Blog Posts

The Importance of Anti-Money Laundering

It's no secret that financial institutions are in the hot seat when it comes to anti-money laundering (AML) compliance. In fact, regulators are getting stricter and stricter about enforcing AML policies. So what's the big deal? Why is AML compliance such a challenge for fintechs and other financial institutions?


It's no secret that financial institutions are in the hot seat when it comes to anti-money laundering (AML) compliance. In fact, regulators are getting stricter and stricter about enforcing AML policies. So what's the big deal? Why is AML compliance such a challenge for fintechs and other financial institutions?

Financial crime includes money laundering. It entails concealing the origins of fraudulently obtained earnings (dirty money) so that they appear to be from a legitimate source. Anti-money laundering (AML) refers to the activities that financial institutions do in order to comply with legal requirements to actively monitor and report suspicious activity.

History of anti-money laundering

When the Bank Secrecy Act (BSA) was enacted in the United States in 1970, it became one of the first countries to introduce anti-money laundering legislation. The BSA was a pioneering attempt to identify and stop money laundering, but it has since been strengthened and updated by other anti-money laundering regulations. The BSA is now administered by the Financial Crimes Enforcement Network (FinCEN), whose goal is to "protect the financial system from abuses of financial crime, including terrorist financing, money laundering, and other unlawful behavior.”

The International Financial Action Task Force (FATF) was founded by a number of nations and organizations in 1989. Its goal is to create and advance global standards to stop money laundering. The FATF enlarged its scope to cover AML and countering terrorism financing (CTF) shortly after the 9/11 attacks on the US. An additional significant body is the International Monetary Fund (IMF). Its main objective is to guarantee the stability of the global monetary system, and it has 189 member nations. The IMF is concerned about the effects that money laundering and associated crimes may have on the financial sector's integrity and stability as well as the overall economy in general.

What is money laundering and how does it work?

Money laundering is the act of concealing the source of money or other assets derived from criminal activity. The money is typically moved around through a series of financial transactions in order to make it appear to have come from a legitimate source. In some cases, money launderers will also attempt to conceal ownership of the money by moving it into different accounts or using shell companies. While money laundering is often associated with organized crime, it can also be used to hide the illegal proceeds of any type of criminal activity. As such, it is a serious problem that has implications for both national and global security.

Three steps make up the core money laundering process:

  • Placement: At this stage, the launderer deposits the dirty money into a legitimate financial institution. This is frequently done in the form of cash bank deposits. This is the most dangerous stage of the laundering process because large sums of cash are visible, and financial institutions are required to report high-value transactions.
  • Layering: This is done by sending money through a series of different financial transactions so that its form changes and it is hard to track. Layering can involve multiple bank-to-bank transfers, wire transfers between different accounts with different names in different countries, making deposits and withdrawals to change the amount of money in the accounts, changing the money's currency, and buying high-value items (boats, houses, cars, diamonds) to change the form of the money. This is the hardest part of any plan to “wash” dirty money. The goal is to make the dirty money as hard to track as possible.
  • Integration: At the integration stage, the money goes back into the main economy, but it looks like it came from a legal transaction. This could involve a final bank transfer into the account of a local business where the launderer "invests" in exchange for a cut of the profits, the sale of a yacht bought during the layering stage, or the purchase of a $10 million screwdriver from a company owned by the launderer. At this point, the criminal can use the money without being caught. If there isn't any documentation during the other stages, it's hard to catch a money launderer during the integration stage.

Why is anti-money laundering important?

In a single year, it is estimated that $800 billion to $2.0 trillion is laundered around the world, which is between 2% and 5% of global GDP. Smuggling, illegal arms sales, embezzlement, insider trading, bribery, and computer fraud are just some of the crimes that frequently go hand in hand with money laundering. Human, arms, or drug trafficking, as well as prostitution, are all examples of organized crime.

The methods used by financial institutions to stop the financing of terrorism, known as counter-financing of terrorism (CFT), and anti-money laundering are closely related. AML regulations combine money laundering (source of funds) with terrorism financing (destination of funds).

Financial institutions employ AML strategies for a number of reasons, in addition to the moral duty to combat money laundering and terrorism financing:

  • Compliance with regulations that require them to monitor customers and transactions and report suspicious activity.
  • They must safeguard their brand's reputation and shareholder value.
  • Avoidance of consent orders as well as potential civil and criminal penalties for non-compliance or negligence.
  • Costs associated with fines, employee and IT costs, and capital set aside for risk exposure are all reduced.

Anti-money laundering compliance and regulations

The FATF assists countries in setting up a financial intelligence unit (FIU), which is in charge of controlling the information flow between their institutions and law enforcement organizations. The first line of defense against money laundering and terrorism financing is provided by financial institutions thanks to government legislation and regulation by each nation's FIU.

Financial institutions notify law enforcement of potentially illegal behavior by filing suspicious activity reports (SARs) and suspicious transaction reports (STRs) with the government. To enforce anti-money laundering, numerous regulatory agencies have passed crucial AML legislation that financial institutions must abide by, including:

  • US: US Patriot Act, Bank Secrecy Act.
  • Europe: EU Fourth Anti-Money Laundering Directive (4AMLD).
  • Canada: Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
  • Australia: Anti-Money Laundering and Counter-Terrorism Financing Act of 2006.

AML regulations differ by jurisdiction, but generally, financial institutions take the following actions to meet compliance requirements:

  • Customer identification program/know your customer (KYC): Financial institutions must require proper customer identification and verification to ensure legitimacy. Higher-risk products and services (e.g., private banking) require more in-depth documentation.
  • Large currency transaction reporting: Requirements call for institutions to file a regulatory report (known as a “CTR” in the US) for transactions above a certain threshold made by a single customer during a business day.
  • Suspicious activity monitoring and reporting: Regulatory agencies publish AML guidelines about behavior that should be monitored (e.g., making numerous cash deposits or withdrawals over several days to avoid a reporting threshold). If an AML investigator uncovers behavior that exceeds reporting thresholds and has no apparent business purpose, they file a SAR/STR with the FIU to fulfill regulatory requirements.
  • Sanctions compliance: Regulatory bodies such as the US Treasury Department, the US Office of Foreign Assets Control, the United Nations, the European Union, Her Majesty’s Treasury, and the Financial Action Task Force on Money Laundering have requirements for financial institutions to check transaction parties against lists of sanctioned individuals, companies, institutions and countries.

Flagright technology & anti-money laundering

Flagright has created a proprietary system designed for fintechs and fintech startups to adapt to changing needs, as well as all of the necessary anti-money laundering and fraud prevention tools, such as real-time transaction monitoring, customer risk scoring, KYC, crypto & sanctions screening, and even fintech license application automation. There are no upfront fees and all pricing is based on usage.

Money laundering is a serious crime, and it’s important that businesses do what they can to aid in the prevention of this type of illegal activity. Technology has come a long way in helping organizations detect and prevent money laundering, and financial institutions should make use of all the tools at their disposal to stay ahead of criminals.

Have you looked into using technology to help with your anti-money laundering efforts? If not, schedule a free demo with us – we’d be happy to show you how our solutions can streamline your processes and keep your business safe from financial crimes.

Similar posts

Dark Blue Bg