Financial institutions are a prime target of money laundering, so they must implement anti-money laundering (AML) compliance policies and tools. AML by several entities, including the United Nations Office on Drugs and Crime (UNODC) and the international group Financial Action Task Force (FATF). `
Each entity recommends using specific AML policies, and UNODC also provides software designed to help prevent financial crimes, aggregate data, and perform analysis. Additionally, the World Bank website offers information about money laundering, including recommendations to support private enterprises and governments to prevent money laundering.
Banks implement AML policies through various means, including:
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Money laundering enables criminal organizations to use earnings obtained by committing crimes. Studies indicate that the vast majority of money laundering activities are committed through financial institutions. Banks mediate millions of financial transactions on a daily basis. This places them at great risk of being used to commit financial crimes. This is why banks are required to fulfill AML obligations, assess risks, and take precautions to mitigate them.
Here are several AML procedures that are recommended or required to achieve AML compliance:
Non-compliance with AML may lead to serious penalties, including but not limited to substantial fines.
An AML compliance program includes all the measures, controls, and tools used by each individual bank in order to satisfy AML requirements and effectively combat financial crimes, including money laundering. Here are several measures that should be included in any AML compliance program.
A risk-based approach involves assessing the risk level of each individual customer while also accounting for the unique risk level of each country. This is a core component of AML compliance programs, required by FATF, UNODC, and the majority of local AML regulations.
A risk-based approach in banking means performing required risk assessments using KYC, CDD, and EDD when needed. Additionally, banks must set in place controls that enable them to filter the transactions of customers, so they could stop suspicious activity. These often include software tools that can detect and alert suspicious activity.
Related content: Read our guide to AML software (coming soon)
Financial records help law enforcement agencies perform money laundering investigators. Keeping records of suspicious transactions and inconsistencies is a requirement, in addition to supplying agencies with this information by submitting a Suspicious Activity Report (SAR).
When suspicious activity is detected, a SAR supplies the information needed to track and catch perpetrators. It can also help compliance officers and analysts ensure that investigations are carried out effectively and quickly.
KYC processes are designed to verify the identity of each customer whenever a customer opens a new bank account. KYC is mandatory for banks and it usually forms the first key step in an AML program. KYC procedures involve collecting customer information and checking its accuracy.
Banks must make sure that the digital identity of a customer matches their real-world identity. KYC processes can use ID document verification, proof of address, or face verification. The verification process may occur manually or through the use of a verification solution.
CDD involves collecting the relevant customer profile information and then assessing their potential terrorist financing and money laundering risk. CDD procedures may vary between countries, but their main goal remains to detect customer risks.
When new customers request to open an account, banks must first apply KYC and then use CDD to assess the risk score of the potential customer. This involves checking and screening customer information against multiple online databases.
This may include, for example, screening customers against government records, lists of politically exposed persons (PEPs), and other watchlists and sanctions lists. Individuals noted in these databases and lists pose a higher risk of committing money laundering and terrorist financing crimes.
Additionally, banks that provide global services also consider the nationality of a customer as well as the record of their financial transactions when assigning a risk factor.
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