Anti-money laundering, or AML, means the legislative, regulatory and enforcement framework put in place to prevent criminals - money launderers – from disguising illegal funds and concealing them within the legitimate economy.
Banks and financial institutions must comply with anti-money laundering regulations and perform checks, monitor and report on any suspicious activity. It is a complex process and companies employ sophisticated solutions to achieve full AML compliance.
Money laundering is a major financial crime. A 2009 United Nations Office on Drugs and Crime (UNODC) study estimated that laundered money alone constituted 2.7% (US$1.6 trillion) of then global gross domestic product. Most estimates put the figure between 2 and 5% of global GDP, which today means as much as US$4.75 trillion.
Laundered money is often used in organised crime, such as smuggling, human, drug and arms trafficking, bribery, fraud, and terrorism financing. Anti-money laundering and counter-financing of terrorism (CFT) are used together to combat these criminal and terrorist activities.
AML is also beneficial for companies, as it helps protect brand reputation and avoid costs resulting from non-compliance.
The global financial sector amassed a total of US$10.6 billion in 2020 for breaches of economic regulations, up 26% from US$8.4 billion in 2019. Of the US$46,6 billion in fines issued globally from 2008 until end 2020, AML and KYC violations accounted for US$25 billion (54%).
Money laundering, AML expenditure, and fines for AML breaches are all increasing simultaneously. Four factors explain this:
You can find out more on the challenges faced by AML/CFT practitioners here.
1970. The USA passed the Bank Secrecy Act. Responding to increasing drug abuse in the country, the act focused on identifying and seizing drug cartels’ laundered profits by obliging all vendors to declare cash transactions above a certain amount, thereby closing a loophole manipulated by money launderers.
1986. The USA passed the Money Laundering Control Act, which amplified focus on the seizure of assets and funds accrued by drug cartels as part of the Reagan administration’s War on Drugs.
1988. The United Nations’ (UN) Vienna Convention sees the USA’s allies follow its lead. A treaty attracts pledges to address money laundering from 171 countries.
1989. Financial Action Task Force (FATF) on Money Laundering established at Paris G-7 summit to lay down strategy to combat money laundering.
1990. FATF reported that the scope of crimes related to money laundering and requiring AML intervention should be extended beyond drug dealing. The 1990 Council of the European Convention (CETS141) concurred that AML laws should not be restricted to only illegal narcotics. The European Union (EU) adopted the first of its six EU AML directives in the same year.
1997. The United Nations Office on Drugs and Crime (UNODC) was formed to better co-ordinate international crime fighting, including against money laundering.
1998. FATF’s 1997/8 Report on Money Laundering Typologies noted that several of its members had cited crimes other than money laundering as higher or equivalent AML priorities than illegal narcotics trading.
2000. The International Monetary Fund (IMF), today 190 members strong, added its voice by re-affirming its commitment to anti-money laundering initiatives.
2001. The 9/11 atrocities in the USA prompted the Patriot Act. To ramp up homeland security, it dramatically amplified AML and countering the financing of terrorism (CFT) procedural and reporting requirements, with global impact on the financial sector. Meanwhile, the IMF shifted its focus from AML to CFT.
2009. The IMF established a donor-sponsored fund to enhance AML/CFT development amongst member states.
The 2010s. Despite increased global co-operation on AML/CFT, the 2010s saw money laundering flourish with the proliferation of cryptocurrencies and online trading. The worldwide response by legislators was to tighten and extend AML controls, reaffirming the central role of the financial sector’s AML/CFT in fighting financial crime.
2015. All 193 members of the United Nations adopted the 2030 Agenda for Sustainable Development and agreed to the 17 sustainable development goals (SDGs). Combatting money laundering was incorporated into SDG 16 as a component of SDG 16.4.
2018. The IMF’s 2018 five-year review report again emphasised the paramountcy of financial integrity among its members to ensure global security.
2020 to current. The ongoing COVID-19 epidemic sees authorities impose lockdown restrictions on human movement worldwide. Occurring in an era of high connectivity and meteoric technological advancement, this gives rise to new, tech-savvy methods of circumventing AML/CFT controls.
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While AML regimes used in the financial sector vary, all have three standard anti-money laundering checks in common:
Know your customer compliance, or KYC, is the verification stage of AML during which the client’s identity is established and the level of financial crime risk they pose is assessed. You can find out why Napier is a leader in the KYC field here.
Transaction monitoring is the ongoing analysis of a client’s financial activities. This stage of AML is where money laundering will most likely be detected if transactional anomalies prompt further investigation. To learn how Napier is at the forefront of transaction monitoring, read this.
Suspicious Activity Reporting (SAR), or Suspicious Transaction Reporting (STR), is a legislative requirement for most financial institutions. You can learn more about how Napier’s products and services streamline and improve the accuracy of the SAR/STR process here.
You can find out more about the facets of AML here.
Any transaction in which large assets or amounts of money changes hands is vulnerable to money laundering. The UK Treasury’s National risk assessment of money laundering and terrorist financing 2020 report cites more than ten sectors needing AML support. However, it focuses on the financial sector, dividing it into four areas of concern for AML breaches, namely:
Retail banking, which is assessed as high risk for money laundering because transfers can be rapid, and it often involves cash
Payment services and electronic money services are assessed as medium risk because although technological advancements such as electronic money, online trade and crypto-asset trading are targeted by money launderers, authorities’ understanding of the field has improved
Wholesale banking is assessed as high risk for AML breaches, since the financial arrangements can be complex and intersect several jurisdictions
Wealth management and private banking are assessed as high risk for money laundering, particularly amongst global vendors of these services, because the large amount of funds involved encourages tax evaders and corrupt politicians
Founded in 2015, Napier is a UK-based RegTech company with a global presence, specialising in AML compliance for finance sector clients of any size. Our innovative Intelligent Compliance Platform can bolt onto any KYC system, providing holistic customer and transaction risk management for your business.
Napier AI’s transaction and client screening services utilise cutting edge technology to steer your business safely clear of the AML/CFT breaches which accrue the colossal fines discussed above. Meanwhile, our ground-breaking transaction monitoring services and client activity review (CAR) will engender more efficient, ongoing monitoring and KYC reviews for your business by overlaying and integrating data from differentiated silo resources.