Anti-money laundering policy (AML) includes a set of arrangements aimed at preventing the use of the financial system of a country or an institution for money laundering or terrorist financing. International and national institutions, banking, and business communities develop and implement these arrangements and instruments to control the financial situation.
How The AML Works
An anti-money laundering policy was created to uncover illegal and corrupt activities used to hide the crime and the sources of financial flows that are contrary to law.
Money laundering is a procedure that leads to concealing the source of receiving illegally-made money (fraud, corruption, crime, terrorism, etc.). The main crimes related to money laundering are defined by law.
Stages Of Money Laundering
To uncover the money laundering schemes, AML follows the actual stages of the criminal procedure.
Placement
At this stage, cash is being physically placed in banks and non-bank financial institutions (for example, exchange offices, conversion of funds into other financial instruments that can cover the availability of this money). Typically, for money laundering, outlaws choose foreign banks with no legal regulations or insufficient anti-money laundering legislation to place them in a regulated environment under the guise of "clean" ones.
Layering
This means separating illegal income from its source by creating special layers of financial transactions. This process includes a variety of multiple transfers of funds between financial institutions, disbursement of cash loans, the use of fake accounts, etc. All this helps to conceal the true source of income, and also ensures the anonymity of the criminal. By transferring funds, changing their form and location, criminals confuse law enforcement agencies, or, more precisely, cover their tracks.
Integration
In the final stage, laundered money can return into the ‘light’. Thus, these funds enter the banking system again because they already look like they’ve been honestly earned.
In fact, in every financial institution, several methods and options allow identifying suspicious financial transactions and manipulations, almost at the initial stage. Detection and prevention mechanisms can be different. In most cases, various automated systems help to determine suspicious financial transactions based on different schemes. The use of the AML policy requires high-quality automation of all processes to simplify reporting and analytics, accounting, as well as monitoring the activities of each specific client. Strengthening internal controls is essential in every financial institution when implementing such a policy.
The History Of AML
According to the American historian Sterling Seagrave, wealthy Chinese merchants began to "launder" money 2000 years ago. Local authorities prohibited any form of commercial trade: in their opinion, merchants showed themselves as shameless, greedy, and resourceful. Most of the merchants' income is the result of speculation, extortion, and bribes.
The government tried to restrict merchants and imposed huge taxes. To get around them, Chinese merchants converted the money into movable property and transferred intangible assets into tangible ones, so that they could be redirected to the merchant business further. But money laundering got its name much later.
The term appeared in the twenties of the last century during Prohibition in the United States. The ban caused a real boom in underground businesses and shady schemes. The black market grew, as did the American demand for alcohol.
To avoid suspicion of the high level of income of the underground business, the money earned was mixed with the income from legitimate activities. "White" capital should have been in cash.
So, the local mafia came up with the idea of opening self-service laundries, which have not lost their popularity up to this day. With their help, illegal business justified a large influx of cash and hid from suspicion of the fiscal authorities.
Know Your Customer (KYC) Policy
KYC (Know Your Customer) is the initial stage of working with a client and means verifying their identity through the collection of confidential information. The kind of data to receive (documents, bank accounts) is decided by the services and institutions independently since there is no single standard.
The KYC policy is an action plan aimed at obtaining certain personal data by the company about its customers, in favor of whom a financial transaction is being conducted. In other words, the service identifies its user before conducting a transaction to make sure that the payment will not be associated with transactions with increased risks: money laundering, terrorist financing, or tax evasion. The Know Your Customer principle is a perfect solution in this case.
AML vs KYC: What's The Difference?
The KYC and AML terms are primarily associated with the social responsibility of the business, and protection against the risks of fraud. They are often found in the contracts of companies from countries with legal restrictions and state control over economic entities. Although KYC and AML procedures are independent procedures, their tools can be used at the same time.
But instead of collecting tons of personal information to track financial flows and suppress illegal activities, it is much more efficient to use AML tools that verify currency addresses at the initial stage. In this way, the user retains both their anonymity and the purity of finances.
KYC policy is used to collect the information to compile a database. AML policy uses more various algorithms to link the KYC database (and other sources of information). This is how the AML database is formed, which updates constantly with new activities and transactions.
Control Financial Situation With AML
Making money illegally is, unfortunately, the reality of our time, and many individuals and companies are engaged in the AML to follow the laws. The problem is that the responsibility for all sorts of lawless transactions lies not only within the "executors" but also, for example, the banks through which such transactions are carried out. As a result, the reputation of the bank greatly suffers, which is also extremely undesirable. That is why, it is required to identify various dubious transactions in time, including money laundering. AML can become your perfect solution to deal with frauds and illegal currency.
