Its history and how it works

Efforts to police illegal profits have a history that stretches back centuries. Anti-money laundering (AML) refers to today’s web of laws, regulations and procedures aimed at uncovering illicit funds disguised as legitimate income.

Money laundering, a term derived from this regulatory regime, consists of actions taken to conceal financial movements underlying crimes ranging from tax evasion and drug trafficking to public corruption and the financing of groups designated as terrorist organizations.

AML legislation was a response to the growth of the financial industry, the lifting of capital controls, and the increasing ease of conducting complex chains of financial transactions. A high-level UN panel estimated that annual money laundering flows amount to at least $1.6 trillion, accounting for 2.7% of global GDP in 2020.

Know Your Customer (KYC)

Regulatory compliance at financial institutions begins with a process sometimes called Know Your Customer (KYC). KYC determines the identity of new customers and whether their funds come from a legitimate source.

Money laundering can be divided into three steps. The KYC process aims to stop money laundering at the first step when customers try to store funds in financial accounts.

Depositing illegal funds into a financial system. Placing a series of transactions, usually repetitive and extensive, to disguise the illegal origin of the funds known as “layering”. “Clean” and “launder” the funds by converting them into real estate, financial instruments, commercial investments and other acceptable assets.

During the KYC process, financial institutions will screen new customers against lists of parties that pose a higher than average risk of money laundering: criminal suspects and convicts, individuals and companies under economic sanctions, and politically exposed persons, who are foreign government officials and their family members and close associates.

Customer Due Diligence (CDD)

KYC goes beyond vetting a customer in the initial stages of opening an account. Throughout the account’s lifetime, financial institutions must conduct customer due diligence (CDD), or maintain accurate and up-to-date records of transactions and customer information for regulatory compliance and potential investigations. Certain customers may be added to sanctions and other AML watch lists over time, warranting ongoing monitoring for regulatory risks and compliance issues.

According to the US Treasury’s Financial Crimes Enforcement Network (FinCEN), the four core requirements of CDD in the US are:

Identifying and verifying the customer’s personally identifiable information (PII) Identifying and verifying the identity of beneficial owners with an interest of 25% or more in a company opening an account. client details

CDD can seek to uncover and counter money laundering patterns such as layering and structuring, also known as “smurfing” – the breaking up of large money laundering transactions into smaller ones to evade reporting limits. For example, financial institutions have introduced AML holding periods that force deposits to remain in an account for a minimum number of days before they can be transferred elsewhere.

If patterns and anomalies indicate money laundering activities, suspicious transactions in US jurisdictions should be reported in Suspicious Activity Reports (SARs) to relevant financial agencies for further investigation.

Against money laundering in the USA

AML regulations in the US expanded after the Bank Secrecy Act (BSA) was passed in 1970 and upheld as constitutional by the US Supreme Court in 1974. and keep records of transactions.

Additional legislation was passed in the 1980s amid increased efforts to fight drug trafficking, in the 1990s to improve financial oversight, and in the 2000s to cut off funding for terrorist organizations.

Banks, brokers and dealers now follow a complex regulatory framework of customer due diligence and the tracking and reporting of suspicious transactions. A written AML compliance policy must be implemented and approved in writing by a member of senior management and overseen by an AML compliance officer.

The Anti-Money Laundering Act of 2020, the most comprehensive overhaul of US AML regulations since the Patriot Act following the 9/11 terrorist attacks in 2001, brought cryptocurrency exchanges, art and antiques dealers and private companies to the same CDD requirements as financial institutions.

The Corporate Transparency Act, a clause of the Anti-Money Laundering Act, eliminated loopholes for shell companies to evade anti-money laundering measures and economic sanctions.

FinCEN, a bureau of the US Department of the Treasury, issues guidance and regulations that interpret and implement the BSA and other AML laws. FinCEN’s guidance and regulations provide detailed instructions for financial institutions on how to comply with AML requirements.

In addition to these federal laws, many states have their own AML statutes and regulations. These state laws often mirror the federal requirements, but may include additional provisions. Financial institutions must comply with both federal and state AML laws.

International against money laundering

The European Union (EU) and other jurisdictions have adopted similar anti-money laundering measures to the US anti-money laundering legislation and enforcement gained greater global prominence in 1989, when a group of countries and. non-governmental organizations (NGOs) formed the Financial Action Task Force (FATF).

The FATF is an intergovernmental body that devises and promotes the adoption of international standards to prevent money laundering. In October 2001, following the 9/11 terrorist attacks, FATF’s mandate to combat terrorist financing grew.

Those standards, the FATF’s 40 recommendations, provide a framework for regulations and policies for AML and countering the financing of terrorism (CFT) in more than 190 jurisdictions worldwide, covering CDD, transaction monitoring, suspicious activity reporting and international cooperation .

Other important international organizations in the fight against money laundering include the International Monetary Fund (IMF) and the United Nations (UN), and programs include the Council of the European Union’s Anti-Money Laundering Directive (AMLD) and the Basel Committee on Banking Supervision . Customer Due Diligence (CDD) for banks.

The IMF has been pushing member countries to comply with international norms that curb terrorist financing. The UN added AML provisions to address money laundering related to drug trafficking in the 1998 Vienna Convention, to international organized crime in the 2001 Palermo Convention, and to political corruption in the 2005 Meridian Convention.

The Council of the European Union’s AMLD, a directive setting out AML/CFT requirements for all EU member states, has been amended several times to reflect the changing risks of money laundering and terrorist financing. The Basel Committee on Banking Supervision’s CDD for banks provides detailed recommendations for banks on how to identify and verify the identity of their customers.

Against money laundering and cryptocurrency

Cryptocurrency has attracted increasing attention among AML professionals. Virtual coins offer more anonymity to users, providing criminals with a convenient solution to move funds. According to cryptocurrency tracking firm Chainalysis, addresses linked to illegal activity sent nearly $23.8 billion worth of cryptocurrency in 2022, up 68% from 2021.

The decentralized nature of cryptocurrency markets makes it challenging to implement and enforce AML regulations. Traditional AML frameworks are designed for centralized financial institutions, but not so much for the decentralized cryptocurrency ecosystem, including decentralized finance (DeFi) protocols, asset-linked digital currencies known as stablecoins, and crypto-investments with standalone money transfer features such as – fungible tokens (NFTs).

Blockchain analytics and monitoring tools enable financial institutions and law enforcement to identify and investigate suspicious cryptocurrency transactions. Crypto forensic services such as Chainalysis, Elliptic and TRM Labs have the technology to flag crypto wallets, exchanges and transactions linked to designated terrorist organizations, sanctions lists, political groups, government actors and organized crime such as hacking, ransomware, scams and smuggling on darknet markets.

Within the US

In the US, cryptocurrencies are largely an unregulated market in that few regulations specifically target the asset class by name. Instead, AML enforcement actions, such as those against crypto exchanges Binance and FTX, have been prosecuted under existing laws and statutes, such as the Bank Secrecy Act and Foreign Corrupt Practices Act (FCPA).

Only recently, under the Money Laundering Act of 2020, US companies are legally required to comply with financial due diligence regulations that apply to fiat currencies and tangible assets. Businesses that exchange or transfer virtual currencies qualify as regulated entities and must register with FinCEN, comply with AML and CFT laws, and report suspicious customer information to financial regulators.

Outside the US

More formal rules on intervention in money laundering of virtual currencies are expected to be introduced in the US and abroad. Recent steps include an Internal Revenue Service (IRS) proposal and several European bills for financial platforms to report digital asset payments and transactions to national and transnational regulatory bodies, law enforcement agencies and industry stakeholders.

On the global stage, the Financial Action Task Force (FATF) Travel Rule, an international AML framework that requires the collection and sharing of beneficiary information for cross-border cryptocurrency flows, is closely watched and gaining traction among regulatory bodies worldwide. Several countries have implemented or are in the process of implementing the FATF Travel Rule in their civil and criminal codes to increase the transparency and accountability of cryptocurrency transactions.

The Bottom Line

Governments have developed their approach to money laundering deterrence by introducing and revising regulatory controls that elicit proactive participation from financial institutions. Anti-money laundering is crucial to protecting consumers and businesses from financial crimes.