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The deep dive: AML compliance

By Puja Sharma

October 20, 2022

  • AML
  • AML Compliance
  • Anti - Money Laundering
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Anti money laundering, UKThe deep dive’ is our bi-weekly exploration of a relevant topic, hot trend, or new product. For Prime subscribers only.

How does it work?

Financial institutions need to understand how money laundering works in order to identify and report potential cases and comply with compliance requirements. Three stages are involved in the laundering of money: the placement stage, the layering stage, and the integration stage. These are a complex series of transactions that start with depositing funds, then gradually moving them into what appear to be legitimate assets.

Illegally obtained funds are placed in different ways and places. Money is often placed via: Payments to cash-based businesses; payments for false invoices; “smurfing,” which means putting small amounts of money (below the AML threshold) into bank accounts or credit cards; moving money into trusts and offshore companies that hide beneficial owners’ identities; using foreign bank accounts; and aborting transactions shortly after funds are lodged with a lawyer or accountant.

A layering scheme separates criminal funds from their sources. It involves converting the illicit proceeds into another form and creating complex layers of financial transactions to disguise the funds’ origin and ownership. Criminals do this to obfuscate the trail of their illicit funds so it will be hard for AML investigators to trace the transactions.

Laundered funds are re-entered into the economy through legitimate, normal business or personal transactions. This is sometimes done by investing in real estate or luxury assets. It gives launderers and criminals an opportunity to increase their wealth.

Who is under the radar?

Money laundering is a significant enabler of serious and organised crime which, according to the
National Crime Agency, generates more than £12bn annually in the UK, according to a report by the Council for Licensed Conveyancers.

The report also found, that around 60% of practices rated as non-compliant following an inspection during the relevant period could not provide an AML training record for relevant staff. With 55% of practices rated as non-compliant following an inspection during the relevant period had not updated their practice-wide risk assessment to account for changes imposed by covid-19 restrictions. Other 50% of practices rated as non-compliant following an inspection during the relevant period had not updated their AML Policy/Procedures following the introduction of the 5th Money Laundering Directive in January 2020.

Why does it matter now?

The estimated amount of money laundered globally in one year is 2% to 5% of global GDP, or $800 billion to $2 trillion – and that’s a low estimate. Money laundering often accompanies activities like smuggling, illegal arms sales, embezzlement, insider trading, bribery and computer fraud schemes. It’s also common with organized crime including human, arms or drug trafficking, and prostitution rings.

Anti-money laundering is closely related to counter-financing of terrorism (CFT), which financial institutions use to combat terrorist financing. AML regulations combine money laundering (source of funds) with terrorism financing (destination of funds).Beyond the moral imperative to fight money laundering and terrorist financing, financial institutions also use AML tactics for:

  • Compliance with regulations that require them to monitor customers and transactions and report suspicious activity.
  • Protection of their brand reputation and shareholder value.
  • Avoidance of consent orders as well as civil and criminal penalties that could be levied because of noncompliance or negligence.
  • Reduction of costs related to fines, employee and IT costs, and capital reserved for risk exposure.

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