What is anti-money laundering?
In 1989, the Financial Action Task Force (FATF) was created to combat money laundering. The FATF organization sets the framework for anti-money laundering (AML) policies, and supervises countries to make sure that they comply. Individual countries also have their own supervisory schemes that oversee national institutions. Globally, the UN, World Bank and International Monetary Fund all have AML schemes in place.
Anti-money laundering is a framework for putting best practices into action in order to detect suspicious activity. The easier it is for criminals to spend illegal money undetected, the more likely they are to commit crimes in the future. As a result, AML regulations make “obligated entities” be aware of red flags to watch out for, and makes sure that such institutions proactively monitor their clients’ activities. But who exactly are the “obligated entities?”
Obligated entities refers to institutions that encounter financial transactions, which could be targeted by money launderers. 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 individual 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 a EU-wide law that provides a framework for institutions. Transactions between “high risk” countries and transaction amounts of €10,000 or more are carefully monitored. Suspicious activity is then reported.
How banking AML works
As the foundation of the financial system, banks need a sharp eye to spot suspicious behavior. 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, are required to 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 own 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. More recently, banks are 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 to take place.
AML transaction monitoring software
Many banks have millions of customers, and oversee millions of transactions. With such a high volume, it’s impossible to manually monitor every single transaction. That’s where AML transaction monitoring software comes in—this technology allows banks and other financial institutions to monitor transactions on a daily or real-time basis.
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 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 which aims to develop frameworks and guidance for the management of financial crime risks, particularly with respect to 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.