Anti Money Laundering: How Does It Work And How Is It Regulated

By 
George Tchetvertakov
Last Edited Mar 23, 2023
Everything You Need to Know About Money Laundering and Regulations

Money laundering is one of the most common financial crimes. It is a means of processing money made through criminal activity, and as such, governments have put increasingly strong controls on financial and other organisations.

But what exactly is money laundering? And what sorts of regulations can you expect to face when running a financial service provider? Why is signing up with banks, remittance companies and corporate FX firms so difficult? How did it change the money transfer history? Be sure to understand the role of regulators in money transfers by reviewing our list of FCA regulated money transfer services and brokers.

What is Money Laundering?

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Money laundering is the process criminals use to make illegitimate sums of money from criminal activities—like drug trafficking, fraud, or embezzlement—that appear to have been obtained through legitimate means.

Criminals use this to hide the true source of their illicit funds to enjoy their profits without the law enforcement authorities catching them.

To launder money, criminals use a series of transactions that obscure the money’s true origin and make it difficult for authorities to track. They may move the money through a series of bank accounts within the country or abroad, convert it into assets by investing in real estate or luxury products, such as precious jewellery and art, or use it to buy businesses that put up a seemingly legitimate front. That is the reason such services have an extensive KYC process.

Anti-money laundering (AML) regulations have been developed to make it easier to detect fraudulent activity from the start. Financial institutions and other regulated entities must prevent, detect and report any potentially suspicious activity to government regulators.

Anti Money Laundering Regulations Around The World

Anti-money laundering (AML) regulations are crucial to global financial governance. They aim to prevent and detect illicit financial activities, including money laundering, terrorist financing, and other financial crimes.

While AML regulations exist in every part of the world, the stringency and effectiveness of these regulations vary widely from country to country.

Some regions, such as Europe and the United States, have some of the world’s most stringent and comprehensive AML regulations. These regulations include beneficial ownership registries, increased scrutiny of high-risk transactions, and harsher penalties for non-compliance.

Similarly, in the United States, the Bank Secrecy Act (BSA) and the USA PATRIOT Act provide a comprehensive framework for AML regulation. These laws require financial institutions to implement robust AML programs, including customer due diligence, transaction monitoring, and suspicious activity reporting.

Anti Money Laundering Regulations In The EU

The EU’s Anti-Money Laundering Directive sets out the legal requirements all EU member states must comply with to prevent money laundering.

Under this directive, all financial institutions such as banks, insurance companies, and investment firms must implement rigorous measures to identify and verify the identities of their customers. They must also monitor their customers’ transactions for suspicious activity and report any such suspicious transaction to the relevant authorities immediately.

The AMLD requires member states to establish national Financial Intelligence Units (FIUs) to receive and analyze suspicious transaction reports from financial institutions. The FIUs are responsible for sharing information with other FIUs across the EU and creating a failsafe network. They are also bound to cooperate with law enforcement agencies to combat money laundering.

Latest Update Of The AMLD

The AMLD has been updated many times since its initial implementation in 1991, with the most recent one being the Sixth Anti-Money Laundering Directive (6AMLD) which was released in 2018 and was put into effect on or before December 2020.

The three factors that the 6th Anti-Money Laundering Directive (6AMLD) identifies as constituting aggression are criminal activity, the acquisition of property through criminal means, and the laundering of illicit proceeds.

The directive also classifies various additional methods of illegally acquiring goods and money as crimes. Article 7 holds legal persons responsible in cases where a lack of supervision or control by a person in a leadership position makes criminal acts possible.

The directive also focuses on applying sanctions for both parties—individuals and companies—including denial of government benefits, judicial closure orders, and imprisonment. The 6AMLD requires organizations to develop technological procedures to comply with EU requirements and recognize risk factors to avoid financial crimes. The directive encourages cross-border cooperation among EU states to detect financial crimes. It also extends international surveillance for companies not complying with the directive.

Anti Money Laundering Regulations In The USA

The Bank Secrecy Act (BSA) of 1970 is the cornerstone of Anti Money Laundering regulations in the USA. The BSA requires financial institutions to establish AML compliance programs and report suspicious activities to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury.

The USA Patriot Act of 2001 strengthened the AML framework by requiring financial institutions to establish Customer Identification Programs (CIPs) and mandating enhanced security measures for high-risk customers. The Act also created the Office of Terrorism and Financial Intelligence (TFI) to combat financial crimes and terrorism financing.

Federal agencies, including FinCEN, the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC), enforce the US AML regulations. These agencies conduct regular AML audits and investigations and can impose hefty fines and sanctions for non-compliance.

In recent years, the US AML regulations have expanded to include virtual currencies and other emerging payment technologies and methods. The Financial Action Task Force (FATF) has also commended the US for combating money laundering. However, it has recommended that the country enhance its beneficial ownership disclosure requirements and improve its coordination with overseas partners.

Anti Money Laundering Regulations In The UK

The Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 govern the Anti Money Laundering (AML) regulations in the United Kingdom. These regulations implement the EU’s Fourth AML Directive and aim to prevent money laundering and potential terrorist financing initiatives.

The UK’s Financial Conduct Authority (FCA) supervises and enforces AML regulations for certain sectors, including financial institutions and other designated businesses. The FCA has the power to impose penalties for non-compliance with AML regulations.

Anti Money Laundering Regulations In Australia

Under Australian law, financial institutions and other regulated entities must comply with a range of obligations, including conducting CDD, reporting suspicious transfers, and maintaining records of transactions. Failure to comply with these obligations can result in fines, imprisonment, or severe penalties.

Australia has also implemented a range of measures to combat the financing of terrorism, including listing terrorist organizations and individuals, freezing their assets, and restricting their access to financial services.

The Australian government has strengthened its anti-money laundering laws by expanding the scope of regulated entities and increasing the penalties for non-compliance. The country has also implemented measures to improve cooperation with international partners, including exchanging financial intelligence and implementing international standards.

Historic Overview

Ancient times

Money laundering goes back at least to 2000 BC. Chinese merchants would hide money from rulers who would take it off them. They’d often move this money offshore. This was early money laundering, as they brought illicit funds into the financial system.

Over the next 4000 years, money laundering was used similarly by minorities to hide their income from oppressive regimes. There have been various parallel banking systems to move this money around without the official financial systems.

The roaring 20s

In a more modern context, money laundering became especially relevant during the Prohibition era. Bootleggers of alcohol or operators of illegal casinos had to account for their incomes and would open cash businesses. According to some, laundry businesses were a suitable and popular option, leading to the term money laundering.

The 70s: introducing the new era of AML

The United States’ Bank Secrecy Act (BSA), was one of the earliest and most important modern tools to fight money laundering. Introduced in 1970, the BSA put new requirements in place for private individuals, banks and institutions (essentially record keeping and reporting of transfers).

Banks were required to:

  • report cash transactions over $10,000 using the Currency Transaction Report
  • properly identify persons conducting transactions
  • maintain a paper trail by keeping appropriate records of financial transactions

The 80s and 90s: guilty until proven innocent

The so-called War on Drugs in the 1980s caused governments to put even stricter AML regulations in place. Bills were passed to root out loopholes and expand companies’ definitions under stricter regulations. Monetary transactions of over $3000 required identity verification.

Eventually, AML regulations turned the rules of evidence – innocent until proven guilty – upside down. Money could be confiscated and held until the individual or institution proves it was obtained legally.

The 2000s: defunding terrorism

After 9/11, America introduced the Patriot Act, and governments worldwide tightened their AMLs to prevent individuals and institutions from funding terrorism. Regulations were implemented to facilitate better communication between countries and keep more careful track of money that left the country.

The FATF

The G7 countries formed the Financial Action Task Force on Money Laundering (FATF) in 1989 with the task of:

  1. Monitoring members’ progress in implementing anti-money laundering measures.
  2. Reviewing and reporting on laundering trends, techniques, and countermeasures.
  3. Promoting the adoption and implementation of FATF anti-money laundering standards globally.

The FATF now has 36 member states and regions.

Famous incidents relating to money laundering

Al Capone

The famous mob boss might have inadvertently originated the term “laundering”. He laundered an estimated $1bn through various businesses. He started out with a chain of laundromats which were cash operated.

The BCCI scandal

The Bank of Credit and Commerce International (BCCI) was the 7th largest private bank in the world. That is before it was taken down by the CIA in a bust revealing a mass of money laundering activity. Some of their most famous clients were revealed to be Saddam Hussein and other dictators and terrorist leaders.

(fines by regulators, famous people accused of it, terror activities funded this way, etc.)

HSBC inadvertently helps fund terrorists

In 2012, a Senate report revealed that HSBC’s lax anti-money laundering procedures had helped for Mexican drug money, Iranian terrorist money, and suspicious Russian money enter the U.S. HSBC was ordered to pay $1.9bn in fines. To the ire of many, no jail time was handed to anyone responsible for the oversights. However, HSBC are still facing knock-on effects of this report today, with families of victims of Mexican drug cartel activity suing the company. The 2016 Panama Papers scandal has also revealed more information on the HSBC’s illegal activities, days after monitors called their AML measures inadequate.

The Panama Papers scandal

In April 2016, 11.5 million files were leaked from the world’s 4th biggest offshore law firm, Mossack Fonseca. The documents contained information on world leaders, politicians, and even sports stars using offshore accounts. Some of this information shows inconsistencies with AML regulations and criminal activity.

Current AML Policies Requirements

Current AML policies require the following:

  • assessing the risk of your business being used by criminals to launder money
  • checking the identity of your customers
  • checking the identity of ‘beneficial owners of corporate bodies and partnerships
  • monitoring your customer’s business activities and reporting anything suspicious to the National Crime Agency (NCA)
  • making sure you have the necessary management control systems in place
  • keeping all documents that relate to financial transactions, the identity of your customers, risk assessment and management procedures and processes
  • making sure that your employees are aware of the regulations and have had the necessary training

Regulations are put in place by both local and international authorities. Thus, each country will have its own specifications in addition to the FATF’s regulations.

Procedures for banks and money transfer companies to approve a transaction

AML regulations are particularly significant for banks and money transfer companies needing to approve international transactions. They are required to verify the identity of all their clients. Documentation proving the client’s identity, as well as the legitimacy of the money, is required.

Future outlook

With money laundering still common and organisations still failing to comply with current regulations, governments are increasing accountability measures. As global terrorism continues to be a threat, with groups such as ISIS targeting European and American states, possible terrorist funding is being taken seriously.

Companies aim to develop quicker and more secure ways to comply with AML regulations, with improving technology allowing for greater data encryption. Thus, suspicious transactions will be more easily identified and reported.

Anti-money laundering regulations have been around in some form as long as money has existed. The 20th Century brought increased regulations in order to counter illegal activities, especially those involving drug cartels and terrorist organisations. Still, some banks and financial organisations have had major lapses, and even with AMLs, it is unlikely that money laundering will ever be entirely eradicated. Additionally – over-regulation can be put the markets in a halt and in many cases, doesn’t protect customers in the fashion they were supposed to.

 

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