Anti-Money Laundering (AML)

In a nutshell, money laundering can be defined as various methods and processes for hiding the origin of money and also switching the source of it. Money laundering is changing the source of illegally gained money to make it appear legal. It is a major financial crime globally. According to United Nations Office on Drugs and Crimes, money laundering represents 2-5% percent of the world’s GDP. Governments want to take precautions for money laundering globally, so they are combating financial crimes with AML(Anti-Money Laundering) regulations over banks and financial institutions. The basic idea is to use compulsory regulations such as KYC and AML for banks.

AML (Anti-Money Laundering) is a term used for fighting money laundering and financial crimes. The fight against money laundering in the world includes all policies, regulations, and laws. These regulations are designed to prevent criminals from hiding illegally obtained money. Governments have formed local and global institutions to spy and monitor money laundering, illegal money flows, and financial crimes in their localities. 

When we look at the history of Anti-Money Laundering, the USA is one of the first countries that started to legislate the fight against Money Laundering in the 1970s. AML started with the increase of dirty drug money in the USA. The Financial Action Task Force (FATF) was established in 1989, and FATF is a supranational organization for fighting against money laundering and financial crimes worldwide. This organization is the biggest organization fighting against Money Laundering. Also, the International Monetary Fund (IMF) is another organization combating money laundering crimes.

Also, the European Union and member countries use AML compliances and AML procedures against Money Laundering. Most of the countries in the European Union are members of the FATF organization. The European Union is going to publish another new directive against Money Laundering and Financial Crimes. This is going to be the 6th Directive on AML/CFT (AMLD 6) policies against Money laundering.

To understand the difference between AML, CFT, and KYC, we first need to know the meaning of these abbreviations. 

AML (Anti-Money Laundering): Set of standards, regulations, and laws that aim to prevent money laundering activities and advanced financial crimes. These regulations and compliances could involve identity verification of clients, PEP status, sanctions screening, transaction monitoring, and other precautions.  AML is the broader level of KYC and CFT. 

KYC (Know Your Customer): KYC rules are the steps for financial institutions and banks to verify their customer and their identity. 

CFT (Combating the Financing of Terrorism): Set of government rules, laws, regulations that limit financial sources and funds that flow to terrorism. Governments could track sources of money and transactions to find related activities. 

There are slight differences between AML, CFT, and KYC. AML and CFT are broader standards that financial institutions should take precautions for money laundering, financing terrorism, and other financial crimes. On the other hand, KYC is the step that financial institutions and banks utilize to verify their customer identity. This verification could be physical, or it could be digital identity verification. Banks use AML, CFT, and KYC compliances to keep their institutions safe. Failure to comply with these rules may result in large penalties for banks.

Banks are the most common institutions in the finance area. Therefore, most money transactions happen via banks. The risk of financial crimes is very high for banks. Financial criminals want to use banks for their money laundering activities. Banks should be aware of these risks and should take precautions for this risk. Banks have to apply AML procedures to stay away from financial crimes. Banks need to consider 4 important steps for AML:

– Know Your Customer (KYC)
Banks need to identify their customer, and also verify the information provided by customers. 
This process consists of customer face verification, ID document verification, and address verification. 

– Customer Due Diligence(CDD)
Companies must identify and verify a customer’s identity, name, residential address, and photographs. A customer needs to go to a branch for this process, but now we can do it digitally. This is a very good advantage for banks. 

– Transaction Screening
Screening transactions of clients for any suspicious situation or controlling client behavior should match with the transaction history. Screening should be continued for any changes on risky or suspicious activity. Banks need to keep relevant document records about their customers to help law enforcement agencies.

– Suspicious Activity Report
Banks should file suspicious activity reports (SAR) to the authorities for potential money laundering activities.