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Many high-profile criminals profit from corruption, drug trafficking, market manipulation, and fraud. Money laundering is the process they use to conceal their crimes’ proceeds and further their illicit activities.

Criminals engage in “money cleaning” to rinse their ill-gotten money of any traces of its criminal sources. If laundered money escapes detection, resources will be diverted away from economically productive uses and negatively impact the financial sector.

The considerable negative impact of money laundering activities across various sectors of the economy led to the establishment of regulatory bodies and laws worldwide to mitigate them. 

These established anti-money laundering (AML) laws will give you the authority to uphold integrity and stability in financial markets.

What is Anti-Money Laundering?

Money laundering disguises profits from heinous crimes such as drug trafficking, public corruption, and terrorist financing and makes the funds appear to come from legal sources. 

Anti-money laundering (AML) regulations are procedures and processes established by authorities across every industry to dissuade potential criminals from disguising illicit funds as legitimate income.

These regulations comprise various controls and directives that will authorize your organization to identify, report, and suspend money laundering activities. These initiatives will give you the power to protect the business, communities, economy, and national security.

Stages of Laundering Money

Placement is how and where criminals place illegally obtained funds.

At this stage, dirty money moves into the economy and away from its illicit origin, disguising the source. Laundering money in a different country is prevalent because the money is taken far from its geographical origin. 

The money would flow through financial institutions: shops, currency exchanges, and other businesses, both local and abroad. The most viable are those with high variable costs like car washes and casinos.

These are some of the many ways to place laundered money:

  • Payments to cash-based businesses
  • Payments for false invoices
  • Depositing below threshold funds into bank accounts
  • Transferring money into offshore companies that hide owners’ identities
  • Using foreign bank accounts

Layering is the act of separating illegally obtained funds from their origin to make them difficult to detect. Criminals layer funds to cover the trail of their dirty money and complicate transaction tracing for AML investigators.

The step involves “layering” multiple financial transactions to conceal a money trail so authorities would have difficulty tracing it back to the original crime. This generally means moving money through multiple countries in methods that evade the detection of financial institutions.

Integration refers to the re-entry of the “cleaned” or laundered funds into the economy where they emerge as a legitimate business or personal transaction.

One of the most typical ways of integrating money into the economy is by purchasing property or companies, allowing launderers and criminals to increase their wealth.

AML Red Flags

Highly secretive customers

A financial institution’s account opening process requires considerable information. 

As a result, you can raise money laundering suspicion if you have clients who are hesitant to share personal information, mask the whole picture of their business operations, or seem connected with politically exposed or sanctioned people.

Set conditions and decline the account opening process of your customers who are tightlipped about business details or source of earnings. Their potential transactions may cause trouble for your organization in the future.

Constant transfers to different accounts

Financial institutions should monitor transactions at all times to identify if a client is conducting unusual activities. For example, suspicion should be raised if your client recently activated a dormant account and is making transactions to sanctioned areas.

Inconsistent business activity

To assess business and money laundering risks, financial institutions need to know what their customers do or their business’s nature. For example, if a customer initiates transactions beyond their established activities, it may be a telltale of illicit activity. This may include:

  • Currency transactions that change in number, type, or volume
  • Cash transactions that do not appear related to the customer’s business needs
  • Transaction patterns that are significantly different from those for similar businesses

You must train employees and managers to recognize potential risks so they can closely inspect them. Submitting a suspicious activity report is not a legal action against a customer. It is just a cautious step to help your business comply with AML regulations.

Multiple suspicious accounts

Your organization must regularly verify clients with multiple accounts. It’s best to monitor them, as criminals may use third parties or money mules to launder. This may be why a client conducting unexplained transactions has more than two accounts with suspicious details.

Immediate withdrawals

Your institution must monitor clients that make rapid withdrawals as soon as they receive funds. For example, one of your clients is deposited a considerable amount of money every five days, but that’s all immediately withdrawn every time.

Trade-based transactions

Criminal funds can be moved through trade transactions, such as importing and exporting goods to disguise their sources. They can launder money through trades by over-invoicing or under-invoicing for shipments.

Other methods include repeat invoicing for the same load, misrepresenting the quality of the shipped goods, or shipping more or fewer goods than arranged.

Conversion to virtual assets

Virtual assets such as cryptocurrencies are neither widely adopted for everyday transactions nor sufficiently regulated to be overseen by authorities. This makes them an easy target for money launderers.

They will typically withdraw small amounts of money and convert them into virtual assets. However, the conversion will incur multiple additional charges in the process. You can raise suspicion to authorities if a client shows routine willingness to incur these expenses.

Avoidance of CTR

Money launderers may conduct multiple cash deposits just below the $10,000 threshold. Doing this can avoid getting a currency transaction report (CTR) when doing their dealings.

Laws That Enforce AML

U.S. Patriot Act

The U.S. Patriot Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) is an anti-terror measure enacted in the U.S. to lower the threshold for acquiring intelligence warrants against suspected spies, terrorists, and other enemies.

This measure was a law passed shortly after the terrorist attacks on September 11, 2001. This allowed law enforcement to investigate, indict, and bring terrorists to justice. In addition, this act increased punishments for engaging and supporting terrorist crimes.

Bank Secrecy Act

The Bank Secrecy Act, otherwise known as Currency and Foreign Transactions Reporting Act, was created in 1970 to prevent U.S. financial institutions from being used as tools by wrongdoers to hide or launder their ill-gotten earnings.

This law mandates banks and other financial institutions to provide documentation to regulators. Banks must present documentation such as CTRs when clients of financial institutions deal with suspicious cash transactions involving sums of money above $10,000.

The law also allows regulators to follow the trail of the transactions more efficiently.

4 Measures to Meet AML Compliance Requirements

1. Customer identification program (CIP) and Know Your Customer (KYC)

Know Your Customer (KYC) is a fundamental practice to protect your organization from fraud and losses resulting from illegal funds and transactions. KYC compliance requires your institution to conduct identity verification of the customer’s background, economic activities, and financial risk.

Since banks and financial organizations provide high-risk services, they must adhere strictly to mandates that will help mitigate money laundering, which include CIP and KYC.

KYC identity proofing procedures include:

2. Currency transaction report (CTR)

Currency transaction reports aim to prevent financial crimes by verifying the identity and Social Security numbers of anyone attempting transactions above a certain threshold ($10,000 for U.S. banks.)

Bank software will automatically create a CTR and fill in customer information when they conduct a transaction involving more than $10,000. Your bank will not be obligated to inform customers about the reporting threshold unless a customer asks.

3. Suspicious activities monitoring and reporting

This is the act of verifying, documenting, and reporting a customer’s banking pattern when it points to potentially illegal behavior. This practice will help you manage risk while complying with regulations.

Suppose you raise a concern to anti-money laundering investigators, and they find behavior that exceeds reporting thresholds and has no justifiable business purpose. In that case, they will file a suspicious activity report (SAR) to fulfill regulatory requirements.

4. Sanctions compliance

Sanction compliance is a combined effort of regulatory bodies to thwart money laundering activities.

The U.S. Treasury Department, the United Nations, the European Union, the Financial Action Task Force, and other regulatory bodies use sanction compliance to require financial institutions to check transacting parties against lists of sanctioned individuals, companies, institutions, and countries.

Anti-Money Laundering, Pro-Prosperity

Without AML laws and regulations, law enforcement will not have the power and means to bring many criminals to justice. As a result, criminal elements and terrorist organizations will prosper, and society and the economy will be left in shambles.

Compliance with anti-money laundering regulations, such as identity proofing, transaction reporting, and sanction checking, will give institutions the tools to detect this crime and protect society against illicit financial activities.

For businesses, identity proofing is a crucial step in addressing money laundering. Thus, you should partner with a proven identity authentication solutions provider such as Q5id.

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