AML Regulations in 2024: What Businesses Need to Know

Day by day, financial crime is increasing; this tendency is expected to continue in the next few years. The Nasdaq research claims that over 3 trillion dollars in illegal money is going to flood the world economy in 2023 alone. Moreover, the United Nations Office on Drugs and Crime (UNODC) projects that 2 to 5% of the world’s GDP is being laundered annually. For the whole economy, as much as for the individual businesses, they are shockingly high figures.

Governments stop money laundering (ML) through protective regulatory AML and KYC policies. Every financial company must embrace these rules. Consequently, businesses must learn how to convert these complex regulations into comprehensible and simple anti-money laundering policies and practices. Here, an AML screening solution is needed to prevent fraudulent activities.

Why is it essential to have AML regulations

A good AML regulation is essential as it spells out the steps and controls that have to be used to stop deals and customers that seem sketchy. It also prevents companies from being fined heavily by the government if ML is found during an audit.

An AML program prevents money laundering and funding terrorism by monitoring transactions, checking out customers, and reporting suspicious activities. Companies must develop an AML strategy that handles new and complex attempts to hide money, as failure to do so risks losing money and their reputation.

Strong AML policies need to be in place for financial institutions (like banks) and places where money laundering is more likely to happen (like casinos, tax experts, forex traders, money service companies, and more). Whether or not they’re needed depends on the country and its AML rules.

What is AML screening

AML screening is a crucial part of the AML compliance program, ensuring that current or potential customers are not on sanctions lists, PEPs, wanted or banned lists, or bad media data. This reduces the risk of potential misconduct.

Objectives of AML screening

AML screening objectives include:

• Conduct risk assessment
• Prevent sanctions violation
• Protect against regulatory fines

Businesses want banks and other financial institutions to check out high-risk customers, especially those on the list of politically exposed people (PEPs), so they don’t commit financial crimes like corruption and bribes and so the businesses don’t have to do business with them.

Effective AML screening methods

Technology has made manual monitoring a waste of time and money for corporations. New technologies make AML screening faster and easier for enterprises. These technologies improve verification accuracy by accessing global regulatory databases, including watch lists, PEPs, and sanctions data. These technologies enable full risk control for your firm and help you meet AML standards.

AML screening platform provides continuous monitoring, rule-setting, thorough anti-fraud prevention, and worldwide AML screening tools. It guarantees business and revenue protection by analyzing the substance and characteristics of the AML policy, which needs to represent the size, kind, complexity, and geographical dispersion of the client and service base.

An effective AML checklist

Most companies satisfy the maximum AML compliance criteria, but they leave gaps that make compliance less effective. With evolving worldwide AML patterns, efficient AML screening is essential. A successful AML compliance checklist might provide long-term advantages to your organization.

What exactly is an AML policy

An AML policy is a set of measures designed to prevent illegal money laundering and terrorist financing. Financial firms must implement it, and regulatory bodies oversee it. These policies provide a framework for establishing systems and controls and determining a company’s AML risk appetite, limits, acceptance criteria, employee rights, and qualification levels.

The AML policy needs to be signed by the top managers of the company and looked over often.

The AML policy functions similarly to an AML program, and in some contexts,  these terms have to be used instead of each other.

3 stages of money laundering

The money laundering process is divided into three distinct stages:

Stage 1: Placement – This is the process of transferring monies obtained through illicit activity into the lawful financial system.

Stage 2 – Layering – This is a strategy for concealing the source of these funds by routing the money via multiple bank transactions.

Stage 3 – Integration or extraction – This is the method for returning the money in a way that does not raise suspicion. This stage is referred to as integration or extraction.

International regulations on AML

The Financial Action Task Force (FATF) is a global watchdog for money laundering and terrorist financing, setting global standards for local AML regulations. National regulating bodies vary by country, such as BaFin in Germany, FINTRAC in Canada, and MAS in Singapore.

Here’s a step-by-step guide based on the FATF, the US Bank Secrecy Act (BSA), and the EU’s 4th Anti-Money Laundering Directive (AMLD4).

Step 1: Drafting AML policy statement

• Defines money laundering and terrorist financing
• Highlights policy necessity
• Commits to customer understanding
• Advocates for regular audits
• Defines the company’s culture and values
• Discusses reasons for staff AML training

Step 2: Appointing a money laundering reporting officer (MLRO)

Businesses must appoint an MLRO to oversee compliance with AML regulations, receive suspicious activity disclosures, and decide on external suspicious activity reports (SARs). The MLRO needs to have sufficient seniority within the firm, such as senior management. The MLRO’s responsibilities include:

• Securing active senior management support
• Ensuring adequate resources
• Maintaining independence of action
• Having access to information
• Producing an annual report

Step 3: Conducting customer due diligence (CDD)

• Collecting and verifying client information
• Identifying and assessing potential criminal risks
• Identifying and verifying the beneficial owner’s identity
• Assessing the purpose and intended nature of the business relationship

CDD measures should be implemented in the following situations:

• Developing new business relationships
• Occasionally observed transactions
• Suspected money laundering suspicion
• Unreliable documentation
• Ongoing monitoring obligations.

Companies need to regularly monitor customer relationships and update their CDD information, determining the extent of measures based on customer type, transaction, or business relationship. They need to determine if a customer requires simplified, customer, or enhanced due diligence. Moreover, companies need to be aware of changes in sanctions regimes using automated systems and verify if onboarding someone targeted by financial sanctions legislation is allowed.

Step 4: Verifying client identity

• Specify the documents and personal data required for client identity checks.
• Mention the information verification methods, including document collection, biometrics, digital identity, database searches, and verification software or manual methods.
• Outline the time limit for client verification and its restriction policy on transactions involving unverified accounts
• Suggest measures to be taken if a client cannot be verified, such as restricting accounting opening, limiting transactions, and blocking users.
• Highlight the risks associated with working with Politically Exposed Persons (PEPs), who are more likely to aid in money laundering, racketeering, and financial fraud.
• The policy should also outline restrictions on business relationships with high-risk or sanctioned countries and industries.
• State the procedure for outsourcing identity verification to a third party.

PEP definitions usually referred by FATF:

• Senior government official
• Prominent politicians from a certain party
• Executive of a government commercial enterprise
• Close family members of a government official
• Publicly-known associate of a financial institution

Step 5: Send a report to the financial intelligence units (FIU)

When companies get calls for information from law enforcement or financial intelligence units, they must specify how they will respond.

Step 6: Give the information to banking companies

AML policies need to spell out a safe and secret way for financial institutions to share AML data with each other without allowing data leakage. The goal is to find and stop other places where money is being laundered.

Step 7: Fill out records of strange behavior

AML rules need to spell out the details needed for Suspicious Activity Reports (SARs) and when they need to be sent. In this case, the BSA gives you 30 days to make a claim before they fine you.

Step 8: Train and create awareness

As long as workers follow the AML policy, they must know how to deal with money laundering. Conduct regular training sessions for staff to help them:

• Understand dangers of ML/TF rules
• Understand MLRO’s duties
• Handling potential ML/TF transactions

Step 9: Maintain records

For auditing reasons, this refers to the steps that are taken to keep track of all AML-related documents and processes. Also, businesses need to say how long they will keep these records. In the case of the BSA and AMLD4, it’s 5 years.

Step 10: Regular audits

• Establish an independent internal audit function
• Evaluate effectiveness of current AML policy
• Make policy recommendations
• Monitor compliance with recommendations

Maintaining compliance is critical in 2024. Companies need to welcome sophisticated AML screening solutions if they are to negotiate the changing regulatory scene. Giving compliance first priority helps your company and builds a competitive advantage. Stay educated, stay compliant, and make sure your company grows despite strict AML rules.