Anti-money laundering (AML)

 Anti-money laundering (AML) refers to the activities financial institutions perform to

achieve compliance with legal requirements to actively monitor for and report suspicious
activities.
 Anti-Money Laundering (AML) is a set of policies, procedures, and technologies that
prevents money laundering.
 There are three major steps in money laundering (placement, layering, and integration),
and various controls are put in place to monitor suspicious activity that could be involved
in money laundering.
History of Anti-Money Laundering
 The United States was one of the first nations to enact anti-money laundering legislation when it
established the Bank Secrecy Act (BSA) in 1970. An early effort to detect and prevent money
laundering, the BSA has since been amended and strengthened by additional anti-money
laundering laws. The Financial Crimes Enforcement Network is now the designated
administrator of the BSA – with a mission to "safeguard the financial system from the abuses of
financial crime, including terrorist financing, money laundering and other illicit activity."

In 1989, multiple countries and organizations formed the global Financial Action Task
Force (FATF). Its mission is to devise and promote international standards to prevent
money laundering. Shortly after the 9/11 attacks on the US, FATF expanded its mandate to
include AML and combating terrorist financing. The International Monetary Fund (IMF) is
another important organization. With 189 member countries, its primary purpose is to ensure
stability of the international monetary system. The IMF is concerned about the consequences
money laundering and related crimes can have on the integrity and stability of the financial
sector and the broader economy.

Importance of Anti-money Laundering

The estimated amount of money laundered globally in one year is 2% to 5% of global GDP,
or US$800 billion to US$2 trillion – and that’s a low estimate. Money laundering often
accompanies activities like smuggling, illegal arms sales, embezzlement, insider trading,
bribery and computer fraud schemes. It’s also common with organized crime including
human, arms or drug trafficking, and prostitution rings.
Anti-money laundering is closely related to counter-financing of terrorism (CFT), which
financial institutions use to combat terrorist financing. AML regulations combine money
laundering (source of funds) with terrorism financing (destination of funds).
Beyond the moral imperative to fight money laundering and terrorist financing, financial
institutions also use AML tactics for:

 Compliance with regulations that require them to monitor customers and transactions and
report suspicious activity.
 Protection of their brand reputation and shareholder value.
 Avoidance of consent orders as well as civil and criminal penalties that could be levied because
of noncompliance or negligence. 
 Reduction of costs related to fines, employee and IT costs, and capital reserved for risk
exposure.

Anti-Money Laundering Works

To identify and report potential money laundering and address compliance requirements,
financial institutions must have a deep understanding of how the crime works. Money laundering
involves three stages: placement, layering and integration. These are a complex series of
transactions that start with depositing funds, then gradually moving them into what appear to be
legitimate assets.

 Placement refers to how and where illegally obtained funds are placed. Money is often placed
via: Payments to cash-based businesses; payments for false invoices; “smurfing,” which means
putting small amounts of money (below the AML threshold) into bank accounts or credit cards;
moving money into trusts and offshore companies that hide beneficial owners’ identities; using
foreign bank accounts; and aborting transactions shortly after funds are lodged with a lawyer or
accountant.

 Layering refers to separating criminal funds from their source. It involves converting the illicit
proceeds into another form and creating complex layers of financial transactions to disguise the
funds' origin and ownership. Criminals do this to obfuscate the trail of their illicit funds so it will
be hard for AML investigators to trace the transactions.

 Integration refers to re-entry of the laundered funds into the economy in what appears to be
normal, legitimate business or personal transactions. This is sometimes done by investing in real
estate or luxury assets. It gives launderers and criminals an opportunity to increase their wealth.

Regulations, Compliance & AML

The FATF helps countries create a financial intelligence unit (FIU) that’s responsible for
managing the flow of information between their institutions and law enforcement agencies.
Government legislation and regulation by each country’s FIU make financial institutions the first
line of defense against money laundering and terrorist financing.

By reporting suspicious activities to the government via suspicious transaction reports (STRs)
and suspicious activity reports (SARs), banks alert law enforcement to possible criminal
activities. Many regulatory bodies have enacted critical AML legislation with compliance
requirements banks follow to enforce anti-money laundering, such as:
 US: US Patriot Act, Bank Secrecy Act.

 Europe: EU Fourth Anti-Money Laundering Directive (4AMLD).

 Canada: Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

 Australia: Anti-Money Laundering and Counter-Terrorism Financing Act of 2006.

AML regulations vary by jurisdiction – but in general, financial institutions undertake the
following measures to meet compliance requirements:

 Customer identification program/know your customer (KYC). Financial institutions must

require proper customer identification and verification to ensure legitimacy. Higher risk products
and services (e.g., private banking) require more in-depth documentation.
 Large currency transaction reporting. Requirements call for institutions to file a regulatory
report (known as a “CTR” in the US) for transactions above a certain threshold made by a single
customer during a business day.
 Suspicious activities monitoring and reporting. Regulatory agencies publish AML guidelines
about behavior that should be monitored (e.g., making numerous cash deposits or withdrawals
over several days to avoid a reporting threshold). If an AML investigator uncovers behavior that
exceeds reporting thresholds and has no apparent business purpose, they file a SAR/STR with
the FIU to fulfill regulatory requirements.
 Sanctions compliance. Regulatory bodies such as the US Treasury Department, US Office of
Foreign Assets Control, the United Nations, the European Union, Her Majesty’s Treasury and
the Financial Action Task Force on Money Laundering have requirements for financial
institutions to check transaction parties against lists of sanctioned individuals, companies,
institutions and countries.

Difference Between AML, CDD and KYC

Anti-money laundering (AML) is the broad category of the laws, rules and procedures aimed
at deterring money laundering, while customer due diligence (CDD) describes the scrutiny
financial institutions (and others) are required to perform to thwart, identify and report
violations. Know your client (KYC) rules apply customer due diligence to the task of
screening and verifying prospective clients.

KYC And AML – What’s The Difference

AML refers to all efforts involved in preventing money laundering, such as stopping criminals
from becoming customers and monitoring transactions for suspicious activity.

KYC refers to customer identification and screening, and ensuring you understand their risk to
your business. In this way, KYC compliance helps prevent money laundering as well as fraud.