What is Anti-Money Laundering?
Money laundering is a type of financial crime. It involves disguising the origins of illegally obtained proceeds so that they appear to be legitimate – “laundering” them from dirty to clean, in other words.
Money laundering is often associated with activities such as arms sales and smuggling, or corporate crime such as insider trading, bribery, or embezzlement. There is also a strong link with terrorist financing.
Anti-Money Laundering (AML) refers to the laws, regulations and procedures performed to prevent criminals disguising illegally obtained funds as legitimate income. This involves the monitoring and reporting of suspected customers and transactions. Financial institutions and other businesses in many countries have a legal obligation to follow directives for doing this. For example, financial and insurance institutions are obliged to check their customers according to "Know Your Customer" (KYC). This involves legitimation and identity verification.
Money laundering remains a widespread problem globally. The overall level of activity is hard to measure – but according to the United Nations, it accounts for 2% to 5% of global GDP (around US$800 billion to US$2 trillion). In the UK, the National Crime Agency records over £100 billion of laundered money affecting the UK economy annually.
The three stages of money laundering
Money-laundering is the process of acquiring money illegally and turning it into clean, legal tender. This typically has three main stages. In reality, these stages may overlap or be repeated.
- Placement. This refers to placing the illegally obtained "dirty "money into the financial system. Funds are moved from their source into a legitimate financial system.
- Layering. The second stage involves creating a complex network of transactions and records for the movement of money. This often involves offshore techniques. Doing this will obscure the sources and the audit trail and make it more difficult for authorities to detect.
- Integration. Finally, the money is absorbed or integrated into the economy. This now legal tender is reunited with its original owner in what appears to be a legal holding.
What is the process of money laundering?
Money laundering can be extremely complex, involving multiple individuals and transactions. Based around the three stages of placement, layering and integration, the process can involve the following:
- Placement involves many different methods to introduce money into a legitimate financial system. These include blending with legitimate funds from legal sources, invoice fraud (typically involving over-invoicing or phantom services), breaking funds into smaller amounts with multiple accounts or transactions, and physical carriage of cash across borders.
- Layering techniques to disguise any trail include conversion between money and stocks or other financial instruments, moving money between countries, and investments in shell companies.
- The final integration stage often involves investing the money into areas such as property, jewelry, or high-priced commodities. False invoicing may be used to over-value goods.
Anti Money Laundering regulation and control
Anti-money laundering initiatives increased globally following the formation of the Financial Action Task Force (FATF) in 1989. It was established to develop international standards to tackle money laundering and promote implementation in different countries. The International Monetary Fund (IMF) is also involved in this.
Anti-money laundering laws are implemented by many countries, often based on the FATF guidance. They usually require banks and other financial institutions to monitor activities and report suspicious transactions.
In Europe, these are implemented through the Anti-Money Laundering Directive (AMLD). This has developed through several iterations, most recently launching the sixth AMLD in June 2021. In the UK, activity is governed by several acts, primarily the Proceeds of Crime Act 2002.
What is the difference between Anti Money Laundering and KYC?
Anti-Money Laundering (AML) and Know Your Customer (KYC) are often discussed together, but there are critical differences.
KYC refers to the steps that financial institutions must take to verify customers' identities. AML is a much wider concept of regulatory processes that must be in place, including monitoring and checking activity and transactions.
Learn more about AML with our Handbook FinTech Regulations 2020.