The main purpose of money laundering is to hide the origins of the proceeds of crime, so that criminals can spend the money without arousing suspicion. This activity is dubbed ‘money laundering’ because it involves a complex process of ‘cleaning’ dirty funds to create the appearance of legitimacy.
Fortunately, many lawmakers and regulators are taking bold steps with anti-money laundering (AML) guidance and regulation. The importance of anti-money laundering is a powerful tool in preventing fraudulent activities and ensuring that businesses operate in an ethical and transparent manner. With that in mind, let’s examine what causes money laundering, ways to fight against it, and how an identity verification provider like Onfido can help.
Causes of money laundering
By understanding the motives and methods behind money laundering, financial institutions can develop effective AML policies and procedures to prevent dirty money from entering the legitimate financial system. Moreover, understanding the causes of money laundering can help businesses identify potential red flags that may signal these illegal activities.
Some of the common causes of money laundering include the following:
- A money launder’s need to conceal the true source and ownership of illegal funds
- The lure of profits and the desire to use ill-gotten funds without fear of being caught
- Vulnerabilities in (or complete lack of) regulatory frameworks and enforcement mechanisms
- Fragmented and inconsistent AML regulations and standards across jurisdictions
- Globalization and the ease of cross-border transactions
- High levels of corruption and lack of transparency in some jurisdictions
- Inadequate resources and capacity of law enforcement agencies to investigate and prosecute money laundering cases
- Insufficient international cooperation and coordination among law enforcement agencies
- Inadequate awareness and understanding of the risks of money laundering among businesses and individuals
How to prevent money laundering
Preventing money laundering is crucial to comply with regulations and to protect the financial system from harm caused by criminals. What exactly does this “harm” look like? Money laundering facilitates unlawful activities like human and drug trafficking, tax evasion, terrorism, and more. It can also create unfair competition, increase corruption, and undermine the public's trust in financial institutions.
So — what’s to be done? To contribute to the global fight against money laundering, here are some of the top action steps to take.
- Implement effective AML policies and procedures - Financial institutions must establish policies and procedures consistent with regulatory requirements and industry best practices. These policies should cover customer due diligence, risk assessment, transaction monitoring, and suspicious activity reporting. Rather than starting from scratch, check with your country’s regulatory body and industry associations for an AML policy template, as many make these available for free.
- Conduct customer due diligence (CDD) - CDD is the process of gathering information about your customers to verify their identities and assess any risk they pose to your business. It’s detective work, in a way. You must collect clues and follow leads to get a complete picture of who your customer is and what they are up to. This includes verifying the identity of customers, understanding the nature of their business, assessing their risk profile, and much more.
- Conduct regular employee training - AML training keeps everyone up-to-date on new money laundering techniques and trends. Plus, this instruction is a requirement for financial institutions in many countries. Regular training should answer questions like “What is the most common way to launder money?” and “What are the 3 steps in money laundering?” To keep employees engaged, consider using interactive training sessions that involve real-life scenarios. Encourage them to think critically and be proactive by using role-playing exercises, quizzes, and even gamification to keep everyone invested.
- Cooperate with law enforcement agencies - Reporting suspicious activity to law enforcement agencies is a cornerstone of proper AML procedure. The exchange of information between businesses and law enforcement can help to identify potential money laundering activities, track illicit funds, and disrupt criminal networks. Businesses can also provide valuable intelligence on the latest money laundering methods and trends, which can help law enforcement to stay ahead of the game.
- Embrace the power of automation - Money laundering statistics show that global compliance costs rose by $33 billion from 2019 to 2020. These costs continue to rise in recent years as businesses fight to keep up with the latest money laundering schemes. Thankfully, AI-powered solutions like Onfido can lessen this growing financial burden. A recent study by Forrester Consulting found that, over three years, an organization using Onfido can see a return on investment (ROI) of 261%.
As businesses operate in an increasingly digital world, the risk of identity fraud and money laundering continues to grow. But with Onfido’s Real Identity Platform, businesses have a fast and secure way to verify customer identities while meeting compliance requirements.
Onfido automates document, biometric, and data verification, as well as fraud detection. Plus, businesses can build custom AML and know your customer (KYC) workflows tailored to their specific needs in Onfido Studio. Our global coverage and fast verification times mean it's never been easier to lower fraud, raise compliance, and drive growth.
Our interactive tour walks through our Verification Suite, and shows how to build workflows in Onfido Studio.