Money laundering, anti-money laundering, and 5 facts you may not know

AML stands for anti-money laundering. There are AML regulations the world over, each designed to create transparency around who is making financial transactions, to stop financial crime not good customers.

Money laundering refers to the process of taking ‘dirty money’ i.e., money acquired through criminal activity, and ‘cleaning’ it by moving it into the mainstream, legitimate economy using different means. The means of laundering money are various, devious, and ingenious. They range from tax evasion to buying big ticket items to funneling money through, what appear to be, legitimate business entities. For example, in 2021, Natwest was fined more than £264 million for AML failings as an apparently unassuming jewelry business laundered £365 million through the bank's network of branches undetected for more than 5 years.

AML regulations vary across the world, however there is a key element that underpins all the legislation - customer due diligence – which mandates that a business governed by AML regulation takes measures to understand who they are doing business with. Financial services organizations must understand the identity of their customers and the likely risks of doing business with them, which is managed through a process known as know your customer or KYC.

What is AML compliance?

Regulated businesses - such as banks, estate and letting agents, casinos, professional and legal services companies - must take steps like register for an AML supervisor, appoint a money laundering reporting officer (MLRO), and implement systems to ensure compliance with the AML regulations relevant to the jurisdiction(s) they operate in.

AML regulations instruct businesses to do several things, including implementing systems; policies; controls; and procedures to understand and manage the risk of money laundering taking place through their operations. These policies and procedures also need to be communicated internally with staff. Regulated businesses then complete risk assessments to analyze where their business may be used to launder money and by whom. This means reviewing the entire operation and the client base for potential risk. This due diligence often extends into the wider business network too, encompassing suppliers and vendors - sometimes know as KYS or know your supplier.

Regulated entities put KYC processes in place to identify risk factors associated with customers. So, as well as performing basic KYC checks to verify a customer’s identity, firms may also look for factors that indicate someone poses a higher risk. This enhanced customer due diligence can involve screening for politically exposed persons (PEPs), sanctioned individuals, or those subject to negative news stories. The checks are usually completed before a customer is onboarded and given access to a financial product, and then at regular intervals throughout the customer’s lifecycle.

Monitoring and periodic reviews, or a process of perpetual KYC, take place to ensure ongoing compliance with AML laws. This involves reviewing any changes in business operations, refreshing customer risk profiles, and monitoring transactions for suspicious activity so they can be reported to the appropriate authorities.

When the FCA issued its £63 million fine to HSBC in December 2021, it said that under the UK money laundering regulations “firms were required to establish and maintain appropriate and risk-sensitive policies and procedures for the monitoring and management of compliance”, it was in this area of ongoing monitoring that the company failed AML compliance.

Five money laundering facts (you may not know)

1. The UK National Crime Agency published a National Strategic Assessment that estimated the cost of serious and organized crime was £37 billion a year, summarizing what further steps were needed to crackdown on money laundering. Since then, the UK has formally joined the Beneficial Ownership Leadership Group to improve the transparency of company ownership and reduce opportunities to hide financial crime with an aim to improving market confidence.

2. The largest AML fine in the European Union to date, totaling the equivalent of $900 million, was imposed on Dutch bank, ING. The bank was prosecuted under AML regulations for failing to prevent clients committing money laundering and paying bribes during the period from 2010 to 2016.

3. The Basel Institute of Governance completes an annual independent assessment of money laundering and terrorist financing across the world, ranking nations according to their AML risk. In 2021, the global assessment took place analyzing 203 jurisdictions and ranked Haiti as the highest risk.

4. The Basel Institute’s analysis also calculated an increase in the global risk of money laundering between 2020 and 2021 - up to 5.3/10 from 5.22/10.

5. The United Nations office on drugs and crime estimates between 2% and 5% of global GDP is laundered each year - that’s between 715 billion and 1.87 trillion euros.

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Despite an increase in AML regulation over recent years, the scale of the problem does not seem to be diminishing. In fact, the Basel institute’s risk analysis shows the risk of money laundering has increased.

There is plenty of work to do to tackle money laundering worldwide, decreasing global risk, and reducing the cost of financial crime. If you need help completing customer due diligence to understand the risks in your business network, or to comply with AML regulations, get in touch with the PassFort team – we would love to help.