What's anti-money laundering, aka AML?

Anti-money laundering (AML) refers to the set of laws, regulations, and procedures that aim to uncover illegal funds that are disguised as legitimate income. Money laundering is the term used to describe actions taken to conceal financial movements underlying crimes ranging from tax evasion and drug trafficking to public corruption and the financing of groups designated as terrorist organizations.

The history of AML legislation stretches back centuries. However, only in the 20th century did the need for a coordinated global response to money laundering become apparent. The financial industry's growth, the lifting of capital controls, and the growing ease of conducting complex chains of financial transactions necessitated a comprehensive regulatory framework to combat money laundering.

AML legislation has evolved over time to keep pace with the changing nature of financial crime. The Financial Action Task Force (FATF), an intergovernmental organization that sets standards for AML and counter-terrorist financing (CTF), has been instrumental in shaping the global AML regime. The FATF’s recommendations are widely adopted by countries worldwide, and compliance with these recommendations is often a prerequisite for conducting international financial transactions.

The AML framework consists of three stages: placement, layering, and integration. Placement involves depositing illicit funds into a financial system. Layering involves placing a series of transactions, usually repetitive and voluminous, to obfuscate the illicit origin of the funds. Integration involves “cleaning” and “washing” the funds by converting them into real estate, financial instruments, commercial investments, and other acceptable assets.

Financial institutions are at the forefront of the fight against money laundering. They are required to implement a range of measures to prevent, detect, and report suspicious transactions. These measures include Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures, transaction monitoring, and reporting of suspicious activity to the relevant authorities.

KYC is a process that financial institutions use to verify the identity of their customers and assess the risks associated with their activities. CDD is a process that involves ongoing monitoring of customer transactions to detect unusual patterns of activity that may indicate money laundering or other financial crimes.

Politically Exposed Persons (PEPs) are individuals who hold prominent public positions or have previously held such positions. PEPs are considered high-risk customers because they may be more likely to engage in money laundering or other financial crimes. Financial institutions must conduct enhanced due diligence on PEPs to ensure that they are not using the financial system to launder the proceeds of their illegal activities.
Sanctions are another tool used to combat money laundering and terrorist financing. Sanctions are restrictions placed on individuals, entities, or countries that are suspected of engaging in illicit financial activities. Financial institutions must screen their customers against sanctions lists to ensure that they are not doing business with sanctioned individuals or entities.

In conclusion, anti-money laundering is critical to the global financial system. The AML framework is designed to prevent criminals from using the financial system to launder the proceeds of their illegal activities. Financial institutions play a crucial role in this effort by implementing various measures to prevent, detect, and report suspicious transactions. Compliance with AML regulations, including those related to PEPs and sanctions, is essential for maintaining the financial system's integrity and preventing the financing of terrorism and other criminal activities.

Please note that you can read about the 5 biggest Money Laundering scandals in recent years.