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. 

What Is Money Laundering?

Money laundering is the act of disguising the illegal origins of money by channeling it through legitimate businesses and transactions. This process aims to make funds obtained from criminal activities, like drug trafficking, appear legal. Global regulators, in their effort to uphold the integrity of the financial system, work to detect and prevent money laundering. To this end, Anti-Money Laundering (AML) laws and compliance programs are in place, designed to stop laundered funds from being used for further illicit activities.

What Is Anti-Money Laundering (AML)?

Anti-money laundering (AML) refers to the policies, procedures, and controls put in place to detect, deter, and report money laundering activities. AML’s primary objective is to prevent criminals from disguising illegally obtained money as legitimate funds. It involves monitoring financial transactions to uncover and halt criminal financial activities.

History of AML

The fight against money laundering in the USA began with the creation of the Bank Secrecy Act (BSA) in 1970. This act was the first major anti-money laundering (AML) legislation in the country, aimed at detecting and preventing money laundering as soon as possible. Over the years, the Bank Secrecy Act has been updated and strengthened, with the Financial Crimes Enforcement Network (FinCEN) overseeing its enforcement.

“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) elevated the battle against financial crimes to a global scale, evolving into a key international regulatory body. Another significant player in this arena is the International Monetary Fund (IMF), which comprises 190 member countries. The IMF’s main goal is to ensure the stability of the international monetary system. It recognizes that money laundering poses a serious threat to the stability and integrity of the financial sector and the overall global 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, including banks and other enterprises, are required to implement Anti-Money Laundering (AML) rules. These rules are crucial not only for the institutions themselves but also for their customers, financial partners, and business associates, to prevent involvement in money laundering activities. Despite adherence to AML rules by these institutions, there’s no guarantee that their customers and business associates will follow suit. Therefore, it’s essential for banks and other financial institutions to be well-versed in the steps and stages of money laundering used by criminals.

Money laundering typically involves in three main stages: placement, layering, and integration.

1. Placement

The first step is placement, where “dirty money” gets put into the financial system without anyone knowing where it came from. This is usually done by breaking up big amounts of money into smaller deposits. People might use checks, money orders, or even mix the illegal money with cash from legit businesses. Smurfing is a common trick where they break the money into tiny amounts to avoid detection.

2. Layering

After the money enters the system undetected, the next step is layering. Here, the money gets moved around a lot, making it hard to trace back to its source. It can get shuffled through different accounts and banks all over, or used in various investment schemes. In the world of cryptocurrency, layering gets even trickier. People might switch between different types of crypto or use multiple exchanges to make tracking really hard.

3. Integration

The final stage is integration. Here, the “dirty money” gets used like normal, clean money. This money might get spent on luxury items or invested in real estate and businesses, just like any regular investor would do, but without drawing the attention of the authorities. Other ways to make the money look legit include paying cash to fake employees, handing out loans to shareholders, and giving dividends to shareholders who bought into the company earlier.

These three stages of money laundering are a guide for compliance officers to systematically track laundered funds. However, it’s not a set rule that criminals will follow these stages in order. Sometimes, they might use only two of the processes. In other cases, they might repeat all three stages over an extended period to refine their methods, making it extremely difficult to trace the funds.

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:

1. 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).

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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?

Creating an effective Anti-Money Laundering (AML) program starts with assessing your company’s risk and understanding the legal requirements. The risk of money laundering varies depending on the financial sector you’re in. For instance, a casino faces different challenges than an insurance company. It’s also important to consider both local and global regulations and the consequences of non-compliance.

To make AML compliance easier and more effective, businesses should follow these five key pillars:

1. Appoint a compliance officer
2. Establish effective internal controls
3. Create regular training for employees
4. Independent testing and auditing
5. Carry out customer due diligence

1. Appoint a Compliance Officer (AML Officer)

An experienced compliance officer is essential. They’ll assess your risks and put necessary measures in place. This officer manages the daily implementation of your Internal Control Procedure, ensuring ongoing compliance. They should understand your industry well and be proactive in avoiding risks, as well as be an effective communicator who can educate staff about compliance.

2. Establish Effective Internal Controls

Work together with your compliance officer to create internal policies and procedures. These should be designed to spot and report financial crimes or suspicious activities to regulatory bodies like FinCEN. It’s important that your team consistently follows these established guidelines instead of making decisions based on individual cases. For this to work, every employee needs to understand their role in the company’s AML compliance efforts. They should be well-versed in KYC (Know Your Customer) procedures, due diligence, and other relevant processes to maintain continuous compliance.

Regularly review and update these policies and procedures to keep them effective and in line with current standards. Make sure that the documentation of transactions, verification of customers’ identities, currency transaction reporting, tracking of monetary instruments, and record-keeping are all thoroughly integrated into your internal controls. This ensures that your company stays compliant at all times.

3. Create Regular Training for Employees

Set up ongoing training sessions for your employees, led by your compliance officer and team. This is to make sure everyone stays on track with the Bank Secrecy Act (BSA) standards and understands AML compliance. While your compliance team will be actively monitoring and applying the rules, all staff should be in the know. The training content should be up-to-date, covering the latest trends in finance and new tactics that criminals might use.

It’s not always necessary for your own compliance officer or team to conduct these training sessions. Sometimes, it’s beneficial to bring in outside experts. These professionals can provide fresh insights and education on AML standards, keeping your team informed about the latest industry trends and regulatory changes.

4. Independent Testing and Auditing

Having an outside perspective is key in catching risks that might go unnoticed by your own team. That’s why independent testing and auditing are essential for a successful AML program. Sure, your internal training and ongoing monitoring are important, but having a reliable third-party service to test and audit your procedures ensures you’re always in line with the Bank Secrecy Act (BSA) standards.

Plan to have an independent audit every year. If your business is in a high-risk area, you might need these audits more often. The main goal is to check if your AML program is effective and if your internal controls are strong enough to shield you from any vulnerabilities in your policies.

5. Carry Out Customer Due Diligence

Benefits of 5-Pillars Compliance Program:

• You’ll be better in line with regulatory requirements.
• Your customer satisfaction could increase.
• There’s potential for improved 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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