What is anti-money laundering?
Fighting money laundering and terrorist financing contributes to global security, the financial system's integrity, and sustainable growth. Laws to combat money laundering and the funding of terrorism are designed to prevent the financial market from being misused for these purposes.
The European Union and many Countries adopted robust legislation to fight against money laundering and terrorist financing, contributing to those international efforts. Competent bodies ensure practical application of this legislation by reviewing the transposition of the plan and working with networks of competent authorities.
Firms must comply with the Bank Secrecy Act and its implementing regulations ("AML rules"). The purpose of the AML rules is to help detect and report suspicious activity, including the predicate offences to money laundering and terrorist financings, such as securities fraud and market manipulation.
The competent authority reviews a firm’s compliance with AML rules which sets forth minimum standards for a firm’s written AML compliance program.
- The program has to be approved in writing by a senior manager.
- It must be reasonably designed to ensure the firm detects and reports suspicious activity.
- It must be reasonably designed to achieve compliance with the AML Rules, including having a risk-based customer identification program (CIP) that enables the Bank to form a reasonable belief that it knows the true identity of its customers.
- It must be independently tested to ensure proper implementation of the program.
- Each Bank must submit contact information for its AML Compliance Officer.
- Ongoing training must be provided to appropriate personnel.
- The program must include appropriate risk-based procedures for conducting ongoing customer due diligence, including (i) understanding the nature and purpose of customer relationships to develop a customer risk profile; and (ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information, including information regarding the beneficial owners of legal entity customers.
In 1989, the Financial Action Task Force (FATF) was created to combat money laundering. The FATF organisation sets the framework for anti-money laundering (AML) policies and supervises countries to make sure that they comply. Individual countries also have supervisory schemes that oversee national institutions. The UN, World Bank and International Monetary Fund all have AML schemes.
Anti-money laundering is a framework for putting best practices into detecting suspicious activity. The easier it is for criminals to spend illegal money undetected, the more likely they will commit crimes in the future. As a result, AML regulations make “obligated entities” aware of red flags to watch out for and ensure that such institutions proactively monitor their clients’ activities. But who exactly are the “obligated entities?”
Obligated entities refer to institutions that encounter financial transactions, which money launderers could target. These include banks, payment processors, and gaming or gambling businesses. In the EU, the European Banking Authority sets guidelines and regulations on supervision. Anti-money laundering supervisors then monitor each institution to see how effectively they carry out their AML tasks.
Institutions have to comply with customer due diligence. The Anti-Money Laundering Directive (AMLD) is an EU-wide law that provides a framework for institutions. Transactions between “high risk” countries and transactions of €10,000 or more are carefully monitored. Suspicious activity is then reported.
How banking AML works
As the financial system's foundation, banks need a sharp eye to spot suspicious behaviour. Like all institutions, banking AML policies are shaped by the framework set by the FATF. Frontline employees are trained in anti-money laundering techniques and are legally required to report suspicious activity.
Banks may hire employees whose purpose is to boost anti-money laundering practices. These security experts are known as AML compliance officers. In addition, AML banking is supported by three key factors: identity checks, AML holding periods, and AML transaction monitoring software.
Specific institutions, such as banks, must follow Know Your Customer (KYC) processes. These are the steps that banks must take to verify the identity of their customers. Although anti-money laundering policies provide the framework, individual banks are responsible for their customers, and it’s their responsibility to flag high-risk transactions.
So what do banks verify? Know Your Customer policies require banks to verify the customer’s name, date of birth, address, and occasionally additional information, such as occupation. Banks typically ask customers to verify their identity with ID documents when opening an account. Banks have recently been using biometric identification, such as face or voice recognition and fingerprint scans.
AML holding period
Another tactic to help prevent money laundering is the AML holding period. This is a policy where deposits must stay in an account for a minimum of five trading days. Slowing down the process assists with anti-money laundering measures and allows more time for risk assessments.
AML transaction monitoring software
Many banks have millions of customers and oversee millions of transactions. With such a high volume, it’s impossible to monitor every single transaction manually. That’s where AML transaction monitoring software comes in—this technology allows banks and other financial institutions to monitor transactions daily or in real-time.
Such software combines different sources of information, such as the account holder’s history, risk assessment, and the details of individual transactions such as the total sum of the money, countries involved, and the nature of the purchase. Transactions can include cash deposits, wire transfers, and withdrawals. When a transaction is deemed to be high risk, it’s flagged by the system as suspicious activity.
We follow the Wolfsberg Group Principles.
The Wolfsberg Group is an association of thirteen global banks that aims to develop frameworks and guidance for managing financial crime risks, particularly Know Your Customer, Anti-Money Laundering and Counter-Terrorist Financing policies. The Group came together in 2000, at the Château Wolfsberg in north-eastern Switzerland, in the company of representatives from Transparency International, including Stanley Morris and Professor Mark Pieth of the University of Basel, to work on drafting anti-money laundering guidelines for Private Banking. The Wolfsberg Anti-Money Laundering (AML) Principles for Private Banking were subsequently published in October 2000, revised in May 2002 and again, most recently in June 2012.
Transaction Monitoring Systems (TMS)
Transaction Monitoring Systems (TMS) are essential tools used by financial institutions and regulatory bodies to oversee and analyze transactions happening within the banking system. They are designed to identify potentially suspicious or fraudulent activities that may indicate money laundering, terrorism financing, or other financial crimes.
Here's how they typically work:
- Data Collection: TMS gather data from various sources within the bank's system. This data includes but is not limited to transaction details such as the amount, date and time, parties involved, and the nature of the transaction.
- Risk Profiling: The TMS uses the collected data to create risk profiles for customers and transactions. These profiles are based on a variety of factors, such as the customer's history, the types of transactions they typically conduct, and their geographic location.
- Rule-Based Monitoring: The system applies a set of pre-defined rules to each transaction. These rules are designed to flag potentially suspicious activities. For example, transactions above a certain value might be flagged, or multiple transactions in a short period of time.
- Anomaly Detection: In addition to rule-based monitoring, many systems also use statistical models or machine learning algorithms to identify anomalies – transactions that deviate significantly from the norm. This could include unusual patterns of transactions or activities that don't match the customer's typical behavior.
- Alert Generation: When a transaction is flagged as potentially suspicious, the system generates an alert. This alert is then reviewed by a compliance officer or a team of investigators within the bank.
- Investigation and Reporting: If, upon review, the transaction is deemed suspicious, the bank will conduct a more thorough investigation. Depending on the outcome of this investigation, the bank may be required to file a Suspicious Activity Report (SAR) with the relevant regulatory authorities.
- Continuous Learning: The feedback from the investigation process is used to continually improve and update the rules and algorithms used by the TMS, enhancing its ability to accurately detect suspicious activities in the future.
By utilizing a Transaction Monitoring System, banks can better manage their risk exposure, ensure compliance with regulations, and help combat financial crimes.