Understanding AML: An Overview

Understanding AML: An Overview

Money laundering, literally, means cleaning illicit profits in order to obscure their source and bringing it into use. Typical sources are drug and arms trafficking, financial fraud, corruption, piracy/ IPR theft, etc. and increasingly, the monies so obtained are becoming linked with terror financing. The idea behind laundering the money is to move it around, through various systems so many times that it becomes difficult to trace its origins and make it appear to have been earned from legitimate sources. According to anti-money laundering (AML) experts, the use of shell companies with partly legitimate business interests is rising.

According to the IMF, the amount of money laundered is between two and five percent of the world’s GDP, which makes it between $600bn and $1.5 trillion yearly. AML specialist Rohan Bedi claims that money laundering is the third largest industry globally after foreign exchange and oil. Further, the amount of money laundered in the Asia Pacific region alone is estimated by the Asia Pacific Group as $200-$250bn annually.

Experts have found that detection of such money is easiest at the stage when the money is first introduced into the banking system. For this reason, there is greater emphasis now being paid on Know Your Customer (KYC) processes and banks are increasingly compelled to invest in technology to support better KYC practices. Regulators in most developed countries are insisting on it and continue to view suspiciously organisations that do not follow these practices.

AML received a great impetus after the September 11 terror attacks and the US Patriot Act, since the links between money laundering and terror financing were more clearly revealed and the subjects are often treated in union. Further, high-profile money laundering and fraud concerning politically exposed persons via private banks have received much media and public scrutiny and the need for change has become evident. The Financial Action Task Force (FATF), global AML watchdog organisation, came out with a set of 40 principles in 2003 that included the Basel Committee recommendations on customer due diligence standards. FATF has specifically stated concerns about the potential for misuse of hawala or informal networks, wire transfers, non-profit organisations and cash couriers in the matter of terror financing.

KYC technology is gaining popularity in the US and UK, particularly transaction trend monitoring technology and KYC databases, since high transaction volumes prohibit manual screening. The idea is to help file more targeted SARs/ STRs (Suspicious Activity Reports or Suspicious Transaction Reports), which generate more hits to known or previously unknown offenders. Beyond a few Western nations, most countries are yet to fully adopt these expensive technologies, particularly in Asia, since they do not see the value in the process.

Mainly in the US and UK, banking institutions, particularly foreign ones, are being fined, not only for known instances of money laundering activity, but also for AML compliance lapses or holes in the system. Another big development is fining employees for negligence; top management in specific is being held personally accountable to the extent of facing civil charges. Greater engagement of senior management, in order to create a pervasive compliant culture is central to avoiding reputation damage.

Turning away a potential customer in today’s competitive banking environment may seem difficult to understand for institutions and governments in countries new to AML regulation but pressure from the US and UK, especially involving action against non-compliant MTOs, may bring some changes. Particularly in Asia, revenue from piracy-related activity is substantial and provides employment, or countries have yet to understand the impact of money laundering in the longer term. Another issue is the trend of trying to tap the unbanked – this raises a whole new level of KYC concerns, since establishing customer legitimacy may be difficult for this group and assumes a lower priority when trying to garner new customers in emerging markets.

Lack of understanding between different cultures leads to widely varying regulations and pursuing a potential AML scam across borders is vastly complicated. But with rising global trade and workers’ remittances, cross border cooperation and global standardisation of regulation is seen by the US and UK as pivotal to the AML struggle. Sooner or later, operators in the emerging world will have to realise that for full financial development and integration with the developed West, they will need to raise the compliance bar.