies to carry out KYC on customers and to continuously perform monitoring to identify and report suspicious transactions and activities. This CDD rule was introduced into the AML procedure in 2018 by FinCEN to boost transparency and help organizations better assess the level of risk each customer poses to their operations’ compliance with the AML standards. A CDD implementation requires greater monitoring of high-risk customers to minimize fraudulent transactions, e.g., extra due diligence on customers from countries with a history of money laundering.

Benefits of 5-Pillars Compliance Program:

• Improved regulatory compliance
• Increased customer satisfaction
• Enhanced operational flexibility and effectiveness

How Often Should You Run AML Checks? 

AML checks are not a one-time event activity. The process should be performed at least once a year; if your firm operates in a high-risk sector, it should be done more frequently. An independent and qualified third party running through your AML program periodically opens up your strengths and weaknesses. The corrective measures would be suggested to strengthen it; this protects your organization from defaulting and paying fines ranging from $25,000 to $100,000.

Identity.com

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