Money laundering is the process of hiding the true source of funds normally applied to money that has been obtained from an illegal source. Governments across the globe are committed to preventing the use of illicit funds and are implementing ever increasing levels of Anti-Money Laundering (AML) regulations which businesses must comply with.
Anti-Money Laundering (AML) definition
AML, or Anti-Money Laundering, is a set of regulations and procedures designed to prevent illegal financial activities, such as money laundering, corruption, illicit trade, and terrorist financing within regulated industries.
AML is also closely related to counter-financing of terrorism (CFT), which financial institutions use to combat terrorist financing. AML regulations combine money laundering (source of funds) with terrorism financing (destination of funds).
Governments across the globe are committed to preventing the use of illicit funds and are implementing ever increasing levels of (AML) regulations which businesses must comply with.
AML regulation is not new. The first AML legislation dates to 1970 when the USA adopted the Banks Secrets Act. Closer to home, the European Union released the first AML directive in 1990, and the UK introduced the Proceeds of Crime Act in 2002.
What is the latest Anti-Money Laundering regulation?
The latest piece of regulation is the 6th Annual Money Laundering Directive (6AMLD). This is an EU directive aimed at enhancing its AML framework. It introduces stricter rules and measures to combat money laundering and terrorist financing. Post-Brexit the UK has opted out of transposing this legislation due to the fact that many of its requirements are already covered by existing UK law.
6AMLD has implemented the following changes and additions, building on the framework provided in 5AMLD:
- Broader scope of application
One of the primary advancements introduced by the 6th Anti-Money Laundering Directive is the expansion of its scope to cover a broader range of activities and entities. By including virtual currency platform, wallet providers, and art dealers, the directive acknowledges the evolving nature of financial transactions and seeks to close gaps that could potentially be exploited by money launderers. This broadened scope underscores the directive’s commitment to staying ahead of emerging trends and technologies in the financial sector.
- Enhanced Beneficial Ownership Transparency
The directive places a renewed emphasis on transparency in beneficial ownership information. Recognising the pivotal role that hidden ownership structures play in facilitating money laundering, 6AMLD mandates member states to establish centralised registers containing accurate and up-to-date information on the ultimate beneficial owners of legal entities. This move is expected to enhance the ability of authorities to trace and investigate suspicious financial activities, fostering a more effective and collaborative approach to combating money laundering.
- Stricter due diligence measures
Building on the foundation laid by previous directives, 6AMLD introduces stricter customer due diligence requirements. Financial institutions are now obligated to conduct more comprehensive risk assessments, especially in cases involving high-risk countries. The directive also emphasises the need for ongoing monitoring of customer transactions, ensuring that any deviations from established patterns trigger timely investigations. These heightened due diligence measures are designed to proactively identify and mitigate the risks associated with money laundering activities.
- Harmonisation of criminal offences and sanctions
To further harmonise anti-money laundering efforts across the European Union, the 6AMLD standardises criminal offences and sanctions related to money laundering. Member states are required to establish consistent penalties for offences, fostering a more uniform and effective legal framework. This harmonisation not only simplifies cross-border cooperation but also serves as a deterrent, sending a clear message that money laundering will be met with severe consequences.
The UK’s Economic Crime and Corporate Transparency Act (EECTA) came into force on 26th October 2023, bringing in stronger powers to tackle money laundering and other illicit activity, and thereby reduce the attractiveness and viability of the UK financial systems being used by criminals through robust anti-money laundering processes.
Who does AML apply to and why is it important?
The estimated amount of money laundered globally in each year accounts for around 2% – 5% of GDP, or US$800 billion to US$2 trillion – and that’s a conservative estimate. Money laundering often accompanies activities like smuggling, illegal arms sales, embezzlement, insider trading, bribery, arms, and drug trafficking.
Anti-Money Laundering compliance is a fundamental requirement for regulated businesses, including banks and financial service institutions such as credit providers, payment solutions, capital markets and insurance organisations.
Impact of AML non-compliance
Failure to comply with AML laws and regulations can have serious consequences including fines, criminal proceedings, reputational damage and even sanctioning, all of which have serious implications for an organisations credibility, performance, and viability. The majority of enforcements centre on lack of adequate risk management systems, with common failings including:
- Insufficient onboarding intelligence – Know Your Customer (KYC), Customer Due Diligence (CDD) and enhanced due diligence (EDD)
- Inadequate Continuous Monitoring – inability to spot material changes that can breach regulatory and legal compliance, e.g., PEPs, UBOs, sanctions, insolvencies, debt and more.
- Lack of prompt action – inability to spot and immediately act on red flags such as changes to clients’ credit scores, adverse media, CCJs, Gazette notices, adverse director history, PEPs and sanctions lists and more.
- Failure to align process to policies – organisations must build a complete Anti-Money Laundering (AML) framework including eKYC, identify verification, PEPs, sanctions and adverse media screening, due diligence, enhanced due diligence and continuous due diligence/in-life monitoring.
What’s the difference between KYC & AML?
In the labyrinth of financial regulations, two acronyms often stand out as critical components of a robust compliance framework: KYC (Know Your Customer) and AML (Anti-Money Laundering). While these terms are interconnected and complementary, they serve distinct purposes in the realm of financial security. Let’s unravel the intricacies and explore the key differences between KYC and AML.
KYC: The Foundation of Trust
At its core, KYC, or Know Your Customer, is the initial step in establishing a relationship between a financial institution and its customer. KYC procedures are designed to verify the identity of individuals or entities engaging in financial transactions. The primary goal of KYC is to ensure that businesses have accurate and up-to-date information about their customers, enabling them to assess and manage risks effectively.
The KYC process typically involves gathering information such as personal identification, address verification, and other relevant details. Financial institutions use this information not only to comply with regulatory requirements but also to build a foundation of trust with their customers. By knowing who their customers are, businesses can tailor their services, mitigate potential risks, and provide a more personalized and secure experience.
AML: Safeguarding Against Illicit Activities
While KYC lays the groundwork for a trustworthy relationship, AML, or Anti-Money Laundering, takes the baton to ensure that financial institutions remain vigilant against illicit financial activities. AML is a broader framework of regulations and practices designed to detect and prevent money laundering, terrorist financing, and other financial crimes.
AML involves the implementation of policies, procedures, and technologies to monitor and analyse financial transactions for unusual or suspicious patterns. The aim is to identify and report activities that may be indicative of money laundering or other criminal behaviour. By deploying AML measures, financial institutions contribute to the global effort to combat financial crime and protect the integrity of the financial system.
Key Differences: KYC vs. AML
The primary difference between KYC and Anti-Money Laundering lies in their focus and objectives. KYC is customer-centric, concentrating on the verification and understanding of the individuals or entities involved in financial transactions. It establishes the groundwork for trust and effective risk management.
On the other hand, AML is transaction-centric, concentrating on identifying and preventing illicit activities within the financial system. It involves ongoing monitoring, risk assessment, and reporting mechanisms to combat money laundering and related crimes.
In essence, KYC is the gateway to establishing a secure financial relationship, while AML is the vigilant guardian that ensures the ongoing integrity of that relationship. Both are integral components of a comprehensive compliance framework, working hand in hand to create a secure and transparent financial environment.
Understanding the distinctions between KYC and AML is essential for businesses and financial institutions striving to navigate the complex landscape of regulatory compliance and financial security.
How can W2 By FullCircl help you comply with AML regulations and prevent financial crime?
We can help you meet every point of the compliance journey via our range of customisable AML solutions:
- Unify global sanctions, Politically Exposed Persons (PEP), and adverse media data through a single access point.
- Prevent money laundering at initial onboarding, through ongoing monitoring, and at point of payment transactions.
- Protect reputation and avoid fines without impacting the customer journey.
Our solutions, seamlessly integrated via API or web portal deliver:
- Access to multiple best-of-breed global AML data suppliers.
- Tailored alert matching to meet your individual compliance standards.
- Granular breakdown to enable a truly flexible risk-based approach.
- Filter alerts based on auto-remediation criteria – Ex-PEPS, country, entity matching and more.
- Fully integrated into onboarding, screening & case management tools enabling a single customer view.
- Complete alert management functionality and audit history to fulfil compliance requirements.