Anti–money laundering (AML) refers to a set of laws, regulations and institutional practices designed to help financial institutions and other regulated entities prevent, detect, and report money laundering and related financial crime. (Anti–money laundering is sometimes paired with combating the financing of terrorism, using the initialism AML/CFT.) In addition to regulatory and supervisory arrangements intended to ensure that banks and other relevant firms implement AML controls and file suspicious transaction reports, the AML policy framework typically also involves financial intelligence units and relevant law enforcement agencies.
Overview
Anti–money laundering guidelines came into prominence globally as a result of the formation of the Financial Action Task Force (FATF) and the promulgation of an international framework of anti–money laundering standards. These standards began to have more relevance in 2000 and 2001, after FATF began a process to publicly identify countries that were deficient in their anti–money laundering laws and international cooperation, a process colloquially known as "name and shame".
An effective AML program requires a jurisdiction to criminalise money laundering, giving the relevant regulators and police the powers and tools to investigate; be able to share information with other countries as appropriate; and require financial institutions to identify their customers, establish risk-based controls, keep records, and report suspicious activities.
Strict background checks are necessary to combat as many money launderers escape by investing through complex ownership and company structures. Banks can do that but proper surveillance is required on the government side to reduce this.
Over recent years, the rise in anti–money laundering mechanisms has been attributed to the use of big data and artificial intelligence.Li, X., Cao, X., Qiu, X., Zhao, J., & Zheng, J. (2017, August). Intelligent anti-money laundering solution based upon novel community detection in massive transaction networks on spark. In 2017 fifth international conference on advanced cloud and big data (CBD) (pp. 176-181). IEEE. Traditional anti–money laundering systems are falling behind against evolving threats and new technologies are helping AML compliance officers to deal with: poor implementation, expanding regulation, administrative complexity, false positives.
Criminalization
The elements of the crime of money laundering are set forth in the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and Convention against Transnational Organized Crime. It is defined as knowingly engaging in a financial transaction with the proceeds of a crime for the purpose of concealing or disguising the illicit origin of the property from governments.
18 U.S.C. 1956 and 1957, the two most prominent U.S. Money Laundering crime statutes makes it criminal to "engage in a financial transaction involving the proceeds of certain crimes in order to conceal the nature, source, or ownership of proceeds they produced..." Money laundering is “the act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced."
Organizations Many countries are obligated by various international instruments and standards, such as the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the 2000 Convention against Transnational Organized Crime, the 2003 United Nations Convention against Corruption, and the recommendations of the 1989 Financial Action Task Force on Money Laundering (FATF) to enact and enforce money laundering laws in an effort to stop narcotics trafficking, international organized crime, and corruption. Mexico, which has faced a significant increase in violent crime, established anti–money laundering controls in 2013 to curb the underlying crime issue.
Formed in 1989 by the G7 countries, the Financial Action Task Force on Money Laundering (FATF) is an intergovernmental body whose purpose is to develop and promote an international response to combat money laundering. The FATF Secretariat is housed at the headquarters of the OECD in Paris. In October 2001, FATF expanded its mission to include combating the financing of terrorism. FATF is a policy-making body that brings together legal, financial, and law enforcement experts to achieve national legislation and regulatory AML and CFT reforms. its membership consists of 36 countries and territories and two regional organizations. FATF works in collaboration with a number of international bodies and organizations. These entities have observer status with FATF, which does not entitle them to vote, but permits them full participation in plenary sessions and working groups.
FATF has developed 40 recommendations on money laundering and 9 special recommendations regarding terrorist financing. FATF assesses each member country against these recommendations in published reports. Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions.
FATF's three primary functions with regard to money laundering are: Monitoring members' progress in implementing anti–money laundering measures, Reviewing and reporting on laundering trends, techniques, and countermeasures, and Promoting the adoption and implementation of FATF anti–money laundering standards globally.
The FATF currently comprises 34 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe.
The United Nations Office on Drugs and Crime maintains the International Money Laundering Information Network, a website that provides information and software for anti–money laundering data collection and analysis.International Money Laundering Information Network. Retrieved on 21 October 2011. The World Bank has a website that provides policy advice and best practices to governments and the private sector on anti–money laundering issues.World Bank Financial Market Integrity . Amlcft.org. Retrieved on 21 October 2011. The Basel AML Index is an independent annual ranking that assesses the risk of money laundering and terrorist financing around the world.Basel AML Index. Retrieved on 25 September 2018.
International institutions, associations, and coordinations Asia/Pacific Group on Money Laundering Moneyval, the Committee of Experts on the Evaluation of Anti–Money Laundering Measures and the Financing of Terrorism, a monitoring body of the Council of Europe Financial Action Task Force on Money Laundering Inter-Governmental Action Group against Money Laundering in West Africa Association of Certified Anti-Money Laundering Specialists
State offices, regulations Anti–money laundering office of the Philippines Anti-Money Laundering Office (Thailand) AMLCFT regulation in the United States US Anti–money laundering program (Patriot Act, Title III, Subtitle B Sec.352) Russian Federal Financial Monitoring Service ("Rosfinmonitoring") Australian Transaction Reports and Analysis Centre or AUSTRAC, Australian government agency, Australia's anti–money laundering and counter–terrorism financing regulator
Role of financial institutions Laws, regulations and guidelines designed to combat money laundering and terrorist financing place legally binding obligations on sectors exposed to the risk of money laundering or the financing of terrorism to monitor their customers and transactions, to report suspicious activities to governments, and to manage risks, including, where necessary, ceasing or refusing to provide financial services.
These sectors are described as "obliged entities" in the European Union, and "covered institutions" in the United States. Since the establishment of the Financial Action Task Force (FATF) the scope of AML/CFT legislation has expanded steadily beyond traditional financial institutions. In the European Union, the list of obligated entities, set out in the recent 2024 Regulation, includes accountants and auditors, crowdfunding services, estate agents, gambling services, investment migration operators, notaries and lawyers, professional football clubs and agents, tax advisors, trusts and persons storing or trading in high value goods.
Whilst banks operating in the same country generally have to follow the same anti–money laundering laws and regulations, financial institutions all structure their anti–money laundering efforts slightly differently. Today, most financial institutions globally, and many non-financial institutions, are required to identify and report transactions of a suspicious nature to the financial intelligence unit in the respective country. For example, a bank must verify a customer's identity and, if necessary, monitor transactions for suspicious activity. This process comes under "know your customer" measures, which means knowing the identity of the customer and understanding the kinds of transactions in which the customer is likely to engage. By knowing one's customers, financial institutions can often identify unusual or suspicious behaviour, termed anomalies, which may be an indication of money laundering. This process is known as Customer Due Diligence (CDD) and also encompasses on-going monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. In 2003, these obligations were expanded by the FATF in the Forty Recommendations report to include Enhanced Due Diligence (EDD) checks and monitoring for higher risk business relationships, customers and transactions. The 2024 EU AML Regulation provides an insight into the current scale of EDD obligations. EDD must be applied in certain specific situations, such as business relationships with Politically Exposed Persons, cross-border correspondent relationships crypto-asset service providers or business relationships with persons in third countries with strategic deficiencies in the national AML/CFT regimes. The Regulation also identifies risk factors that, if present, may require application to EDD. Factors include reputation, nature or behaviour of customers, complex ownership, customer domicile, presence of nominee shareholders, cash-intensive businesses, use of new technologies or transactions linked to oil, tobacco, arms, precious metals or stones.
Bank employees, such as tellers and customer account representatives, are trained in anti–money laundering and are instructed to report activities that they deem suspicious. Sectors subject to AML/CFT legislation are legally required to maintain internal processes capable of monitoring customers and transactions, meeting CDD and EDD obligations and identifying and reporting suspicious activities to relevant regulators and law enforcement. Financia institutions that fail to comply with these requirements face threats to their reputation and heavy fines, sometimes running into billions of dollars.
Additionally, anti–money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies include any sudden and substantial increase in funds, a large withdrawal, or moving money to a bank secrecy jurisdiction. Smaller transactions that meet certain criteria may also be flagged as suspicious. For example, structuring can lead to flagged transactions. The software also flags names on government "blacklists" and transactions that involve countries hostile to the host nation. Once the software has mined data and flagged suspect transactions, it alerts bank management, who must then determine whether to file a report with the government.
Enforcement and compliance costs, and associated privacy concerns