In an attempt to conceal the illegitimate source of their income, Criminal gangs “clean” money of its illegal origin and make it appear legitimate in the form of business profits by passing it through complex transactions and transfers. This process of moving illegally-obtained funds around the globe is known as Money Laundering. In today’s world, money mules play a key role in the transfer of funds. These people or organisations act as intermediaries, even when they are oblivious to the fact that they are laundering illegitimate funds. 

The solution? Anti-Money Laundering Compliance. 

AML compliance regulations require institutions to keep an eye on customers’ transactions and file a report if any suspicious financial activity is detected. To eliminate any efforts of money laundering, customers are screened against sanctions, PEP lists and global watchlists. As Money Laundering activities exert a huge impact on national economies, screening customers through AML screening softwares has become a crucial part of the KYC verification process, especially for institutions such as banks, stock exchanges, fintech, cryptocurrency, real estate etc. 

Red Flags in Money Laundering

  1. Suspicious/Insufficient Information

A customer providing dubious information is one of the first indications that something is wrong. For example:

  • Unverifiable documents that cannot be verified
  • Multiple tax ID numbers
  • Hesitant while providing detailed information about the business in question
  • Suspiciously large cash transactions 
  • Hiding the identity of beneficial partners or owners of the business
  1. Avoiding Record-Keeping Requirements

The Bank Secrecy Act, introduced in the USA in 1970, made it mandatory for businesses to perform a variety of reporting and record-keeping tasks related to transactions and customers. Customers that resist complying with these requirements may be evading detection of fraudulent activity.

  1. Inconsistency in the Business Activity, such as:
  • Transaction appears inconsistent with the socio-economic profile of the customer
  • Cash transactions being made seem unrelated to business needs
  • Sudden substantial changes in the pattern of transactions being made by the customer

Why Anti-Money Laundering Compliance Is Critical for Businesses to Flourish 

Increasing Fraud Rates

According to a report by the Federal Trade Commission, $145 million were lost to frauds related to Corona Virus in 2020. Keeping this in mind, AML compliance is not just another regulatory burden, but a vital source for risk prevention. By creating AML compliance policies, a separate AML compliance department and using AML screening softwares, suspicious individuals can be identified within seconds through background checks and other screening processes before they cause any harm to an organisation’s reputation and finances. 

Loss Due To Non-Compliance

In the USA, 60.5% of total fines in 2019 came from banks that violated anti-money laundering rules and regulations, while the remaining fines of 38.7% arose from transactions with countries that were under sanctions. By undertaking customer due diligence and complying to Anti-Money Laundering regulations, significant losses due to operational, legal and reputational damages can be prevented.

Financial Institutions Utilizing AML and KYC Solutions 

Financial institutions and banks in particular use AI-powered Anti-Money Laundering screening softwares and implement KYC verification for their benefit in the following ways:

  1. Authenticating Credit or Debit card of the customer
  2. Screening existing and potential customers through PEP (Politically Exposed Persons) lists and global watchlists
  3. Ensuring PCI Compliance
  4. Document, Age and Address Verification to avoid any fake or modified customer details while onboarding
  5. Restricting investors from sanctioned countries to prevent introduction of illegal cash into the business
  6. Biometric Authentication for the removal of fake users
  7. Real-time verification of IDs, passports and utility bills

Key Points

  • AML compliance regulations require institutions to keep an eye on customers’ transactions and file a report if any suspicious financial activity is detected
  • Customers are screened against sanctions, PEP lists and global watchlists
  • Red Flags should not be left unreported once detected and must be dealt with immediately 
  • Compliance to AML regulations is necessary for risk aversion, reduction in fraud rates and to avoid monetary losses
  • Banks are successfully making use of AML compliance and KYC solutions for customer due diligence