What is Anti-Money Laundering?

Anti-money laundering (AML) is a term used worldwide to describe the policies, procedures and regulations that prevent the financial crime that is money laundering. These systems are used primarily within large financial companies and government systems in order to monitor financial activity and detect anything fraudulent.

In recent years, money laundering has become an increasingly serious issue in many different industries. The AML regulations that have been put in place by the government aim to deter criminals from laundering their funds through the financial system by making it much harder to do so and increasing awareness of the techniques that are used.

What is Money Laundering?

Money laundering is a major financial crime that involves making illegally obtained money appear to have been legally earnt. ‘Dirty’ money is fed into the financial system, undergoes several different transactions and emerges ‘clean’ and ready to use without arousing suspicion. 

There are many different processes for money laundering that are continuing to develop as technology grows more advanced and criminals become aware of the anti-money laundering procedures that are being put in place. Financial and government institutions are the biggest sites for money laundering, as people who work in these institutions have the most access to systems and software that can process ‘dirty’ money without raising any red flags. 

It is estimated that between 2-5% of global GDP is laundered, which is why an increased effort has been made in the last few decades to crack down on the illegal practice and implement AML compliance.

Anti-Money Laundering Regulations

The most recent UK government regulations regarding anti-money laundering came into place in June 2017 with the Money Laundering, Terrorist Financing and Transfer of Funds Regulations. An amendment to these regulations came into effect in January 2020 called the EU Fifth Money Laundering Directive, which updated the definitions and policies put in place to tackle more recent methods of money laundering. 

These regulations ensured that the UK was in line with the Financial Action Task Force’s (FATF) standards and recommendations for anti-money laundering. The FATF is responsible for creating most anti-money laundering standards that are followed internationally.

Certain businesses are required by anti-money laundering regulations to register with HMRC, comply with their guidance and be supervised by an AML authority. Some industries are monitored automatically and do not need to be registered, but those who do can be found on the UK government website.

Numerous different industry sectors are affected by anti-money laundering policy and regulations, and each of these has slightly different procedures to follow and processes to focus on. However, all groups affected by the regulations are required to take a risk-based approach to AML to stop criminals using professional services to launder their money.

AML regulations require the completion of a money laundering and terrorist financing risk assessment. The purpose of this assessment is:

• To help develop controls, policies and procedures that reduce the risk of money laundering taking place
• To help implement a risk-based approach to detecting and preventing money laundering within a business 
• To identify the level of risk associated with certain business relationships and interactions that will inform decisions about working with certain clients or individuals

This risk assessment will help to highlight whether there are certain aspects of a business that might attract money launderers, and help to calculate the likelihood of a business unknowingly getting involved in money laundering. 

Risk factors for potential money laundering activity are not only found within a business but also with their customers, the country they operate in, their product or service, each financial transaction and the channels through which a product or service is distributed. Certain industries are more at risk than others, and may have more specific risk factors that also have to be assessed.

Factors that may put businesses more at risk of money laundering:

• Dealing with clients operating in industries that have a higher risk of money laundering
• Having a high client turnover rate
• Working for clients without meeting them face to face

Once a risk assessment has taken place, businesses will need to put internal monitoring systems and controls in place to prevent money laundering in the identified aspects of the business that are more at risk. This will include risk management policies, recording and reporting systems, procedures that respond to suspicious behaviour and how customer due diligence is conducted.

Customer due diligence (CDD) is the other key aspect of the regulations, alongside risk assessment and ALM procedures, and refers to the steps taken to identify customers and check that they are who they say they are.

There are three different types of due diligence, all of which apply to different scenarios and risk factors.

Customer Due Diligence

Customer due diligence is required when a business relationship with a client or customer is established, when a customer’s circumstances change, or in the case of suspicious activity that hints towards money laundering, such as doubting the credibility of identification that has been provided. CDD is also required if the ‘beneficial owner’ of a transaction needs to be identified, which is often the case if the owner of a company or trust needs identifying or an individual if acting on behalf of someone else. 

Simplified Due Diligence

If it is decided that the person or business involved in a transaction presents a low risk of money laundering, then simplified due diligence is permitted and a less thorough identity check is required. The risk level of a transaction will have been decided through the risk assessment which is required of every potential customer.

Enhanced Due Diligence

There are some situations in which a more thorough check is needed before engaging with a customer or client, and this is where enhanced due diligence is necessary. These situations include a customer not being physically present for identification checks, entering a transaction with a customer from an EU-identified high-risk third country, a customer classed as a ‘politically exposed person’ or any other situation that presented a higher risk of money laundering.

Money Laundering, Terrorist Financing and Transfer of Funds Regulations require that a record is kept of all the customer due diligence measures that are carried out, including risk assessments, personal identification documents and a copy of the procedures that are followed. 

To summarise what the AML regulations require:

• A risk assessment identifying where a business may be targeted by money launderers
• Risk assessments of every potential customer or client
• Customer due diligence
• Internal anti-money laundering controls and monitoring

What is Anti-Money Laundering Compliance?

Anti-money laundering compliance refers to the process of ensuring that any attempts of money laundering are identified and eliminated before they occur through customer screening, AML procedures and a risk-based approach to business. 

It is vital that businesses and organisations are compliant with anti-money laundering guidance and regulations, primarily so that they do not become the victim of money laundering criminals. However, it is also important to be able to demonstrate compliance in the case of an ALM compliance check from HMRC, which can take place if a company is registered under the Money Laundering Regulations. 

Anti-money laundering policy is frequently being updated, so it can be difficult to ensure that a business is compliant with the regulations and often takes many administrative changes. Whilst certain industries and jurisdictions will have slightly different regulations and specifications, several features of AML compliance apply to all businesses. 

AML Policy

All businesses who are required to follow AML regulations must produce a policy that outlines the procedures and systems that they are putting in place to tackle money laundering. It should include:

• A framework for how a business is going to prevent money laundering
• Details of the customer due diligence processes used to identify and monitor people who approach a business
• An outline of AML employee training plans that will ensure all staff are compliant, including the nomination of an AML Compliance Officer
• The procedure used by all staff to report instances of suspicious activity
• Descriptions of the controls put in place to monitor the success of this policy

AML Compliance Officer

A mandatory part of AML compliance is having a designated individual whose responsibility it is to monitor the anti-money laundering procedures taking place within the business and take charge of reporting any cases of suspicious activity. It will be their responsibility to check that a business is up to date on the latest regulations and processes, keep all staff updated on their AML training, and manage the systems and steps that are taken to reduce the risk of money laundering.

The AML compliance officer is the individual that all staff members should report cases of suspicious activity to, and it is their responsibility to further investigate and report suspects to a higher authority. 

Staff Training

All staff in businesses affected by anti-money laundering regulations should receive anti-money laundering training, so that everyone knows what red flags they should look out for and understands the procedures that have been put in place to minimise the risk of any criminal activity. Staff directly involved in AML risk assessments and strategy may need more specific guidance, but general training is required of the entire company.

Employees are often targeted and bribed by criminals who are attempting to launder money through a business, so all staff members must know what to and who to go to if this happens

Reporting Obligations

In order to comply with AML regulations, businesses are obligated to report any suspicious transactions that hint towards customers getting involved in money laundering. There should be a company-wide procedure of reporting to the designated AML Compliance Officer, who will submit a Suspicious Activity Report to the relevant authoritative body for further investigation. 

Customer Screening

Customer due diligence and ‘Know Your Customer’ are two key requirements of anti-money laundering policy, and having procedures in place to verify the identity of customers is essential in compliance with AML regulations. After identity checks have taken place each customer will need to be risk assessed, often using anti-money laundering screen software, and the appropriate measures will need to be taken based on their level of risk.

FAQs

How many stages of money laundering are there?

There are typically three stages to money laundering; placement, layering and integration. Placement involves moving ‘dirty’ money into a legitimate source whilst hiding where it really comes from, layering breaks this money down into small amounts that make it harder to detect and then trades or buys items with the money, and integration returns the money to the money-launderer so it can be retrieved legally.

Who can certify documents for anti-money laundering?

Anti-money laundering legislation requires that financial services must ensure that their customer’s identity is legitimate to prevent financial crime, which requires documents to prove identity. These documents can be certified by:

• Someone who is regulated by the Financial Conduct Authority, EU financial regulation organisation or Prudential Regulatory Authority
• A Serving Police officer
• A Solicitor or Barrister
• An accountant or Notary Public
• A Commissioner of Oaths
• A member of the Justice of the Peace
• A Commanding Officer (armed forces only)
• A Member of Parliament
• The Post Office identity-checking service

What is an anti-money laundering check?

An anti-money laundering check is an assessment of someone’s identity to ensure that they are who they claim to be, and aren’t handling or investing money on behalf of someone else. This may involve background checks of personal data or the presentation of documents that prove identity, such as a passport or bank records.

Summary

Anti-money laundering legislation and training are essential in the ongoing battle against financial crime, and the consequences of avoiding compliance can be severe. For more information on money laundering and how you can prevent it in your business, our Anti-Money Laundering online training course can be found here.