Meta Description: AML compliance has become more critical than ever for the financial wellbeing of a company, fraud prevention, and meeting international regulatory standards.
With the advancement of technology, fraud is accelerating worldwide. Financial institutions do not remain insusceptible to this development. The growth in the online payment industry creates numerous opportunities for cybercriminals. To prevent frauds, scams, and identity thefts, financial institutions are devising anti-money laundering compliance programs and strategies.
In this article, we will be finding out more about money laundering, AML (Anti-money Laundering) providers and the consequences of regulatory non-compliance.
But before we get to that, let's start by understanding the difference between money laundering and anti-money laundering.
What is Money Laundering?
Money laundering is the illegal process of moving cash through numerous transactions to hide its origin. "Dirty" cash obtained through fraudulent activities, such as the sale of drugs, human trafficking, or financing of terrorist acts, is channelized in a specific way to make the money trail untraceable by regulatory authorities.
The act of laundering money is also referred to as a white-collar crime, as it often involves the participation of high-ranking officials and Politically Exposed Persons (PEPs). The motive behind money laundering is always common, despite who implements it - Washing the dirty cash of its illegal source to make it appear legitimate.
Financial institutions such as banks, fintechs, stock exchanges, online casinos and gaming platforms, etc. are all used by criminals to launder money. To prevent this, institutions need to devise a robust AML compliance program and implement ongoing AML screening against global watch lists.
What is Anti-money Laundering?
Any attempts made to prevent the act of money laundering are known as anti-money laundering procedures. In financial institutions, these procedures involve:
- Know Your Customer (KYC) identity verification
- Anti-money laundering screening
- Ongoing anti-money laundering monitoring
These three methods include verifying the legitimate identity of individual customers and business entities through government-issued identity documents, biometric verification to validate customers in real-time, screening the customers through PEPs, criminal watch lists, and global sanctions, and finally a continuous cycle of AML monitoring.
What is AML Compliance?
AML compliance refers to following the mandatory regulations set out by global authorities and local governments. Meeting regulatory requirements is the primary obligation of every registered business. Examples of industries that have to comply with AML processes are listed below:
- Banking and payment industry
- Online casinos and gaming platforms
- Real estate
- International currency exchanges
- Investment firms
- Insurance enterprises
AML compliance is not just necessary for meeting regulatory requirements but is also detrimental to build a legitimate customer base. With the help of third-party AML service providers, businesses can detect suspicious transactions and entities on time i.e. prior to incurring financial losses and reputational damage.
AML Compliance Regulators
Anti-money Laundering initiatives gained prominence back in 1989 global organizations from a group of countries joined hands to form the Financial Action Task Force (FATF). The aim of the FATF is to formulate international standards for the prevention of money. Soon after the 9/11 attacks of 2001, the FATF updated its mandate to include combating terrorist financing.
Another significant organization assisting the battle against money laundering is the IMF (International Monetary Fund). Similar to the FATF, the IMF has advised 189 member countries to stay in compliance with global standards to prevent terrorist financing.
What Happens Due to Non-compliance?
Non-compliance to AML regulations results in losses, such as penalties and fines. Typically, non-compliance fines are rather high, including but not confined to monetary fines, reduction in credit rating, temporary or permanent suspension of business, and so on. An example is that of Swedbank in its recent scandal regarding money laundering. The bank incurred a loss of €7 billion off its market value along with a massive reduction in its credit rating.
Key Takeaways
- Money laundering is gaining prominence worldwide and has to be prevented by organizations of all business sectors
- Any attempts made to prevent the act of money laundering are known as anti-money laundering procedures
- AML compliance refers to following the mandatory regulations set out by global authorities and local governments
- IMF and the FATF are two major organizations responsible for monitoring AML regulatory compliance
- Non-compliance to global regulations leads to heavy fines and penalties which are disastrous for a company's reputation and financial wellbeing