The Essentials of Anti-Money Laundering
Uncover practical tips on what every business needs to know when building their compliance function.
Download nowMoney launderers and those involved in other types of financial crime often leverage businesses to channel and disguise the proceeds of crime. To protect themselves and comply with regulations, businesses must understand and implement the core principles of anti-money laundering and countering the financing of terrorism (AML/CFT). Non-compliance can cause financial, legal, and reputational damage, making a strong grasp of AML compliance vital for every business.
Organizations must comply with AML regulations to maximize their ability to detect and prevent financial crimes like money laundering, terrorist financing, fraud, tax evasion, and sanctions evasion. Inadequate AML compliance brings financial, legal, and reputational consequences for firms. Global AML fines exceeded $8bn in 2022, their highest ever total, while stringent regulations, encoded in law, mean firms and officers can face criminal penalties for negligence. Consumer confidence, typically only achieved after significant time and hard work by a business, can be quickly and significantly diminished by compliance failures and the associated bad press.
Faced with these risks, firms can use AML compliance to gain a competitive advantage, build trust with customers, and grow their business.
Although AML regulations tend to share fundamental tenets, they vary across jurisdictions, and firms should always consult their local legislation for full details. A quick overview of regulations in key jurisdictions includes:
An AML compliance program is an organization’s set of policies and procedures that help them detect and prevent money laundering and other financial crimes. Compliance programs rely on the fundamental pillars of tech and talent: the most effective combine specialist AML software, suited to the specific needs of a given business, with a team of experts who are well-placed to use and optimize it.
A risk-based approach to AML involves first establishing where a business is likely to face risks, and defining their tolerance of these risks, based on their sector, products, customer base, and regulatory obligations. It then means tailoring their compliance program to this outcome. This method allows firms to proactively identify and address risks while reducing inefficiencies in the compliance process. A risk-based approach is crucial in ensuring firms carry out proper due diligence on higher-risk customers, without excessively inconveniencing customers with lower risk profiles or unfairly limiting people’s access to financial services through derisking. The Financial Action Task Force (FATF) has published guidance on implementing risk-based approaches for various industries, including banking, legal, and virtual assets.
Risk assessments allow organizations to implement a risk-based approach by identifying potential risks across their products or services. Conducting a comprehensive business-wide risk assessment helps determine which offerings are most vulnerable, allowing for targeted evaluation of customer AML risk during onboarding. This approach informs the necessary steps and level of due diligence required for effective risk management. Firms should undertake risk assessments on a regular basis: on a defined schedule as well as in response to relevant developments such as regulatory updates or new product launches.
Uncover practical tips on what every business needs to know when building their compliance function.
Download nowWhen onboarding new customers, firms should carry out a know your customer (KYC) process, including customer due diligence (CDD) checks. KYC entails establishing and verifying a customer’s identity, with CDD specifically involving a look at data such as a customer’s location, occupation, or financial history, and screening them for politically exposed person (PEP) status, adverse media, and sanctions status, to define their risk profile.
Once a customer has been onboarded, firms should monitor their transactions and profile on an ongoing basis. This allows them to identify and investigate suspicious transactions and capture any changes that may affect their risk level.
Institutions subject to AML regulation are legally required to report any suspicious behavior they detect to the relevant authority. In many jurisdictions, this is done by submitting a suspicious activity report (SAR) or a close variant.
Firms need to maintain accurate, comprehensive, and up-to-date documentation of their compliance policies and any actions taken relating to AML compliance. This is because firms need to be able to explain to regulators or auditors what their policies are and the reasoning behind any decisions taken. Auditors will use a firm’s written compliance policies as a benchmark to evaluate how well the firm performs in practice.
A dedicated, specialist compliance officer oversees the implementation of AML programs within businesses and should have the requisite expertise, experience, and authority. However, staff members in other areas – such as customer service – often form the first line of defense against money laundering, and must, therefore, be trained effectively and frequently to recognize and combat financial crime, including its emerging typologies.
The expanding range of AML threats organizations must contend with, as well as the data collection and analysis that effective AML compliance demands, have phased out manual compliance processes and made the use of specialist AML technology essential. A variety of tech-based solutions exist to make AML compliance easier for businesses, who must make sure they choose the one best suited to their needs.
ComplyAdvantage leverages proprietary data and leading-edge artificial intelligence (AI) to deliver AML solutions across the entire customer lifecycle. Top features include:
ComplyAdvantage’s industry-leading compliance solutions are trusted by businesses across the world.
Learn moreOriginally published 18 October 2024, updated 08 November 2024
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
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