AML Compliance or Anti Money Laundering Compliance is one of the fundamental security concepts in the financial sector, that all such institutions have to take note of and follow. Preventing financial crimes from being committed in an institution is a requirement for all financial entities.

As one of the fundamental aspects of a smooth-running financial business, it is important to understand the core concepts that make up an AML-compliant system and operation. So we will discuss this in detail in today’s blog.

Money Laundering and AML

While the majority of people have heard of the concept of money laundering, most people are not aware of how it actually works.

Money Laundering

Money laundering as you might be aware involves taking ‘dirty money’, money that has been obtained through illegal means or activities, and taking advantage of business and operations to make it appear as if it is legally obtained.

It works through three steps. The first involves placement of the dirty money into a legal institution, possibly a shop or multiple bank accounts. These are usually systems that work through cash, or otherwise, the money is divided into smaller deposits to be less suspicious. Then a process called layering occurs, where the money goes through many different transfers and changes to disguise its true origin, like from cash to assets, for example.

In the third step, the now distant from its criminal origin funds are placed into the legal financial system. Whether through selling the asset or other investments. At this point, the money is considered ‘clean’.

AML and AML Compliance

AML stated simply is a system of laws, processes, and regulations that work to prevent illegally obtained money and funds from entering the legal financial system in the first place. It targets many different crimes from corruption to tax fraud and terror financing, and tries to prevent attempts to mask the funds of these crimes.

AML Compliance thus is the system of processes that a bank or other institution goes through, including following mandated AML regulations, to make sure that its clients and business partners are not involved in any such illegal activity. An AML check usually involves a series of identification and background checks to make sure that the person being interacted with is involved in legitimate business activity.

AML Screening

AML Screening usually happens near the beginning of any financial partnership or interaction. It is the process in which the financial institution screens an individual or entity, by checking records that they have provided against a series of public lists that indicate potential involvement in some sort of illegal activity.

The screening process involves multiple steps: the first part involves a sanctions check. Here it is confirmed that the entity has not been restricted by the government or other authoritative bodies to interact with or engage in other activities with.

The second part involves checking for the person in different watchlists. Watchlists are made by different bodies, usually law enforcement or financial, to indicate a person that may or may not be a risk to work with or be involved in some dubious activity.

The third is to check for Politically Exposed Persons or PEPs. These are people who of course are involved in a political or public role. These are considered to be high-risk people to work with as they tend to hold high influence in public spaces, which can be used to their advantage, possibly illegally.

A fourth check involves checking for ‘Adverse Media’ on the entity. Public negative opinion of an entity is in and of itself a risk when engaging in financial activity. These reports and articles can also indicate if a person is involved in some sort of misconduct or legal issues.

AML Monitoring

AML Monitoring is the second part of the AML process which happens after the person has been on-boarded onto the business. It is the ongoing process of monitoring the financial activities and transactions of an individual or business to check for suspicious and potentially illegal activity.

The goal of this transaction monitoring process is two-fold. The first of course, is to prevent to the best of the business’ ability, the use of its platform for illegal activity, like for example laundering money. The second benefit that this activity confers is that in the case that illegal activity does occur, there is a record or ‘paper trail’ that is maintained. Thus, it is easier to track and subsequently punish such activity.

An institution can look at multiple factors when checking for suspicious activity including transaction geography, transaction amounts, sudden changes in transaction frequency, and so on.

Conclusion

Anti Money Laundering Compliance is one of the fundamental parts of the prevention of illegal activity being committed using legal frameworks of business and finance. Understanding the core concepts involved is important to make effective implementation possible.