Money laundering schemes are increasing rapidly and are becoming more sophisticated making financial institutions vulnerable and placing them at great risk. To keep pace with the complex money laundering tactics of criminals, banks need to stay one step ahead by developing robust anti money laundering practices.
When money launderers try to siphon money illegally obtained, they run it through a legitimate cash business. It becomes the responsibility of the financial institutions to monitor deposits and other transactions of customers to make sure they are not part of any money laundering scheme.
is when the illegally-obtained funds are directly deposited in banks thereby introducing them into the financial system.
is when the funds are mixed, by converting them to other forms or moving them to other institutions to separate them from their original criminal source.
is the last stage where the funds are utilized for buying assets and making them a part of the legitimate economy.
To deter the criminals, effective Anti-Money Laundering (AML) programs are a fundamental requirement to ensure that financial organizations are protected and customers have confidence in their operations.
AML refers to a system of controls to detect, report and prevent money laundering activities. It is a set of laws, procedures and regulations which are followed with the intent to money launderers. AML consists of finding, freezing, and forfeiture of criminal assets.
There are AML compliance officers who are appointed to make sure that the AML policies are being followed by the banks and financial institutions.
Anti-money-laundering laws, regulations and procedures seeks to deter all criminal activities, including illegal goods trading, corruption of public funds, tax evasions, market manipulation, and also methods used to cover up these crimes and the money made from these crimes.
Theoretically, anti-money-laundering laws extend to only a limited number of transactions and criminal behaviours. But practically, they are a part of every aspect of a bank or financial institution's relationships with its customers. It is therefore the responsibility of the bank or institutions themselves to monitor, detect and prevent any illegal transactions, and report on anything suspicious.
Banks are required to verify every customer's identity, monitor transactions and report any activity that may raise suspicion, like sudden and large growth in funds or withdrawals. All financial institutions follow the Know Your Customer (KYC) rule which is a mandatory set of identification documents required to be submitted by the customer. It is not about just knowing the identity of the customer but also getting to know his or her typical transactions and behaviour.
There are very strict enforcement actions for noncompliance to AML regulations. There are billions of dollars collected globally in AML related fines annually. In some cases, financial institutions have also been banned from operating due to noncompliance.
Money launderers are using more sophisticated ways to skip detection. Hence it is necessary to counter them with stringent AML regulations.
Any money laundering incident puts a financial institution's reputation at risk. There's a lot at stake with the average value of top banks running in tens of billions.
Financial institutions lose potential customers due to slow onboarding processes or other inefficiencies on the part of the compliance staff who need several touch points with customers to gather and verify information.
Hence, AML is today a top priority for the banks and financial institutions as they have recognized the competitive advantages, they gain, namely
With all these benefits to gain, AML efforts are more crucial and necessary than now than they have ever been.