HSBC was charged for failing to respect anti-money laundering regulations. The bank processed money coming from drug trafficking and sanctioned lists. They reached a settlement of almost $2B in the US and were fined an extra $85M in the UK. This happened because they didn’t have any proper AML regulations in place — read on to make sure you don’t make the same mistake!
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What is Anti-Money Laundering?
Anti-Money Laundering Definition
Before diving into Anti-Money Laundering (AML), let’s take a moment to talk about money laundering.
Money laundering is the act of turning money obtained illegally into legitimate money. This process is also called cleaning money, taking the money from “dirty” to “clean”.
Contrary to what Hollywood has depicted, this activity has nothing to do with putting bills into the washing machine: money laundering AML is all about disguising the origin of some money (cash or electronic) so it can be used in the financial system without attracting the attention of law enforcement agencies.
This can be done through accounting or corporate fraud, or other financial operations. Laundering money is a financial crime that has terrible implications for Society at large, financing terrorism and human and drug trafficking.
That’s why anti-money laundering laws exist in the vast majority of countries. AML initiatives are what governments and financial institutions (and those who work with them) set up so money laundering activities don’t happen.
AML is about:
- Achieving compliance with regulatory authorities.
- Monitoring transactions.
- Reporting suspicious-looking activities.
A Brief History of Anti-Money Laundering
Every legal and finance professional nowadays has heard about AML laws regulations. But do you know where they originated?
Here’s a global recap of the most important anti money laundering laws:
- 1970: creation of the Bank Secrecy Act (BSA) in the United States. It was the building block of AML laws, requiring financial institutions to cooperate with government agencies to fight money laundering. Other AML laws have since supplemented it, and the Financial Crimes Enforcement Network is the one administering it.
- 1986: the Money Laundering Control Act in the US was established to recognize money laundering as a federal crime in and of itself, regardless of the criminal activity that generated the money.
- 1990: the EU created its first anti-money laundering regulation, which has been updated regularly since.
- 2001: the Patriot Act was enacted after 9/11. It built upon the BSA to integrate the fight against terrorist financing. It also introduced stricter requirements for financial institutions, which now have AML compliance programs with enhanced due diligence.
- 2002: the Proceeds of Crime Act (POCA) in the UK gives a way to recover proceeds from crimes committed in the UK. Although the UK left the EU, it still follows its AML acts and the FAFT rules.
- 2020: The 6th Anti-Money Laundering Directive (6AMLD) was adopted in the EU. It clarified and increased the scope of the pre-existing AML regulations, including tougher sanctions, increasing cooperation between countries, and the possibility for legal entities to be criminally liable.
AML laws are always evolving. Governments across the world are trying to regulate ever-changing financial markets, such as the rise of instant payment methods, cryptocurrency, and the development of AI.
How does anti-money laundering work?
AML is a set of laws, rules, and processes that stop money generated from illegal activities from entering the financial system.
Anti Money Laundering initiatives are preemptive and detective. They are:
- Stopping money laundering from happening.
- Detecting and reporting suspicious activity to the relevant countries’ authorities.
This isn’t a simple job, however, as money laundering takes many different forms:
- Corruption,
- Tax evasion,
- Accounting fraud,
Etc.
Organizations, public and private, have internal AML programs to combat money laundering. They’re set by local and international authorities such as:
- Governments,
- The International Monetary Fund (IMF), which gathers almost 200 countries.
- The Financial Action Task Force (FATF), created in 1989 to develop international standards against money laundering.
Companies have to implement the relevant regulations depending on where they’re based and do business. Large international organizations must adhere to regulations from various countries, turning AML compliance into a full-time job (for many people).
Who is concerned by AML?
The short answer is that every legal entity is concerned by AML. The longer answer is more nuanced, but amounts to the same: today every organization needs to comply with AML regulations in the country (or countries):
- They are based in.
- They have their banks and assets.
- They do business with.
- Whose currency they deal in.
For example, a French company with banks in the US will have to comply with both US and EU laws.
People and entities managing funds and assets are the ones who are directly targeted by AML. Financial institutions, accountants, auditors, financial professionals, and asset managers all fall under this umbrella.
They need to respect AML regulations, and they do so by asking their clients to comply with them as well.
Why is Anti-Money laundering important?
AML is important for one main reason: money laundering’s damage to society. It’s estimated that 2-5% of the worldwide GDP every year is money that has been laundered. This amounts to $800 billion to $2 trillion (a conservative estimate).
Money laundering comes from illegal activities like drug dealing, smuggling, embezzlement, insider trading, corruption, and financial crimes.
It’s also connected to organized crimes like human and child trafficking, and the financing of terrorism, which is why AML and CFT (Combating Financing Terrorism) work hand in hand.
Governments have set up AML regulations that organizations must comply with to ensure this is a priority for all of society.
Today, financial institutions and their clients (ie every individual and company) have to comply with such regulations. AML becomes imperative to everyone for:
- Being compliant: adhering to the regulations in vigor.
- Protecting themselves from reputational loss.
- Saving money on fines, financial crime, and capital for risk exposure.
What are the main AML requirements?
To be compliant with anti-money laundering regulations, organizations big and small must have an internal AML program.
Here are some of the requirements of this framework:
- Applying the Know Your Customer (KYC) for customer diligence and Know Your Suppliers (KYS) methods to identify who they do business with.
- Doing their supplier and customer due diligence and identifying Ultimate Beneficial Ownernship (UBO) of their third parties to ensure their funds don’t go to businesses or individuals on sanctions lists.
- Complying with sanctions and watch lists (such as PEP).
- Keeping a record of their transactions and clients’ data.
- Reporting any suspicious banking activity to the relevant authorities.
- Proving that they have, as a business, made sufficient effort to avoid money laundering activities.
How can you make your business compliant?
Now that you know the theory about AML, let’s wrap it up into concrete measures you can implement in your company to be compliant.
These measures are examples of what organizations have set up and are by no way exhaustive, but a good starting point.
Employee training
Your employees are your first line of defense against cyber fraud and money laundering (the former enabling the latter). That’s especially true for your teams handling cash, payments, and your financial and accounting departments.
Offering regular and ongoing training is important so they know how to recognize fraud and detect suspicious-looking activity which could lead to money laundering. In 2023, 96% of US companies were targeted by at least one fraud attempt!
With increasingly elaborate scams through AI and social engineering, it’s important to ensure your employees know how to accurately assess and report cyber risks. Having a clear reporting process will help raise the alarm ASAP before anyone has a chance to tamper with your accounts or assets.
Risk assessment
Risk assessment and due diligence are key points of AML. Identifying your weaknesses and vulnerabilities is the first step to setting up protective measures against them.
Make sure you know exactly who you’re working with, and that your teams carry out enhanced Customer Due Diligence CDD before starting to work with a new client or with a new supplier (Supplier Due Diligence).
But due diligence doesn’t stop here! It needs to be ongoing throughout your relationship, as your supplier’s UBO or information could change without you being the wiser.
Secure processes
Reviewing your internal processes is key to preventing money laundering from happening. This goes for your processes when dealing with third parties too.
Adopt strong security measures, using the segregation of duties so no one employee has full responsibility for tasks like payments or attributing contracts. Internal fraud and money laundering often go hand in hand.
Make sure that you always know who you’re paying by using anti-fraud software like Trustpair.
Internal controls
Processes are only good so long as they’re respected. And we all know that there is a real possibility that employees or managers don’t fully respect them.
That’s where internal controls and detective controls come into play. Nominate a department or a money laundering compliance officer that will make sure your Anti Money Laundering program is respected throughout your company.
Ideally, you want to go even further by ensuring your clients and suppliers also adhere to AML regulations — something that’s often discussed when negotiating contracts.
Anti-fraud software
Last but not least: using anti-fraud software ensures that no financial fraud and money laundering happens in your company.
With Trustpair, you can track all the information you need into one centralized dashboard. At a glance, you can see who your supplier is, and ensure that they really are who they say they are.
This is especially handy for overseas suppliers, whose bank accounts and identity are harder to verify. Our account validation feature makes this effortless by automatically checking their credentials — including their names, bank account numbers, and the match between both.
Our software solution blocks any suspicious transaction before it is sent. We secure your payment chain from end to end, making your team’s job more secure and efficient.
Trustpair helps you be compliant with the main AML regulation and optimize your whole B2B payment process.
Key Takeaways:
AML regulations are here to fight money laundering terrorist financing. Failing to comply with them results in fines and reputational losses. The best way to protect yourself against money laundering is to use the anti-fraud software Trustpair.
