What is the anti-money laundering process?

Money laundering is not a new phenomenon. In the United States, the first widely documented rise in money laundering occurred in the 1920s and ‘30s reflecting the rise of organized crime in the Prohibition era. In fact, it’s said that the popular use of the term ‘laundering’ in the U.S. actually came from Al Capone’s utilization of laundromats to cover his tracks from federal agents. 

Other reliable sources suggest that the term ‘money laundering’ has little to do with physical laundromats and more with the notion of taking dirty money — putting it through cycles of transformation — and it coming out the other side ‘clean.’ 

These days, money laundering has a similar meaning. According to the United States’ Financial Crimes Enforcement Network: “Money laundering involves disguising financial assets so they can be used without detection of the illegal activity that produced them. Through money laundering, the criminal transforms the monetary proceeds derived from criminal activity into funds with an apparently legal source.” In fewer words, the European Union describes money laundering as “the process by which criminals conceal the illegal origin of their property or income.” 

Generally speaking, these illicit funds come from criminal activity such as: 

• Drug trafficking
• Corruption
• Embezzlement
• Gambling
• Human trafficking
• Poaching
• Forestry crime

Money laundering has serious and tangible consequences. It can lead to negative social and economic impacts, potential systematic legal trouble, and other issues. What’s more, in today’s digital age, money laundering is as rampant as ever. That’s why, globally, there are anti-money laundering (AML) initiatives in place. Anti-money laundering guidelines help regulate specific businesses — like the finance industry for example — to prevent illicit financial activity and to draw attention to suspected infringements. 

In the following sections of this article, we break down:

• Some background information on money laundering 
• What anti-money laundering is
• What an anti-money laundering process might look like
• Why anti-money laundering is important
• Advice on remaining compliant with the ever-changing landscape of AML and KYC (know your customer) regulations

A brief background on money laundering 

Before you can fully understand what anti-money laundering is and why it’s important, you need to be familiar with how and why criminals launder money. For starters, there are different types of money laundering. Examples of money laundering include:

• Bank laundering
• Cash business laundering
• Casino laundering
• Real-estate laundering
• Structuring
• Trade-based laundering 

What is the main purpose of money laundering?

The main purpose of money laundering for criminals is to take their illicitly earned money and make it appear to have come from a legitimate and legal source. 

What are the 3 stages of money laundering?

The three stages of money laundering are placement, layering, and integration. Let’s break down each one in more detail.

What is placement in money laundering?

Placement is the first stage for a criminal laundering money. In this stage, dirty money is placed into legal financial systems for safe keeping. As you might expect, keeping large amounts of cash on hand can be risky, so in order to put it somewhere safe, criminals have to place it into legitimate systems. This often involves using offshore accounts, claiming falsified profits in a cash-heavy business, or depositing small amounts into bank accounts (called smurfing). 

What is layering in money laundering?

Layering is one of the most common forms of money laundering and involves transferring dirty money into different forms, transfers, and transactions. Examples of layering in money laundering include exchanging cash for casino chips, casino chips for real estate, and real estate for gold. These days, cryptocurrency is often used as a layering tactic to disguise the origins of illegal money. 

Usually, layering involves moving assets around several different countries and offshore accounts in an effort to obscure the audit trail and make it difficult for governing bodies to track the funds. Layering also typically involves fraudulent bookkeeping, and as such, is a very intricate process.   

What is integration in money laundering?

Integration is what happens when ill-gotten criminal funds are absorbed into the economy. This involves using the money to buy goods and services like real estate, business ventures, and luxury assets. Additional integration tactics include paying fake employees, offering loans to shareholders (with an understanding they will never be repaid), and paying dividends to shareholders of criminal organizations. 

What is anti-money laundering?

Anti-money laundering includes regulations, policies, laws, and governing bodies all with the explicit goal of reducing financial crimes and preventing illegal activity. Many countries and political unions have their own nuanced rules and regulations, but they all share the same goal. As such, there is a heavy amount of overlap between laws from each country.  

For example, in the United States, anti-money laundering examples began with the bank secrecy act (BSA) of 1970 and have evolved through the Anti-Money Laundering Act (AMLA) of 2020. In Australia, regulations include the Anti-Money Laundering and Counter-Terrorism Financing Act, while the European Union enforces several Anti-Money Laundering Directives. 

In addition to the guidelines of specific countries, the Financial Action Task Force (FATF) is a coalition of 37 member countries, all committed to tackling terrorist financing, money laundering, and proliferation financing. The FATF provides 40 recommendations, divided into seven particular areas. Included in the seven areas are “AML policies and coordination”, as well as “money laundering and confiscation.” 

How is anti-money laundering done?

Creating a successful anti-money laundering process involves several components. Note, every AML process will vary depending on what source you look at, what country you operate in, and what your exact business does. That being said, a quality AML process should incorporate five different pillars. 

What are the 5 pillars of an AML process? 

1. Appoint a Compliance Officer. The first place to start when outlining your own AML process is to appoint someone to be in charge. They will then get familiar with the AML guidelines and regulations that directly affect your organization. Your compliance officer will be responsible for not only staying up to date with AML regulations, but relaying any changes in AML policies to management and stakeholders. They will also oversee staff training for proper AML compliance.
2. Complete Risk Assessments. A risk-based approach for AML requires categorizing your potential threats, placing the highest priority on the most pressing compliance risks, then addressing all risks accordingly. The potential risks of money laundering will look different for each institution. Therefore, you must develop a risk assessment that profiles your specific needs and risks that your organization may face. Many tools and templates exist to help with risk assessment. Digital tools, like Onfido’s Real Identity Platform, can help organizations leverage the power of technology and artificial intelligence to optimize their KYC processes. These tools can also help you stay up to date on any changes in international AML policy.
3. Prepare AML Policies and a Procedure Manual. It’s one thing to know what you have to do, it’s another to outline the steps to actually execute it. Once your compliance officer understands AML regulations, they must work with management to create internal AML policies and processes. Additionally, training on AML should begin with the onboarding process and persist throughout the course of employment for all relevant staff. Having outstanding software and solid AML policies is a huge part of the fight against money laundering. But it’s all for naught if your staff doesn’t know how AML policies work or how to operate AML software. As one of the first lines of defense against financial crimes, be sure to invest in adequate training for all employees.
4. Monitor and Maintain Your AML Program. Constantly monitoring for, and reporting, suspicious activity is a key part of any AML initiative. Keeping detailed records (especially for high-risk customers) and noting suspicious activity and transactions can help you remain compliant and deter future nefarious activity. A true, unbiased assessment of your compliance cannot be done by those in the organization. As such, third-party auditing helps maintain an objective outlook on your AML program. Annual audits are key at a minimum, though a higher frequency may be needed depending on the risks your organization faces. An AML audit is distinctly different from a financial audit, as it focuses solely on AML compliance.
5. Implement Customer Due Diligence (CDD). Simply identifying your customers’ risks isn’t enough to prevent money laundering. You also need to truly understand and assess each customer. The CDD process involves rating customers according to their level of risk (high, medium, and low) as it pertains to laundering money. This includes evaluating them against databases, government records, and watchlists. It also means identifying the true legal owners of legal entities, to protect against AML tactics like shell companies. While CDD is the newest addition to the AML process, it is no less important than the other steps. If anything, its importance has increased over time, as it is one of the most actionable steps. CDD is the combination of all your AML procedures and infrastructure, in action.

One thing that AML guidelines and criminals have in common is that they are always evolving. Ensuring your software and security systems are up-to-date and reflect the most pressing changes in AML compliance can go a long way in preventing criminal activity. Modern tools like Onfido's Real Identity Platform can help ensure that your changing needs are met. 

Why are anti-money laundering efforts important?

The importance of anti-money laundering efforts is hard to overstate. Essentially, the importance of AML initiatives really falls into two main buckets: benefits for society as a whole, and benefits for institutions who want to remain compliant and in business. Let’s start by discussing the concerns for society. 

Societal benefits of AML 

Money laundering is illegal for a reason. In short, the law punishes money derived from illicit activity. When criminals can successfully launder money, it can have severe repercussions and consequences for just about everybody. For starters, the government cannot tax laundered money. This means that public works, schools, hospitals, and infrastructure will all suffer from money laundering. But beyond just that, since money laundering allows criminals to evade customary economic institutions, it can also directly impact interest and exchange rates. Combined, this can increase unemployment and inflation rates and result in major economic destabilization. 

Aside from the economic turmoil money laundering can instigate, successfully laundered money tends to breed more criminal activity. Whether it’s existing criminals getting away with devious acts, or new bad actors entering the game to get their share of the dirty winnings, when money laundering goes unchecked, it’s hard to enforce law and order. For example, imagine two people running a similar business. If person A — who can barely make ends meet — runs an honest business, while person B — who is making noticeably more money — engages in criminal activity, person A might be tempted to do the same. 

Business benefits of AML

Refocusing on financial organizations in particular, the benefits of AML compliance come in many forms. First of all, remaining compliant not only means your company is doing its part to help prevent money laundering and financial crime in the big picture, but it also prevents your organization from having to pay hefty fines. For example, Canada levies fines of up to $500,000 for non-compliant institutions. 

However, beyond just remaining compliant, following AML guidelines can help protect you and your organization against severe legal action. If an institution is found to be enabling or allowing money laundering in any way (knowingly or not) they face sanctions from governing bodies. These sanctions can include:

• Additional fines
• Criminal charges for institutions and individuals involved
• Associated legal fees
• Removal of employees and personnel involved
• Fees associated with replacing said individuals

Criminal activity doesn’t happen in a vacuum, either. Not only will you have all of the compliance and legal issues to deal with, but more than likely your customer base will also find out. Once that happens, it can be hard to keep (or more likely regain) customer trust. This can lead to more lost business.

Onfido: AML due diligence simplified 

The world of AML compliance is constantly changing. It’s a good thing that AML guidelines are always adapting to keep up with criminal trends and new-age activity. But for compliance officers, it can feel like a lot to manage, especially if most of your AML process is manual. Embracing compliance technology like Onfido can not only streamline your AML process, but also save you time and money. Plus, with the power of Atlas™ AI, you can trust Onfido to provide accurate insights.