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Money Laundering and AML Security Regulations
Across the Globe

Money Laundering

In simplest terms, Money Laundering refers to the illegal process of obtaining large amounts of “dirty” money, which is generated from an illicit source. By passing the money through different complex stages, dirty money is “cleaned” by making it appear as legitimate business profits. Here’s a summary of the money laundering process and examples of some global regulations.

How Money Laundering Works

To conceal the illegal source of funds, money is laundered is three phases:

  • Phase 1: Initial Entry or Placement
    In this step, dirty cash proceeds are entered into a legitimate business to get rid of its illegal origin and introduce it into the financial system instead.
  • Phase 2: Layering Dirty Cash
    In this stage, illegally obtained money is transferred through multiple investments, and transactions via multiple countries and bank accounts to make it untraceable during audits. In this stage, dirty money is stripped of its illegal origin.

  • Phase 3: Final Integration
    After the funds are layered by transferring them through multiple channels, it is then fully integrated into the financial system eliminating any need to conceal it any further.

Global Regulatory Body - The FATF

To tackle threats of money laundering, something had to be done. This is where Anti-Money Laundering security measures step in. Anti-Money Laundering checks and initiatives gained popularity back in 1989 when 36 countries and organizations around the globe joined together to form the Financial Action Task Force (FATF). The mission behind FATF’s formation was to have a global regulatory body that would devise international standards for the prevention of money laundering. After the 9/11 terrorist attack in the U.S. in 2001, FATF extended its law to include combating risks associated with terrorist financing as well.

FATF is responsible for publishing AML/CFT (Combating the Financing of Terrorism)recommendations and guidelines. All the member states and financial institutions are required to follow these standards to avoid facing hefty fines. According to the findings of Fenergo’s Mid-Year Report 2020, financial crime-related penalties worldwide crossed US$5.6 billion. Consequently,massive amounts of fines were handed down to financial institutions like banks in the U.S., EU, and Australia by the end of the third quarter.

The European Union: 5AMLD and 6AMLD

The European Union publishes guidelines to prevent criminal activities like money laundering or terrorist financing. With the aim of contributing to the growth and integrity of the financial system, the EU introduced its Fifth Anti-Money Laundering Directive (5AMLD) in 2018, which came into effect in January 2020. The Sixth Anti-Money Laundering Directive (6AMLD) was drafted in late 2018 and came into effect in December 2020. Here’s a summary of what these two directives cover:

  • 5AMLD includes guidelines related to crypto-wallets and cryptocurrency. It also includes mandatory requirements regarding the management of risky customers and PEP (Politically Exposed Persons) lists in payment transactions.
  • 6AMLD follows the path of 5AMLD and has directives regarding remote customer onboarding and online identification methods. Additionally, it contains regulations that state the need for more stringent penalties to be imposed in order to reduce money laundering instances.

The United Kingdom: FCA

The Financial Conduct Authority (FCA) is the main conduct regulator in the UK that is responsible for AML monitoring. FCA regulations aim to encourage competition, safeguard customers and increase market integrity. To achieve this goal, it focuses on three key operational activities: Authorize, Supervise and Enforce.

  1. Authorize: Monitors whether banks, insurance companies and other financial service providers are authorized by the FCA before they offer their services
  2. Supervise: The FCA closely supervises individuals and firms to make sure they meet the required standards
  3. Enforce: In case companies do not comply, the FCA imposes penalties. Examples of such penalties include orders to prosecute or stop trading

The United States of America: BSA

The Bank Secrecy Act (BSA) of 1970 is the most important U.S. regulation regarding AML and CTF. The BSA was put forward by the Financial Crimes Enforcement Network (FinCEN) and is responsible for ensuring that financial institutions meet mandatory requirements.

The Act requires banks and other financial institutions to maintain records of cash transactions of negotiable instruments and file reports in case the daily aggregate exceeds an amount of US$ 10,000. Another regulation it introduced required these organisations to report any suspicious activity that might be linked to tax evasion, money laundering, or other criminal activities. Firms that fail to comply with the BSA’s regulation regarding AML compliance process are sanctioned.

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