Anti-money laundering (AML) regulations are complex, but companies and financial institutions must comply to avoid steep penalties and reputational damage. This comprehensive guide provides extensive details on how to build an effective AML compliance programme.
What is AML Compliance?
AML compliance refers to the policies, procedures, and controls governments implement to detect, prevent, and report money laundering and terrorist financing. It encompasses all the tools and systems used to adhere to anti-money laundering laws and regulations, with rules tailored to individual needs.
Some critical elements of an AML compliance programme include:
- Appointing a Compliance Officer: Having a qualified professional responsible for managing AML compliance is the foundation of any strong programme.
- Know Your Customer (KYC) Procedures: Collecting client information to verify identity, nature of business, source of funds, and to assess risks.
- Transaction Monitoring: Ongoing monitoring of customer activity and transactions to identify suspicious behaviour.
- Regulatory Reporting (SAR, STR, CTR): Filing reports on transactions or attempted transactions and those that display red flags.
- Staff Training: Educating employees across the company about AML and their obligations.
- Record-Keeping: Maintaining documentation related to compliance processes and analyses.
- Independent Audits: Conducting unbiased periodic reviews of the AML programme to assess effectiveness.
- Updating Policies: Reviewing procedures regularly and adjusting to emerging risks and regulatory change.
The Importance of AML Compliance
The estimated scope of global money laundering is $1 to $2 trillion annually and can increase rapidly without AML compliance in place.
Ultimately, robust AML processes protect the integrity and stability of the financial system. Firms that fail to comply risk heavy fines, lawsuits, revocation of licences, and severe reputational damage, allowing financial crime to continue to threaten the world at large.
Understanding the 3 stages of Money Laundering
As money laundering allows criminals to conceal and legitimise illegal proceeds, understanding how laundering works can help identify suspicious financial activities. Let’s examine the three main stages of money laundering in greater depth.
Stage 1: Placement
The first step in money laundering is placement, which involves introducing “dirty money” – proceeds obtained through illegal activities – into the legitimate financial system.
Common placement methods include:
- Making cash deposits: This remains a prime technique despite the risks. Launderers make multiple smaller deposits below reporting thresholds at various bank branches. However, banks must report unusually large or frequent cash transactions.
- Co-mingling with legal funds: Launderers open legitimate businesses like restaurants, launderettes, or retail stores and mix illegal cash into revenues, justifying cash deposits.
- Smurfing: A cash amount is divided into smaller sums and distributed across many accounts, deposited by various “smurfs” to evade suspicion.
- Bank complicity: In some instances, corrupt bank insiders facilitate illicit cash deposits and ignore reporting duties, heightening risks to the financial system.
- Trade-based laundering: Misrepresenting trade transactions, like over- or under-invoicing imports or exports, allows transferring funds across borders
Placement enables launderers to surreptitiously introduce “dirty cash” into banks and accounts, although significant, unexplained cash deposits often trigger anti-money laundering alerts.
Stage 2: Layering
The second step is layering, where the funds are moved through a complex web of transactions to obscure the audit trail back to the illegal source.
Layering techniques include:
- Making multiple transfers across accounts and institutions, domestically or globally, spreading funds geographically.
- Wire transfers between shell corporation accounts. Fictitious businesses mask transfers.
- Overpaying invoices and returning the excess amount creates the illusion of legitimate transactions.
- Changing the money’s currency through trades or exchanges further dissociates it from the source.
- Purchasing high-value assets like gold, art, and real estate changes the form of the funds.
- Gambling the money and requesting casino payouts creates justification for large, suspicious transactions.
The more layers created, the harder it becomes to link funds back to the original illicit activity. Complex layering, therefore, is a hallmark of sophisticated money laundering schemes.
Stage 3: Integration
The integration phase places the laundered proceeds back into circulation in the legitimate economy, allowing criminals to use the funds openly.
Typical integration techniques used are:
- Transferring layered funds back into personal or business accounts, often to jurisdictions and entities with weak AML monitoring.
- Cashing out investments bought with laundered money, For example, spending extravagantly on stocks, bonds, and property.
- Spending laundered funds on yachts, luxury items, vacations, and property.
- Loans, mortgages, or business investments using shell companies that received layered funds.
After successful integration, the criminal origins of the money become near-impossible to find, and the launderers can now spend or reinvest the funds in further illegal activity.
Key reasons AML compliance is mandatory:
- Adhering to Legal Requirements – Laws like the UK’s Proceeds of Crimes Act 2002 (POCA) and SA’s FIC Act legally obligate companies to have AML programmes. Regulators impose stiff penalties for non-compliance.
- Avoiding Penalties – AML breaches can lead to several million-dollar fines, depending on the bank’s severity, size, and nature of lapses. Individual liability can also arise for managers and compliance officers.
- Protecting Reputation – Involvement in money laundering destroys customer trust and causes significant public relations damage. Media coverage of fines magnifies reputational risk.
- Preventing Crime – Stopping laundering helps combat severe crimes like drug trafficking, corruption, fraud, and terrorism, which depend on using the financial system to hide illicit proceeds.
- Upholding Governance Standards – AML compliance demonstrates a firm’s commitment to integrity, transparency, and ethical conduct. Responsible firms understand its importance.
Steps to Achieve AML Compliance
Combating the threats of money laundering and terrorist financing listed above is solidifying a robust, risk-based AML compliance programme tailored to your institution’s needs. It can be achieved by following this step-by-step guide.
1. Appoint a Compliance Officer.
A skilled and experienced professional as an AML Compliance Officer can lead your compliance programme, equipped with relevant qualifications, knowledge, and access to resources.
Appointing a Chief Compliance Officer who reports to the board demonstrates that AML compliance is taken seriously, and regulators will assess if this person has sufficient authority, resources, and skills.
The Compliance Officer’s responsibilities include:
- Developing AML policies, procedures and controls
- Overseeing client due diligence and onboarding
- Managing transaction monitoring systems
- Reviewing suspicious activity alerts
- Deciding which Suspicious Activity Reports (SARs) need to be filed
- Arranging necessary AML training for staff
- Keeping board and senior management informed on compliance updates
- Conducting risk assessments to identify and implement programme gaps
- Testing and updating the AML programme periodically
2. Conduct a Risk Assessment.
By performing a detailed risk assessment, you can identify and rate potential money laundering and terrorist financing vulnerabilities.
Prominent risk areas to evaluate are:
- Nature of customers and counterparties: Risk profiles based on type of business, location, reputation, nature of transactions, etc. Higher-risk clients like offshore companies, PEPs, casinos, or arms dealers require enhanced due diligence.
- Products and services: Anonymous or cash-intensive products, such as private banking or wire transfers, are particularly vulnerable. Always assess the risks of new products before launch.
- Channels and interfaces: Online, mobile, or telephonic channels pose higher risks than brick-and-mortar channels due to fewer physical interactions.
- Locations: Countries with lax AML laws or those involved in conflicts pose higher risks.
- Assess risks posed by new technologies, outsourcing practices, or acquisitions.
Risk assessments should be updated regularly to reflect changes in products, services, risks, and regulations.
3. Develop AML Policies and Procedures
Draft clear, written policies and procedures that align with your risk assessment and resources. It’s critical to cover all compliance processes, including:
- Client Due Diligence: Procedures for identifying clients, verifying identity, screening for PEPs and sanctions lists, establishing the purpose of the relationship and source of funds, etc. Enhanced checks are required for high-risk categories.
- Transaction Monitoring: The process for monitoring client activity to detect suspicious transactions should outline transaction types, threshold timeframes, and systems for monitoring.
- Reporting Suspicious Activity: Define the process for analysing alerts, determining which are reportable, and escalating potential SARs to the Compliance Officer for filing with the Regulator.
- Record Keeping: Policy for maintaining detailed records of client information, account activity, transactions, risk analysis notes, investigations, regulatory reports, etc., in compliance with data privacy laws.
- Staff Training: Role-wise training on AML obligations for employees across departments, including new staff onboarding
- Independent Audit: Guidelines for conducting internal and external audits by third-party experts to assess the functioning of the AML programme, including frequency of audits.
It is also essential to ensure AML policies are comprehensive and regularly updated to account for new risks, regulations, and the outcomes of audits or inspections. They need approval from the board and senior management.
4. Implement Customer Due Diligence (CDD)
Rigorous customer due diligence processes should be established during onboarding, with KYC review aligned with the risk level, as follows:
- Identify clients and verify their identity using reliable documents, data, and reference checks. Screen against PEPs, sanctions lists, and adverse media.
- Understand the nature of the client’s business, occupation, location, expected transactions, source of funds, and purpose of the relationship to develop a risk profile.
- Conduct ongoing monitoring of client activity against expected behaviour and update KYC details periodically, with enhanced ongoing CDD for high-risk clients.
- Ensure a risk-based approach; higher-risk clients should undergo enhanced CDD, and changes in the risk profile should be identified promptly.
CDD lays the foundation for spotting red flags. Poor KYC is often cited in penalties against banks and companies for AML lapses as regulators continue to assess the adequacy of CDD policies and procedures.
5. Monitor Transactions
Ongoing transaction monitoring and risk-based alert resolution are vital in detecting behaviour indicative of money laundering. Leveraging artificial intelligence, data analytics, and AML software can help monitor transactions across customer accounts in real-time and periodic batches:
- Define scenarios like volume spikes, threshold breaches, counts of cash transactions, wire transfers to high-risk countries, etc., that will generate alerts for review.
- Your custom alerts should involve risk elements such as the client, product, jurisdiction, and bank. High-risk scenarios should have stricter thresholds.
- Devise protocols for reviewing alerts and escalating potential SARs to the Officer with analysis notes.
6. Report Suspicious Activity (SAR)
It’s imperative to file timely, complete, and accurate SARs on transactions over set thresholds and those displaying red flags that cannot be reasonably explained. Document analysis is performed to identify suspicious transactions, anomalies, risk indicators, and investigations, and the following should be ensured:
- Include all key transaction parties, like the account holder, beneficiaries, counterparties, and locations.
- Maintain thorough records of all SARs filed, analyses performed, management notes, etc., to demonstrate rigour during audits.
- Review past SARs periodically for any follow-up required internally and, if necessary, with law enforcement.
7. Deliver Staff Training.
It is also helpful to guide staff on what constitutes suspicious activity and when to escalate it to management and/or the Compliance Officer for reporting, as well as provide the following training pointers:
- Conduct well-planned AML training programmes across departments covering AML laws, internal policies, and the latest regulations. Risks, flags and new typologies should be tailored by job role, for example, customer-facing, operations, product, technology, etc.
- Include assessments to check and ensure staff understanding. Track attendance and results, as failure to report can result in penalties.
- Repeat timeously to ensure staff are updated regularly with real examples relevant to the organisation.
- Have a senior executive or manager present the importance of compliance to reinforce a compliance culture.
8. Maintain Well-organised Records
Be sure to hold all client information securely, including transaction analysis reports, investigation notes, regulatory filings, and other documents that are relevant to demonstrating compliance:
- Organise records for easy retrieval – client files, regulatory filings, SARs, etc – digitise records to store them securely.
- Implement access controls and data security measures in line with internal information security policies.
- Store records for a stipulated duration based on jurisdictional laws (5–10 years typically) and destroy records irretrievably after the retention period ends.
With thorough documentation of compliance processes, the programme’s effectiveness can be successfully demonstrated to regulators.
9. Conduct Independent Audits
Both internal and external audits by qualified third-party consultants should be performed regularly to assess the adequacy of your AML programme and include the following areas to audit:
- Process walk-throughs – KYC, transaction monitoring, reporting, etc.
- Policy and procedure documentation
- Risk assessment methodology
- Resources, including staff skills and tools/systems used
- Reporting and record-keeping
- Testing of scenarios with sample client data
- Evaluation of training programmes
- Sample file reviews
- Governance and management oversight
Once gaps, deficiencies, and areas for improvement are identified during each audit, it’s easier to define corrective measures and follow up on their implementation.
10. Update for Regulatory Changes
As AML regulations evolve, staying up-to-date relies on monitoring regulatory notices, enforcement patterns, and industry events, as follows:
- Evaluate the impact of new laws or changes in existing rules on policies and procedures.
- Enhance monitoring scenarios and systems to align with emerging typologies.
- Increase vigilance for new high-risk threats.
- Test preparedness and implement preventive controls proactively before regulations take effect.
- Seek legal/consulting advice to clarify new obligations.
Keeping the AML programme concurrent with the compliance landscape is critical to avoiding penalties and reputational loss.
Money laundering constantly tries to stay one step ahead – and so must efforts to combat it. Adhering to the mandatory compliance programme steps is a great start, while innovative technology can take AML compliance to the next level.
RelyComply’s AI-driven software solution offers robust transaction monitoring, customer risk scoring, KYC/KYB workflows, sanctions screening, and more. RelyComply allows large and small companies to access enterprise-grade compliance capabilities tailored to individual requirements.
This article is intended for educational purposes and reflects information correct at the time of publishing, which is subject to change and can not guarantee accurate, timely or reliable information for use in future cases.