Anti Money Laundering (AML)
Anti Money Laundering (AML) What Is Anti-money Laundering (AML)? Anti-money laundering (AML) refers to the online laws, regulations, and procedures aimed toward uncovering efforts to disguise illicit funds as legitimate income. Money laundering seeks to hide crimes starting from small-time evasion and traffic to public corruption and also the financing of groups designated as terrorist organizations. AML legislation was a response to the expansion of the financial industry, the lifting of international capital controls, and also the growing simple conducting of complex chains of financial transactions. A high-level global organization panel has estimated annual hiding flows at $1.6 trillion, accounting for 2.7% of world GDP in 2020. KEY POINTS Anti-money laundering (AML) efforts seek to make it harder to cover profits from crime. Criminals use hiding to create illicit funds that appear to possess a legitimate origin. AML regulations require financial institutions to develop sophisticated customer due diligence plans to assess hiding risks and detect suspicious transactions. Understanding Anti-money laundering (AML) AML regulations within the U.S. have expanded from the 1970 Bank Secrecy Act’s requirement that banks report cash deposits of over $10,000 to a fancy regulatory framework requiring financial institutions to conduct due diligence on customers and to hunt out and report suspicious transactions. The ECU Union and other jurisdictions have adopted similar measures. Know Your Customer For banks, compliance starts with verifying the identity of the latest clients, a process sometimes called Know Your Customer (KYC). Additionally, to establish the customer’s identity, banks are required to know the character of a client’s activity and verify that deposited funds are from a legitimate source. The KYC process also requires banks and brokers to screen new customers against lists of crime suspects, individuals and firms under economic sanctions, and “politically exposed persons”—foreign public officials, their members of the family, and close associates. Money laundering is often divided into three steps: Deposit of illicit funds into the national economy Transactions designed to hide the illicit origin of the funds are referred to as “layering” Use of laundered funds to accumulate realty, financial instruments, or commercial investments. The KYC process aims to prevent such schemes at the primary deposit window. Customer Due Diligence Customer due diligence is integral to the KYC process, for example ensuring the knowledge a possible customer provides is accurate and bonafide. But it’s also a relentless process extending to customers old and new, and their transactions. Customer due diligence requires ongoing assessment of the chance of money laundering posed by each client and therefore the use of that risk-based approach to conducting closer due diligence for those identified as higher non-compliance risks. That has to identify customers as they’re added to sanctions and other AML lists. According to the U.S. Treasury’s Financial Crimes Enforcement Network, the four core requirements of customer due diligence within the U.S. are: Identifying and verifying the customer’s identity Identifying and verifying the identity of beneficial owners with a stake of 25% or more during a company opening an account Understanding the character and purpose of customer relationships to develop customer risk profiles Conducting ongoing monitoring to spot and report suspicious transactions and update customer information Customer due diligence seeks to detect money laundering strategies including layering and structuring, also referred to as “smurfing”—the ending of enormous money laundering transactions into smaller ones to evade reporting limits and avoid scrutiny. One rule place to foil layering is the AML holding period, which needs deposits to stay in an account for a minimum of 5 trading days before they will be transferred elsewhere. Financial institutions are required to develop and implement a written AML compliance policy, which is approved in writing by a member of senior management and overseen by a chosen AML compliance officer. These programs must specify “risk-based procedures for conducting ongoing customer due diligence” and conduct “ongoing monitoring to spot and report suspicious transactions.” History of Anti-money laundering Efforts to police illicit gains have a history stretching back centuries, while the term “money laundering” is barely about 100 years old and in wide use for less than 50. The first major piece of U.S. AML legislation was the 1970 Bank Secrecy Act, passed partially to thwart organized crime. Additionally, to require banks to report cash deposits of quite $10,000, the legislation also required banks to spot individuals conducting transactions and to keep records of transactions. The U.S. Supreme Court upheld the Bank Secrecy Act’s constitutionality in 1974, the identical year “money laundering” entered wide use amid the outrage. Additional legislation was passed within the 1980s amid increased efforts to fight drug trafficking, within the 1990s to expand financial monitoring and within the 2000s to chop off funding for terrorist organizations. Anti-money laundering assumed greater global prominence in 1989 when a bunch of nations and international organizations formed the Financial Action Task Force (FATF). Its mission is to develop international standards to stop money laundering and promote its adoption. In October 2001, following the 9/11 terrorist attacks, FATF expanded its mandate to incorporate combating terrorist financing. Another important organization in the fight against money laundering is the International Monetary Fund (IMF). Just like the FATF, the IMF has pressed its member countries to go with international standards to thwart terrorist financing. The United Nations included AML provisions in its 1998 Vienna Convention addressing drug trafficking, the 2001 Palermo Convention against international organized crime, and also the 2005 Merida Convention against corruption. The Anti-Money Laundering Act of 2020, passed in early 2021, was the foremost sweeping overhaul of U.S. AML regulations since the PATRIOT Act of 2001. The 2021 legislation included the Company Transparency Act, which made it harder to use shell companies to evade anti-money laundering and economic sanctions measures. The legislation also subjected cryptocurrency exchanges additionally as arts and antiquities dealers to identical customers due to diligence requirements as financial institutions. What Are Some Ways in which Money Is Laundered? Money launderers often funnel illicit funds through associates’ cash-generating businesses, or by inflating invoices in shell company transactions. Layering transactions are