Stamping out money laundering is more than a matter of catching bad actors red-handed. Money laundering is closely related to other forms of serious and organized crimes. It’s also used to fund terrorism. The United Nations Office on Drug and Crime estimates that the total value of laundered finances is between 2% and 5% of the global GDP. That’s around $800 billion to $3 trillion annually.
Anti-Money Laundering Frameworks
Wrapping your head about a clear AML meaning isn’t enough to really understand how financial institutions and government organizations are combating money laundering. For that, you’ll need a closer look at AML frameworks.
Anti-money laundering (AML) frameworks are sets of rules, regulations, and practices established by governments and international organizations to prevent and combat money laundering and the financing of terrorism.
These frameworks vary from country to country; however, some similarities make it possible to identify money laundering. To combat laundering, frameworks typically include the following elements:
Legal Frameworks: AML frameworks begin with laws and regulations that criminalize money laundering and require financial institutions to establish AML programs.
Customer Due Diligence (CDD): Financial institutions must identify and verify their customers’ identities to assess the risk of money laundering. This form of enhanced due diligence is applied to high-risk customers.
Suspicious Activity Reporting: Financial institutions must report suspicious transactions to relevant authorities, helping detect and investigate potential money laundering activities.
Record Keeping: Records of customer transactions for a specified period must be maintained, making it possible to trace and investigate suspicious activities.
Training and Awareness: Employees of financial institutions are trained to recognize and report suspicious activities as part of AML compliance programs.
Risk Assessment: AML frameworks often involve risk assessments to determine the level of risk associated with customers, products, services, and geographic locations.
International Cooperation: Many AML frameworks emphasize international cooperation through organizations like the Financial Action Task Force (FATF), which sets global AML standards.
Penalties for Non-Compliance: Penalties are commonly used and applicable to institutions and individuals who fail to comply with AML regulations. Failing to meet compliance can result in liability to pay fines and legal consequences.
Technological Solutions: Most AML frameworks have evolved, increasingly incorporating technology, including automated KYC, data analysis, and artificial intelligence, to enhance detection and monitoring capabilities.
How can you tell if someone is laundering money?
Detecting money laundering involves recognizing certain red flags and suspicious behaviors. Here are some of the most common behaviors or activities that are typically associated with money laundering:
Unusual Transactions: Look for transactions inconsistent with a person’s or business’s normal financial behavior. This can include large cash deposits, frequent transfers to offshore accounts, or unusual patterns of incoming and outgoing funds.
Immediate Cash Withdrawals: Frequent and immediate cash withdrawals following large deposits can signal money laundering. Criminals may try to convert illicit funds into cash to obscure their source.
Secretive Customers: Suspicion may arise when customers avoid providing necessary information or are excessively secretive about their financial activities. Incomplete or false identification documents can also be a red flag.
Unusual Source of Funds: Investigate the source of funds used in transactions. If the origin is unclear or unrelated to the individual or business’s legitimate activities, it could indicate money laundering.
Rapid Movement of Funds: Watch for rapid and frequent transfers of funds between accounts or across borders. Criminals often move money quickly to make tracing more difficult.
Sudden Changes in Instructions: Be cautious if clients or customers frequently change their instructions or appear inconsistent in their financial decisions. Money launderers may adjust their tactics to evade detection.
High-Volume Transactions: High-value transactions that seem disproportionate to a person’s or business’s known income can be a red flag. Criminals may attempt to legitimize large sums of illicit money.
Complex Structures: Be wary of complex ownership structures, trusts, or shell companies that obscure the true beneficiaries of financial transactions. These may be used to hide the source of funds.
No Legitimate Business Purpose: Assess whether transactions have a legitimate business purpose or appear solely designed to move money without any economic rationale.
Inconsistent Documentation: Inconsistent or altered documentation, such as forged invoices or financial records, can signal money laundering. Verify the authenticity of the documents presented.
How do money launderers get caught?
Money launderers are often caught when institutions identify suspicious behavior. Today, with more sophisticated tracking systems, financial institutions can spot irregularities fast enough, in conjunction with state and federal organizations, to quickly stamp out criminal activity.
While anti-money laundering frameworks help identify potentially risky clients, technological advancements shouldn’t be underestimated. Financial institutions can leverage sophisticated CDD solutions, which help perform crucial due diligence by investigating and authenticating clients to prevent and deter laundering activities.
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