The Basics of Anti-money Laundering Laws and Regulations

1. Anti-money laundering is associated with a set of rules, regulations, and procedures that are formulated with the aim to prevent financing criminals from acquiring illegal funds under the pretense that the funds are part of supposedly legal business. AML laws tend to have a limited scope when it comes to transactions and criminal behavior but its implications are quite extensive. Know Your Customer or KYC is a part of the AML process that involves properly identifying clients to determine if they are legit and if they are involved in any form of illegal financial activities before a business transacts with them. The Basics of Anti-money Laundering Laws and Regulations Anti-money laundering refers to a set of regulations, laws, and procedures intended to prevent criminals from disguising funds that are illegally obtained as legitimate income. Anti-money laundering or AML laws cover a limited scope of transactions and criminal behavior, its actual implication is extensive. For instance, AML regulations require banks and other financial institutions that issue credit and debit accounts to follow certain rules to ensure that they are not aiding in any money laundering crime. A compliance officer is appointed to oversee anti-money laundering or AML policies, as this will regulate and ensure that the banks and other financial institutions are compliant with the rules. How Does AML Work? AML laws and regulations were created to target criminal activities that include trade in illegal goods, market manipulation, corruption of public funds, and tax evasions. The methods to conceal such crimes and the money acquired from these crimes are also the targets of the AML laws and regulations. Criminals try to launder money that they illegally obtained through drug trafficking. This way, the money cannot be easily traced back to them. In addition, one of the most common techniques used by such criminals is running illegal money through a legitimate cash-based business. The supposedly legal business can deposit the money and the criminals are able to withdraw the money as if it was not acquired illegally. There is also a tendency for money launderers to sneak cash into other countries to have it deposited. Money launderers sometimes invest the illegally acquired money through dishonest brokers who will ignore the rules in exchange for large commissions. Monitoring Client Accounts Financial institutions should monitor their client’s deposits and other transactions to make sure that they are not part of any money-laundering scheme. Banking institutions must ask the right questions to verify where large amounts of money come from. It is also essential that financial institutions report any suspicious activities and transactions made by the clients and report any cash transactions that exceed the maximum rate. Banking institutions should not be the only ones aware of the AML laws and comply with them. They should be able to inform their clients and make sure that the clients are aware of such rules and regulations.

2. When there is a suspected money-laundering scheme, an investigation is conducted by law enforcement agencies. The investigation will involve scrutinizing the financial records for suspicious activity or any inconsistencies. According to today’s regulations, extensive records should be kept when it comes to every significant financial transaction. Know Your Customer The notion ‘Know Your Customer’ or KYC has a very important meaning in the business industry. This process is what most businesses do to verify the identity of their clients before they start doing business with them. In addition, KYC also references the regulated bank practices, which can be used to verify their client’s identities. A lot of banks and financial institutions regardless of size have become supporters of KYC. In fact, such a policy has become increasingly common for credit companies, banking institutions, and insurance agencies. Such service providers now require their clients to provide detailed information to ensure that they are not involved in any illegal activities like bribery, corruption, and money laundering. KYC policies have evolved and expanded over the years and have already reached a global scale. With the increasing number of corruption and money laundering issues, KYC policies have become an important tool to combat any illegal transactions both locally and internationally. With KYC policies, financing institutions are able to protect themselves through ensuring that they are doing business legally and only with legitimate individuals. Also, such policies can help protect those people who have the tendency to be harmed and affected by any type of financial crime. How Does KYC Work? Most financial institutions start their KYC processes through simple data collection about their client’s identities. Data collection is often linked with electronic identity verification, referred to as the ‘Customer Identification Program.’ Information like names, birthdays, social security numbers, and addresses can be useful to determine whether a person is involved with financial crime. Financial institutions will compare the data collected to the list of individuals who are involved in any financial crime. Based on what they gather from comparing such a list, financial institutions quantify how much of a risk their customer appears to be and how likely they are to be involved in any illegal activity. AML vs. KYC It is important to note the difference between KYC and AML. In the banking industry, KYC is the process that financial institutions must take to verify the identity of their clients before they begin providing any type of financial service. AML, on the other hand, operates on a much broader aspect. AML is considered the measures that financial institutions take to combat and prevent financial crimes like money laundering and corruption.

3. Financial institutions use both AML and KYC to maintain security and ensure that they are working with legitimate individuals who are not involved in any form of financial crime. AML programs consist of the following: • • • • • • Risk-based AML Policies KYC Procedure: Enhanced Due Diligence (EDD) and Due Diligence (CDD) Ongoing Risk Assessment and Ongoing Monitoring Internal Controls Internal Audits AML Compliance Training Programs for Staff Customer Due Diligence (CDD) is a basic KYC process that involves gathering the client’s basic data like a proof of identity and address to address the risk profile of the client. On the other hand, Enhanced Due Diligence (EDD) is considered advanced KYC procedures that are intended for those clients that are considered high-risk. High-risk clients are typically those who are classified under the high-risk category after CDD. These people are prone to money laundering and financial terrorism. Thus, such people are constantly regulated and monitored as per restricted norms. The EDD procedure includes the verification of UBO or Ultimate Beneficial Ownership information and PEP or politically exposed persons. EDD also involves transaction monitoring and regulation. References: https://complyadvantage.com/knowledgebase/anti-money-laundering/ https://sumsub.com/blog/kyc-and-aml/ https://www.quora.com/What-is-a-difference-between-KYC-and-AML