In today's globalized financial landscape, the battle against illicit money flows has become an urgent priority. Money laundering, the process of disguising the origins of illicitly obtained funds, poses significant threats to the integrity of financial systems worldwide.
Anti-money laundering regulations require businesses to monitor customer activity and report suspicious transactions. The goal of AML is to make not only money laundering but also terrorist financing and evasion of sanctions, if not impossible, at least quite a challenging task.
Anti-money laundering (or AML) compliance presents a set of measures required by the anti-money laundering regulations, which involved businesses must apply. Today we’ll review the basics of compliance put in place within the EU.
The compliance across the European Union is shaped by the 4th EU AML Directive of 2015, the 5th EU AML Directive of 2018, and the just-approved 6th EU AML Directive. Once the first two outlined a shape of requirements, the 6th Directive made these rules stricter in order to close existing gaps in combating targeted illegal practices.
Under the 6AMLD, there are three points of consideration — criminal activities themselves, property acquisitions in criminal ways, as well as the laundering of these properties. It also establishes the European Anti-Money Laundering Authority (AMLA) to supervise compliance and investigate its possible breaches.
EU countries have implemented the requirements of the EU AML Directives into their own national laws. For example, in Germany, the German Money Laundering Act (GwG) incorporates the standards set by the EU Directives. Even though different EU members have formally different legal implementations of AML, all of them are based on the same principles stated in the above-mentioned AML Directives.
In the UK, the Money Laundering, Terrorist Financing and Transfer of Funds Regulations of 2017 (MLR 2017) transposes the 4th EU AML Directive into law. The UK has also polished its AML/CFT compliance framework over time, with its first anti-money laundering legislation introduced in 1987 and the most recent Anti-Money Laundering and Countering the Financing of Terrorism Code coming into effect in 2019.
In the United States, the Bank Secrecy Act of 1970 (BSA) requires financial institutions to monitor customer activity and report suspicious transactions as a way to combat money laundering. The Patriot Act of 2001 further strengthened AML regulations in the USA. It requires regulated businesses to establish comprehensive compliance programs that incorporate existing policies, a compliance officer designation, employee training, suspicious activities monitoring, as well as customer identification and validation.
Briefly, AML compliance helps companies avoid legal penalties for non-compliance and mitigate the risks of their services being used for criminal activity. As compliance within the EU is based on the same goals, principles, and measures, it is worth it to identify them.
A successful compliance program incorporates several key elements:
Risk assessment to understand the exposure of specific businesses to money laundering and terrorism financing.
Internal policies, procedures, and controls must be established and maintained in order to meet the AML compliance requirements effectively and efficiently.
AML compliance officer designation is aimed at choosing an employee who will own the AML compliance program within the company. This means an officer is accountable for establishing and keeping the policies and procedures up-to-date with regulations, as well as for their appropriate implementation.
An independent audit is a powerful approach to assessing the efficiency of your compliance program for finding and eliminating gaps. Within the company where the designated compliance officer usually has the highest AML-related awareness, an independent audit is the best way to identify if the decision to designate this person was right.
Customer due diligence to identify and assure the customer person for understanding the purpose of the business relationship before their start. In high-risk situations, businesses require to conduct enhanced due diligence covering additional measures.
Know Your Customer (KYC) practice means ensuring that businesses know their customers’ real identities.
Checks of politically exposed persons (PEPs) include a set of measures to detect PEPs, members of their families, and other persons closely associated with PEPs.
Monitoring potentially suspicious transactions is seeking signals that raise suspicion for specific transactions.
Using technological advancements like AI-based tools can drastically increase the efficiency of transaction monitoring, detecting suspicious activities, and conducting due diligence.
Suspicious activity reporting (SAR) contains clearly defined workflows on how to report activities indicating money laundering or terrorist financing to the relevant Financial Intelligence Unit (FIU).
Rules of record keeping require businesses to keep a record of due diligence, transactions, and measures applied for a minimum of five years.
Global standards adherence means the corporate compliance program should take into account not only national but also global or regional compliance standards in force.
Staff training is aimed at ensuring all the employees understand the compliance requirements and can detect suspicious activities within their areas of responsibility.
Third-party reliance and risk management cover the context of the possible involvement of third parties for the purposes of due diligence. It is worth mentioning that the legal responsibility in such cases remains fully on the company itself. That’s why risks associated with third parties must be also managed properly by conducting third-party due diligence and monitoring their activities.
Exit strategy is an important part of the compliance program, once defines a procedure for the termination of relationships with customers whose behavior is unacceptably risky.
As we already said, AML compliance protects companies from significant legal, financial, and reputational risks. And these risks are too significant for not mitigating them. Failure to comply with AML regulations can lead to the following consequences:
Legal penalties for non-compliance include quite severe civil and criminal consequences. Among them are fines and legal prosecution, and, in some cases, even imprisonment for executives involved. Both EU and US regulators actively investigate and pursue legal enforcement against companies badly managing compliance.
The financial losses category covers only financial fines and legal fees for AML non-compliance. Aside from them are the potential financial losses from lost customers and business opportunities.
Regulators may prohibit certain types of transactions for non-compliant companies, force them to terminate any risky relationships, or even revoke their licenses. This usually happens in the case of major AML failures.
Reputational damage is an intricate but severe consequence of money laundering episodes that spark public scandals. In such cases, losses of trust and reputation result in financial losses or even the inability to continue to do business further.
Systemic risk is a complex of overarching threats not for the business itself but for the financial system, related industry, or national security. Such risks might arise in case of widespread AML breaches. They result, for instance, in emerging of organized crime and terrorism.
Summing up, the resources a specific business needs to set and maintain proper compliance is nothing compared to the potential costs of non-compliance, especially in case of any incidents happening.
To follow AML compliance effectively and efficiently, companies must establish their own compliance programs, covering key elements of compliance and taking into account both internal and industry-wide contexts. It’s also important to keep abreast of game-changing technologies like AI-powered detection tools.