Anti-money laundering responsibilities require institutions to take appropriate measures to protect themselves and the economy against financial crimes. Financial institutions all over the world take AML security measures every day to protect themselves and their customers from criminal activity. They:
- Verify the identity of prospective customers based on document and biometric verifications
- Comply with anti-money laundering (AML) regulations to prevent criminals from using illegally acquired money
- Monitor customers’ activities for suspicious behavior
- Train employees on how to spot fraudulent activities
When financial institutions don’t follow AML regulations, they run into serious consequences. For example, the Bank of Credit and Commerce International was accused of falsifying transactions, having unregistered deposits, and using bribery in 1990. In 1991, the Bank of England closed it permanently. AML regulations stop financial crime and protect the institutions who follow them. This guide outlines the importance of AML to help you better understand why it is regulated by governing bodies across the globe.
What is the main objective of anti-money laundering?
The main objective of anti-money laundering is to monitor and report any suspicious activity that tries to disguise the presence and use of illegal funds. Criminals gain these funds through:
- Drug trafficking
- Terrorist financing
- Tax evasion
- Illegal gambling
Criminals are always looking for new methods to hide how they gained illegitimate funds so it can be spent and invested. Transactions involving illegal funds hurt the economy by removing that money from the economy.
Illegal funds also make it hard for honest-run companies and enterprises to stay in business. Organizations owned and operated by people with illegal funds can produce and sell products at a much lower price than their competitors. Other companies can’t compete with these lower prices, and many end up going out of business. In severe cases, this imbalance of incomes — where criminals gain more money and honest citizens can barely make ends meet — may encourage others to take part in similar criminal activities.
The use of funds acquired illegally hurts financial institutions themselves, too. Should authorities identify money laundering at an institution, whether advertent or inadvertent, you will face severe penalties. Additionally, time spent mitigating damage caused by money laundering interferes with normal business operations. Damage mitigation requires both extra time and money, two things that many institutions don’t have. AML compliance assists you in preventing these repercussions.
How to prevent money laundering
The anti-money laundering process best practices are laid out in regulations and anti-money laundering guidelines. Your applicable regulations and anti-money laundering guidelines will vary depending on your institution’s geographic location. In general, the anti-money laundering process looks similar around the world:
- Appoint a compliance officer. This person will be in charge of the AML program, particularly ensuring that your institution remains compliant. To do that, the compliance officer must stay on top of any new AML regulations that arise and communicate those updates to the appropriate parties. This person will also provide AML training to your employees and make changes to the AML program based on findings from audits.
- Complete risk assessments. These assessments will guide you in creating policies and procedures for uncovering money laundering attempts. When doing risk assessments, determine which compliance risks are highest. Create policies around those first. After that, move down the line from those that are higher risk to those that are low-level.
- Create AML policies and a procedure manual. Once you’ve completed your risk assessments, you must create policies and a procedure manual so that all employees within your institution know what to do should they notice money laundering events or activities that could lead to money laundering. You must also train employees in learning how to use the tools and platforms that can detect fraud. This training should occur throughout an employee’s entire time with your institution.
- Maintain your program. You should schedule regular audits of your AML program. You should have at least one a year, although you may consider having more depending on how high of a risk your institution has for money laundering. You must have a third-party complete the audit, as institutions are not allowed to perform their own. That third party will analyze how well your organization follows AML regulations and what steps you’ve taken to protect your organization from money laundering. Based on these audits, you can make changes to your AML program as necessary.
- Perform customer due diligence (CDD) tasks. This step focuses on evaluating the risk level of new and existing customers. You do so by checking:
- Submitted documents
- Local and national government sanctions lists
- Public records
- Private data sources
From there, customers can be deemed either low, medium, or high-risk based on the findings. Further enhanced due diligence (EDD) measures should be taken for customers considered high-risk. These measures require a deeper dive into understanding who the customer is and their financial history.
A part of AML is KYC, which allows you to verify from the start that a customer is who they say they are. AML screening tools like Onfido help with both KYC and CDD. Onfido’s Real Identity Platform uses Atlas™ AI, which has award-winning document and biometric verifications, as well as fraud detection signals and trusted data sources for quicker, more accurate identity checks.
Why is it important to comply with anti-money laundering?
The importance of AML in banking and other industries that use it comes down to protecting business operations and the economy as well as upholding your moral responsibility. Specifically, compliance with AML allows institutions to:
- Avoid sanctions and fines
- Save money
- Prevent criminal activity
We take a closer look at each of these areas below.
Avoiding sanctions and fines
Should you allow money laundering in your financial institution, knowingly or unknowingly, both your institution and the employees involved may face sanctions and fines. Sanctions may include criminal charges and even imprisonment. In Canada, for example, individual violators may face a fine of $100,000 depending on how serious the violation is and how compliant the institution has been overall. Entities may have to pay up to $500,000. Guilty parties may also face up to five years in prison.
Non-compliant institutions in the United Kingdom may get their authorization removed and certain activities suspended. They may also have to pay fines and take down their websites.
Who investigates money laundering?
The following are some of the governing bodies that investigate money laundering:
- Australia: Australian Transaction Reports and Analysis Centre
- Brazil: Council for Financial Activities Control
- Canada: Financial Transactions and Reports Analysis Centre of Canada
- France: Treatment of Information and Action Against Illicit Financial Circuits
- Germany: Federal Criminal Police Office
- Spain: Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences
- United Kingdom: UK Financial Intelligence Unit
- United States: Federal Bureau of Investigation
You do not necessarily report to one of these bodies if you suspect money laundering in a customer’s account. For example, institutions in the U.S. would complete a Suspicious Activity Report in the Bank Secrecy Act (BSA) E-Filing System. The Financial Crimes Enforcement Network (FinCEN) would then review the report. If it seems serious, FinCEN will provide the Federal Bureau of Investigation with the report to aid them in their efforts. Make sure to familiarize yourself with your country’s regulations and guidance on how to make reports.
Financial institutions that comply with AML save money for their government. According to the United Nations Office on Drugs and Crime (UNODC), money laundering costs the world trillions of U.S. dollars a year. That means countries are missing out on billions of dollars a year that could be taxed and put toward public works. AML efforts allow countries to stop money laundering and get some of that money back into legitimate, taxable forms.
AML compliance allows financial institutions to save their own money, too. As we mentioned above, non-compliance may require that your organization pay a fine for each violation you commit. You could also face other associated costs unrelated to sanctions. For example, should you have an employee go to jail for their role in money laundering, you will have to pay to hire and train a new employee.
You must consider legal fees should you face lawsuits for your non-compliance. Your reputation is also damaged when you don’t comply with AML. A poor reputation means fewer customers and less money coming in, which could eventually cause you to go out of business.
Disassociating with criminal activity
Financial institutions have an ethical imperative to prevent criminal activity. It’s an expectation held by good customers, and once their trust is lost — it can be tough to earn it back.
How does AML affect financial institutions?
Proper AML screening and monitoring makes financial institutions more trustworthy in the eyes of their customers, their employees, and governing bodies. That trust leads to maintaining their authorizations and gaining more business over time. They will also attract top talent to their institution. Lastly, compliance leaves institutions room to focus on business itself, rather than fixing the messes caused by money laundering and regaining customer trust.
AML holds financial institutions to higher standards. It requires that they put in more effort when verifying and monitoring your customers. AML also keeps institutions engaged in learning about the latest updates so that they can maintain compliance. These daily operations pay off in the end, though, especially when institutions work towards going above and beyond with their efforts. Automated tools like Onfido make completing some of these processes even quicker and easier.
Meet AML screening requirements with Onfido
Automation makes the KYC and customer identification elements of anti-money laundering compliance simple. Our end-to-end Verification Suite contains:
- Document verification
- Biometric verification
- Data verification (including watchlist, PEPs, and sanctions checks, plus ongoing monitoring)
- Fraud detection
Plus, you can orchestrate identity verification journeys for AML to best fit each customer journey and market in Onfido Studio — all you have to do is drag-and-drop.
Identity verification with Onfido takes seconds. Once our check is complete, we tell you whether the customer has been cleared or whether you should consider looking further into the customer’s background.
Meet the future of AML compliance with Onfido. To learn more about what we provide, take an interactive tour of our software.