How do you know that you’re conducting business with honest people? Criminals can use trusted institutions — like banks and small businesses — to attempt to legitimize illegal funds through money laundering. Once ‘cleaned’ they can then safely cash out the funds for use in the general economy.
Anti-money laundering (AML) laws and best practices represent an international effort to protect businesses and society. However, with a mix of international and national laws and guidelines, it’s not always easy to know what you need to do to remain compliant. In this blog, we make it a little easier by answering “Who is subject to AML rules in the United Kingdom.” We also provide an easy step that businesses in any jurisdiction can take to improve their financial security.
What is money laundering?
Money laundering is a criminal activity committed by people who need to hide the source of money they’ve illegally obtained. That way, institutions don’t detect the money as illegal during transactions, and criminals can use their illegitimate funds in the wider economy. In other words, money laundering is the act of 'washing' 'dirty' money so it becomes 'clean.' This process typically involves three steps:
- Placement. Criminals place their illegal funds ('dirty' money) in the financial system through an established institution, such as a bank or a business. When operating through bank accounts, money launderers will often split up deposits into smaller amounts to avoid suspicion. When operating through businesses or shell companies, money launderers will often falsify invoice or revenue records to disguise illegal funds as profits.
- Layering. Criminals attempt to disassociate their identity from the illegal funds by undertaking actions such as making frequent transfers, converting money into cryptocurrency then back again, and dealing with banks that have fewer AML checks.
- Integration/Extraction. Criminals attempt to use the illegal value they’ve created to participate in the economy. At this point, authorities may have trouble connecting the original source of illegal funds to new transactions, so criminals will use this money to purchase assets. These assets can be sold for additional funds with little to no connection to the original criminal activity, so the money is considered “washed.”
In the UK and in other jurisdictions, the money launderers are the most likely to try to “clean” their money using the following:
- Financial institutions (banks, credit and insurance providers, etc.)
- Small businesses (laundromats, restaurants, etc.)
- Shell companies
- Real estate
Anti-money laundering efforts are an international cause, so many jurisdictions share a similar working definition and guidelines. However, some jurisdictions have stricter AML regulations than others. According to the National risk assessment of money laundering and terrorist financing 2020, the UK is paying special attention to reducing money laundering through cash deposits, retail banking, cryptocurrency exchanges, and more.
What are the main anti-money laundering laws in the UK?
The main anti-money laundering laws in the UK are:
- Proceeds of Crime Act 2002 (POCA): Requires financial institutions to monitor transactions and report suspicious activity.
- The Terrorism Act 2000: Requires financial institutions to take active steps to minimize the illegal funding of terrorism.
- The Money Laundering, Terrorist Financing and Transfer of Funds 2017: Requires certain institutions to abide by EU 5AMLD and implement AML risk assessment programs. These requirements are still in place after the UK exited from the EU.
The primary UK AML regulatory bodies are:
- The Financial Conduct Authority (FCA): As the central AML regulating authority in the UK, the FCA regulates financial institutions and can investigate organizations in any industry.
- HM Revenue & Customs (HMRC), The Serious Fraud Office (SFO), and The National Crime Agency (NCA): These organizations assist the FCA in regulating, overseeing, and enforcing AML practices.
The regulations put forth by these bodies are legal requirements that businesses must follow. Not doing so can result in serious consequences. For example, the failing to report money laundering penalty in the UK is up to 14 years in prison.
Who is required to comply with AML in the UK?
Anti-money laundering checks in the UK are required for the following businesses:
- Banks, credit providers, insurance companies, and other traditional financial institutions (notably laws for cryptocurrency are also rapidly developing)
- Estate agents
- Gambling institutions
- Luxury jewelry, art, and car dealers
- Over 100,000 more businesses as governed by the Financial Conduct Authority (FCA)
Anti-money laundering laws vary by industry and risk level. For example, AML checks for estate agents require that these practitioners register through HM Revenue & Customs (HMRC) and follow AML best practices, such as conducting due diligence for suspicious transactions.
For additional requirements in jurisdictions outside of the UK, look into the Bank Secrecy Act in the US or Directive (EU) 2019/1153 in the European Union.
Protect your organization with Onfido
Doing your part to reduce money laundering isn’t just good for business, it’s required by law. Common AML regulations require organizations to:
- Analyze fraud risks
- Monitor customer activity
- Treat each transaction as an independent event
Onfido makes completing these AML checks seamless without affecting service for honest customers by conducting identity verification at onboarding and beyond.
See the difference that automated documentation, data, biometrics, and fraud detection can make in our interactive tour.