Understanding Anti-Money Laundering (AML)

What is AML?

AML represents the measures of control from the governments that aim to prevent and criminalize money laundering. In simple words, these are the measures that help to find out the cases when a person tries to show that the money obtained illegally were obtained legally. 

What does AML stand for?

AML, or Anti-Money Laundering, first of all, indicates the state policy, including laws and regulations that enable the detection and stopping of attempts to hide crimes. That’s why money laundering as such is also a crime in most jurisdictions. 

What is money laundering and an example?

The UNODC explains money-laundering as “the processing of criminal proceeds to disguise their illegal origin” and provides some common examples of it. Particularly, when a drug dealer opens a restaurant to create a fake impression that his income comes from lawful activity. Another example is when corrupt public officials use similar methods to show their clear reputation. So, the field of money laundering can be varied.   

Money Laundering Explained

What are the 3 stages of money laundering?  

When it comes to the questions: what are the money laundering steps and how can they be recognised, there is also a useful diagram from UNODC. It represents three main stages:

1. Placement. In plain language, that is when a person puts money in their bank account or an account in other financial institutions, which, of course, represent a regulated financial system. A common situation is when a person splits a large sum and puts it in small amounts. 

2. Layering. This procedure seeks to create several levels of money holding in order to conceal the money's source. For instance, exchanging fiat for crypto and otherwise for some time to mask the initial transaction. Another example is to invest money in so-called “shell corporations" in less strict jurisdictions, which actually do not conduct any specific activity. 

3. Integration. The final stage, which helps to make money fully “clean”. A person purchases luxury goods, cars, real estate, and so on. Such investments and property seem ordinary things that do not raise obvious suspicion. 

AML Compliance and Regulations

AML regulations around the world

AML regulations are generally similar worldwide, as they share the same goal. In Europe, the key instruments are the 4th and 5th AML Directives, which all EU countries must implement. In the USA, the Bank Secrecy Act applies, covering laws such as the USA PATRIOT Act and the Anti-Money Laundering Act of 2020, which set general principles supplemented at the state level. In Canada, the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations apply, alongside the Criminal Code, which establishes liability for money laundering. 

Anti-money laundering policy requirements

Without a doubt, the jurisdiction and type of obliged entity influence the scope of AML measures. Still, common requirements include: having an internal AML policy outlining applied measures, conducting KYC/CDD checks, assessing risks related to clients, services, or products, reporting suspicious activities to the regulator, maintaining customer identification records, appointing an AML officer (MLRO) responsible for compliance, and providing employee training.

AML programs for businesses

Not all legal entities are required to adopt an AML policy or implement related measures. AML regulations usually specify a list of obliged entities and individuals subject to compliance. These typically include banks, financial institutions, CASPs (crypto asset service providers), attorneys, accountants, real estate brokers, and others. Considering the stages of money laundering, these are precisely the entities offenders interact with at each step.

AML Structuring and Risk Management

As mentioned above, there are some common requirements to the obliged entities and individuals, and they need careful attention. Particular, the following: 

Internal controls and reporting 

An AML program, legally referred to as an AML policy, outlines how a company complies with AML laws. It usually covers the KYC procedure (steps, documents, and verification methods), risk profiles and conditions, transaction monitoring, reporting of suspicious activities, staff training methods, AML officer/MLRO responsibilities, record-keeping rules, and the risk management plan. In short, the AML policy sets out the practical framework for AML compliance.

Identifying and preventing suspicious activity

These activities can be found at the KYC stage or at the moment of the transaction, depending on the case. As a rule, the following actions can be the triggers: 

• frequent transactions in small amounts, 

• differences between the personal information of an account holder and his documents, 

• absence of documents, confirming the source of funds, 

• transfers to “high-risk” jurisdictions (defined by FATF),

• anonymous payment methods,

• absence of confirmation of real economic activity of the company, and others. 

To prevent money laundering, companies may block transactions, refuse account openings, request additional proof, or report suspicious activity to the regulator. With advancing technology, businesses also rely on specialized software to conduct checks more quickly and accurately.

Role of compliance officer

The AML officer is the core person for the company’s AML compliance. His main responsibilities include the development of AML policy and risk management system, monitoring and reporting suspicious actions and generally, ensuring that the company complies with AML regulations.

FAQ about AML

What is AML and ML in simple terms?

AML is a set of measures aimed at detecting and preventing money laundering. Often, it is combined with counter-terrorism financing, referred to as AML/FT measures, since the regulations cover both areas. Money laundering itself is defined as the process of making illegally obtained funds appear legitimate through ordinary business activities such as company income or gifts. This makes money laundering a separate crime, in addition to the illegal origin of the funds.

What are the stages of money laundering?

Money laundering is commonly divided into three stages: placement, layering, and integration. First, illicit funds are deposited into a bank or other financial institution. Next, their origin is obscured through exchanges, investments, or other transactions. Finally, the funds are reintegrated into the legal economy, often by purchasing high-value assets. These stages are only approximate and may vary, include additional steps, or involve different actors. This logic underlies the list of entities and individuals obliged to comply with AML requirements. 

How does AML compliance protect businesses?

The main benefit for businesses is not to be involved in money laundering and illegal activity. If a business ignores the obvious signs of violation and does not inform a regulatory authority about it, then such a business can bear its own responsibility for AML laws violations. Moreover, the business won’t be able to conduct its activity and obtain a licence or authorisation if it doesn’t have the required anti-money laundering programs and measures. 

What is an anti-money laundering program?

An anti-money laundering program is usually formalized as an AML policy, which reflects how an obliged entity complies with legal requirements. It sets out procedures for customer verification, transaction monitoring, reporting suspicious activity, and defining the compliance officer’s duties. The policy must be regularly updated to match current legislation. Although it is an internal document, there is little room for deviation from general regulations. Still, specific obligations may differ depending on the type of obliged entity or individual.

What is the Money Laundering Act?

The main AML framework in each country is usually set by a key national act, such as the Prevention and Suppression of Money Laundering and Terrorist Financing Law in Cyprus or the Anti-Money Laundering and Counter-Terrorism Financing Act in Australia. These laws form the core of national AML legislation. In addition, Criminal Codes also play a role, establishing liability for money laundering as a criminal offense. On a broader level, international acts such as the EU AML Directives set core compliance principles for European countries.

The FATF (Financial Action Task Force), which is an international governmental organization, also defines key trends and requirements in AML meters. And it regularly updates the recommendations for countries, which, in turn, affect the local laws and make the legislation harmonised across jurisdictions.