Anti-Money Laundering (AML) is the prevention of financial crimes by policies, laws, and regulations. Financial crime prevention is the responsibility of local and global regulators, who build AML policies. Companies are required to adhere to AML regulations. Compliance can be challenging for companies. As a result, financial institutions have AML compliance departments.

What is Money Laundering?

Before understanding AML regulations, one must know what money laundering is. A major financial crime, money laundering involves sneaking money obtained illegally into financial systems. Methods of money laundering increase and develop with the advancement of technology. It is estimated that laundered money represents between 2% and 5% of the world’s GDP, according to the International Monetary Fund (IMF). Consequently, local and global authorities impose regulations to fight financial crimes and minimize their damage.

Beginning of Anti-Money Laundering

In July 1989, the Financial Action Task Force (FATF) was formed in Paris by a group of countries to combat money laundering. It has been imposing regulations since then. Following the 9/11 attacks, FATF expanded its mandate and imposed regulations to combat terrorism financing.

Not only that but there’s more initiative taken by different-different countries to fight financial crime.

In 1990, the European Union released its first Anti-Money Laundering Directive to prevent the misuse of money laundering within the financial system. Increasingly, the EU AML Directives are being revised with the goal of reducing money laundering and terrorist financing risks.

The UK AML laws are imposed by the Proceeds of Crime ACT 2002 (POCA). Several organizations were established in the U.K. to prevent financial crime, like NCA, SFO, FCA, and HMT. Even though the U.K. has left the European Union, The U.K.’s AML laws and regulations comply with FATF recommendations and European Union Anti-Money Laundering directives.

Office of Foreign Assets Control (OFAC) is a functional financial sanction organization in the USA. OFAC develops programs to protect U.S. Foreign Policy and national interests.

In Turkey, MASAK has a financial intelligence unit established in 1997 to prevent money laundering and terrorist financing.

Many more countries have regulatory bodies dependent on FATF regulations but with different functions.

What Is The Anti-Money Laundering Process?

AML regulations are primarily designed to prevent money laundering. Various procedures are published by regulators in order to accomplish this. The companies must comply with them. An example is the Know Your Customer (KYC) process. Regulators require companies to gain insight into their customers. Based on customer information, companies can develop a risk-based approach. Suppose a customer who wants to transfer money is on a country’s list of terrorists. Without knowing this customer, the firm may finance terrorism. Therefore, it will constitute a serious financial crime with hefty penalties. Screening Software can help prevent this from happening. Businesses must report suspicious financial activities and transactions to regulators.

Aside from KYC measures, organizations can perform Customer Due Diligence (CDD) procedures in order to understand their customers’ risks and get to know them better. CDD procedures can help identify and address new customer risks as needed. It is riskier to do business with some customers than others, such as political-exposed persons (PEPs).

While knowing customers and their risks is vital to AML compliance programs, reviewing customers’ transactions is just as important. By constantly monitoring their customers’ transactions, organizations can instantly detect suspicious transactions and write reports. Financial institutions use AML Transaction Monitoring Software for this exact reason.

Financial organizations can also set rules for their customers’ transactions and get warned if they get broken. AML Transaction Monitoring stops the transaction automatically in such situations. Compliance officers can review the transaction and write a report called Suspect Activity Report (SAR) to regulators if they find it necessary.

Why Is AML Compliance Important?

Criminals use money laundering to hide their crimes and use illegally obtained money more effectively. Financial institutions play a critical role in fighting against financial crimes. If financial institutions do not comply with the AML regulations, financial crimes will continue to increase. Money laundering makes up 2% to 5% of the world’s GDP. That’s a considerable amount. Besides, regulators impose various penalties for companies that do not comply with the regulations. The value of AML fines in 2018 was $ 4.27 billion. In 2018. At the end of 2019, the penalties increased by approximately two times compared to 2018 and reached around $8 billion. AML penalties in 2020 are higher than in 2019. Banks are the most fined financial organizations. Take a closer look at AML Fines in 2021.

How Do Companies Ensure AML Compliance?

AML compliance can be complicated for companies, especially given the continuous nature of new regulations and increased audits/penalties. Compliance officers help provide processes for companies to prioritize their compliance efforts. Their role involves not only following regulations but also being able to identify financial crimes; however, doing so manually is not a viable option due to the thousands of sanctions and watchlists published globally. Companies don’t want people on these lists to be their customers, so compliance officers should check whether new customers are on these lists with IntelleWings AML Screening solutions that enable quick scanning of these lists.

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