The term anti-money laundering, or AML, refers to the laws, regulations, and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income. Though anti-money laundering laws cover a limited range of transactions and criminal behavior, their implications are far-reaching.
What Is Anti-Money Laundering (AML)?
For example, AML regulations require banks and other financial institutions that issue a credit or accept customer deposits to follow rules that ensure they are not aiding money laundering. Other examples are manifold, and they cover all types of businesses and go far beyond financial services.
AML laws and regulations target criminal activities, including market manipulation, trade in illegal goods, corruption of public funds, and tax evasion, as well as the methods used to conceal these crimes and the money derived from them.
The main purpose of AML regulations is to prevent money laundering. Regulators around the world have published and are continuously publishing many pieces of legal work to achieve this goal, and companies are required to comply with these laws and regulations.
Anti-Money Laundering History
When it passed the Bank Secrecy Act (BSA) in 1970, the United States was one of the first countries to enact anti-money laundering legislation. The BSA was an early attempt to detect and prevent money laundering, and it has since been amended and strengthened by additional anti-money laundering laws. The Financial Crimes Enforcement Network is now the BSA’s designated administrator, with the mission of «protecting the financial system from financial crime abuses such as terrorist financing, money laundering, and other illicit activity.»
The global Financial Action Task Force was established in 1989 by a group of countries and organizations (FATF). Its mission is to develop and promote international money-laundering prevention standards. Shortly after the 9/11 attacks on the United States, the FATF expanded its mandate to include anti-money laundering and counter-terrorism financing.
Another important organization is the International Monetary Fund (IMF). Its primary goal, with 189 member countries, is to ensure the stability of the international monetary system. The IMF is concerned about the impact money laundering and related crimes can have on the financial sector’s integrity and stability, as well as the broader economy.
Anti-Money Laundering Objective
The goal of anti-money laundering is to discourage criminals from transferring illicit funds into the financial system. Criminals use money laundering to conceal the true source of their money, which has been obtained through criminal activity.
Why Is Anti-Money Laundering Important?
The amount of money laundered globally in one year is estimated to be 2% to 5% of global GDP, or $800 billion to $2 trillion – and this is a low estimate. Money laundering is frequently associated with illegal arms sales, smuggling, embezzlement, insider trading, bribery, and computer fraud schemes. It’s also common in organized crime, such as human trafficking, arms or drug trafficking, and prostitution rings.
Counter-financing of terrorism (CFT), which financial institutions use to combat terrorist financing, is closely related to anti-money laundering. Money laundering (source of funds) and terrorism financing are both addressed by AML regulations (destination of funds).
Aside from the moral imperative to combat money laundering and terrorist financing, financial institutions use AML tactics for the following reasons:
- Regulations require them to monitor customers and transactions and report any suspicious activity.
- They must safeguard their brand’s reputation and shareholder value.
- Avoidance of consent orders, as well as civil and criminal penalties that may be imposed for noncompliance or negligence.
- Costs associated with fines, employee and IT costs, and capital set aside for risk exposure are all reduced.
Financial Institutions Reactions to Anti-Money Laundering
Although financial institutions are required to comply with anti-money laundering regulations, this does not always imply that they agree with them. Many banks have recently expressed their dissatisfaction with anti-money laundering policies, believing that they are both costly and ineffective.
Millions of dollars are spent each year in Europe and America alone to try to regulate and stop money laundering. However, many people are beginning to believe that the current anti-money laundering systems are largely ineffective, and that the money spent on them is not worth the questionable results.
Given the importance of financial institutions in the world of financial crime, it is critical that they receive proper training on how to identify and handle money laundering. Almost every bank employee receives anti-money laundering training, and they are all legally required to report any suspicious activity. Furthermore, new anti-money laundering software is increasingly being used to detect potential criminal activity that bank employees may miss.
Anti-money laundering legislation entered the global arena shortly after the formation of the Financial Action Task Force. The FATF was in charge of developing most anti-money laundering standards and creating a framework for countries to follow. Following the implementation of this framework, the FATF began to systematically identify countries that lacked proper money laundering legislation. This «name and shame» strategy aided in motivating countries to change their legislation and begin properly enforcing existing policies. The FATF currently has 37 member countries.
In addition to the FATF, the United Nations Office on Drugs and Crime works hard to detect and prevent money laundering. This office maintains an informative website that provides facts and details about money laundering, as well as how to detect and prevent it. The UN Office on Drugs and Crime also provides software to aid in the prevention of financial crime, data collection, and analysis.
Final Thoughts
Anti-money laundering (AML) refers to all policies and laws that require financial institutions to monitor their clients in order to prevent money laundering. AML laws require financial institutions to report any financial crime they discover to the appropriate regulators.
Money laundering has become an increasingly common problem over the last several decades. Both financial institutions and governments are constantly looking for new ways to combat money launderers, and several anti-money laundering policies have been implemented to assist in this effort.
