Isabella Carter
Anti-money laundering (AML) refers to the international network of laws, regulations, and procedures aimed at uncovering money that has been disguised as legitimate income. AML laws are designed to prevent criminals from hiding criminal profits inside the financial system. Money laundering is the process of making illegally gained proceeds (dirty money) appear legitimate (clean). This typically involves three steps: placement, layering, and integration. To prove a violation of money laundering laws, a prosecutor must prove that the defendant knew that the property involved was the proceeds of any felony under state, federal, or foreign law. Financial institutions play a key role in detecting and reporting AML violations through customer due diligence (CDD) and Know Your Customer (KYC) measures. Non-compliance with AML regulations can result in serious consequences, including criminal penalties.
| Characteristics | Values |
|---|---|
| Definition | Anti-money laundering (AML) refers to legally recognized rules, national and international, that are designed to thwart attempts to hide criminal profits inside the financial system. |
| Stages | The three stages of money laundering are placement (depositing), layering (obscuring through many transactions), and integration or extraction (using for large purchases or withdrawing). |
| Regulatory Bodies | Financial Action Task Force (FATF), Financial Crimes Enforcement Network, Financial Industry Regulatory Authority (FINRA), Federal Deposit Insurance Corporation (FDIC) |
| Applicable Laws | Bank Secrecy Act (BSA), Anti-Money Laundering Act of 2020, Title III of the USA PATRIOT Act, Corporate Transparency Act, Intelligence Reform & Terrorism Prevention Act of 2004, Money Laundering and Financial Crimes Strategy Act (1998) |
| Reporting Requirements | Financial institutions are required by law to gather information on customers, track deposits and outflows, and report any suspicious activity. |
| Compliance Requirements | Financial institutions must have reasonably designed risk-based programs to prevent money laundering and the financing of terrorism. |
| Penalties | Increased civil and criminal penalties for money laundering. |
| Other Overlaps | AML efforts may overlap with other regulatory concerns, such as cybersecurity and protecting senior investors from exploitation and fraud. |
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What You'll Learn
Terrorist financing
To combat terrorist financing, the Financial Action Task Force (FATF) develops standards and promotes the implementation of legal, regulatory, and operational measures. The FATF's glossary includes 21 categories of predicate offenses, such as participation in organized crime, fraud, drug trafficking, and corruption. The US Department of the Treasury's Office of Terrorism and Financial Intelligence also develops and implements strategies, policies, and programs to combat terrorist financing domestically and internationally.
The European Commission carries out risk assessments to identify and address terrorist financing risks in the EU, and has adopted legislation such as the Anti-Money Laundering Directive in 1990 and the new Regulation on the Traceability of Transfers of Funds (TFR) to ensure the traceability of crypto-asset transfers.
Organizations like Conservation International (CI) have developed Anti-Money Laundering and Counter-Terrorism Financing Policies (AML/CFT Policies) to prevent the misuse of funds for terrorist financing. These policies outline the principles, expectations, and requirements for staff and partners to manage and reduce AML/CFT risks.
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Customer Due Diligence (CDD)
CDD involves screening and verifying the identities of prospective customers, tracking their deposits and outflows, and reporting any suspicious activity. This includes analysing information from different sources, such as the customer, sanctions lists, and public and private data sources. The specific information collected depends on the risk profile of the customer. Basic CDD requires information such as the customer's name, address, and a photograph of an official identity document.
Financial institutions must take a risk-based approach to CDD, meaning that customers who potentially pose a higher risk will be subject to enhanced due diligence processes. This approach ensures compliance with the regulations and laws of the regions or markets in which the organisation operates. CDD is an ongoing process that continues even after a new customer is onboarded, as a customer's activities and risk profile may change over time.
CDD is a costly exercise for banks, as they need to employ dedicated teams to onboard customers, investigate false positives, and conduct manual checks. However, solutions like cloud-based platforms can help reduce the administrative burden associated with the due diligence process. Overall, CDD is a critical tool in the fight against money laundering, helping to improve financial transparency and prevent criminals from misusing companies to disguise their illicit activities.
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Know Your Customer (KYC)
KYC in the banking sector requires bankers and advisors to identify their customers, the beneficial owners of businesses, and the nature and purpose of customer relationships. Banks must also review customer accounts for suspicious and illegal activity and maintain and ensure the accuracy of the customer accounts. KYC checks are done through independent and reliable sources of documents, data, or information. Each client is required to provide credentials to prove their identity and address.
KYC has its origins in the 2001 Title III of the Patriot Act, which aimed to provide various tools to prevent terrorist activities. It is a component of Customer Due Diligence (CDD), which involves screening and verifying prospective banking clients. Financial institutions are required by law to gather information on customers, track deposits and outflows, and report any suspicious activity.
KYC processes are also employed by companies of all sizes to ensure their proposed customers, agents, consultants, or distributors are anti-bribery compliant and are who they claim to be. This includes Know Your Business (KYB) protocols, which involve verifying business activities to determine whether they align with a company's risk tolerance.
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Operating an unregistered Money Services Business (MSB)
Money Services Businesses (MSBs) have been required to register with FinCEN since 1999, when the MSB regulations came into effect. An MSB is generally defined as any person or business offering check cashing, foreign currency exchange services, or selling money orders, traveler's checks, or pre-paid access products for an amount greater than $1000 per person per day, in one or more transactions. A person who engages in the transfer of funds is also considered an MSB or money transmitter, regardless of the amount of money being transmitted.
The registration of an MSB is the responsibility of the owner or controlling person of the business and must be filed within 180 days of the MSB being established. This registration is a vital first step in establishing a compliance framework for applicable FinCEN regulations, which are designed to mitigate the risks of criminal abuse of MSBs for money laundering and terrorist financing. FinCEN provides detailed instructions and resources to help MSBs understand and comply with these requirements.
Operating an unregistered MSB is a serious violation of anti-money laundering regulations and has significant consequences. Failure to register may result in civil money penalties of up to $5000 for each violation, and each day the violation continues constitutes a separate violation. In addition, the Secretary of the Treasury may bring a civil action to address the violation, and the business may face possible criminal prosecution.
To prevent such violations, FinCEN actively encourages law enforcement and regulatory authorities to report any suspected unregistered MSBs through their Regulatory Helpline or normal reporting channels. These efforts have helped increase the number of registered MSBs and overall compliance with BSA requirements.
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Cross-border electronic transmittals
Anti-money laundering (AML) refers to legally recognized rules, both national and international, that aim to prevent the concealment of money gained from crimes such as tax evasion, human trafficking, and drug trafficking, among others. It also includes money being illegally routed to terrorist organizations.
To combat money laundering and terrorist financing, the Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA) was enacted. This Act requires the Secretary of the Treasury to study the feasibility of requiring financial institutions to report certain cross-border electronic transmittals of funds. This is to aid in the efforts against money laundering and terrorist financing.
The Financial Crimes Enforcement Network (FinCEN) has determined that the basic information already obtained and maintained by U.S. financial institutions is sufficient to support the Secretary's efforts. FinCEN has also stated that the reporting of cross-border wire transfer data is technically feasible for the government but requires further collaboration.
The Annunzio-Wylie Anti-Money Laundering Act of 1992 amended the BSA, authorizing the Secretary and the Board of Governors of the Federal Reserve System to jointly issue regulations. These regulations require insured banks and certain non-bank financial institutions to maintain records of international funds transfers and transmittals.
In conclusion, cross-border electronic transmittals are an important aspect of anti-money laundering efforts. The feasibility of requiring financial institutions to report such transmittals is being studied, and initial assessments indicate that it is technically feasible and can support the fight against money laundering and terrorist financing.
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Frequently asked questions
Money laundering is the process of making illegally-gained proceeds ("dirty money") appear legal ("clean"). This typically involves three steps: placement, layering, and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the "dirty money" appears "clean".
AML refers to legally recognized rules, national and international, that are designed to prevent money laundering. AML laws, regulations, and procedures are attempts to reduce the ease of hiding criminal profits. A violation of AML laws, therefore, constitutes an attempt to hide criminal profits within the financial system. This includes the concealment of the origins of money gained from crimes, including tax evasion, human trafficking, drug trafficking, public corruption, and terrorist financing.
AML regulations vary across jurisdictions. Here are some examples:
- The Bank Secrecy Act (BSA) in the United States, which provides a foundation to promote financial transparency and deter and detect those who seek to misuse the financial system for money laundering purposes.
- The Anti-Money Laundering Act of 2020 in the United States, which requires financial institutions to have reasonably designed risk-based programs to prevent money laundering and the financing of terrorism.
- The Corporate Transparency Act, a clause of the Anti-Money Laundering Act, which eliminates loopholes for shell companies to evade AML measures and economic sanctions.
- The Financial Action Task Force (FATF), an intergovernmental body that devises and promotes the adoption of international standards to prevent money laundering and the financing of terrorism.
- The European Union's (EU) anti-money laundering legislation, which is similar to that of the United States.
- FINRA's Anti-Money Laundering (AML) e-learning courses, which cover concepts and strategies for detecting and preventing money laundering activity.
