Money laundering has disrupted the financial ecosystem by appreciating illegal funds sources. To fight and minimize the spread of illegal cash in the financial system, global authorities have issued guidelines and regulations. These regulations are covered in Anti Money Laundering Compliance. All financial institutions are obliged to obey these directives to combat money laundering and terror financing.
AML in the Banking
Banks are mostly used for financial crimes because of the large number of daily transactions processed through their channels. Thousands of financial transactions process in a second by using banking services. This huge number and amount of transactions attract money launderers to place their illicit funds. It is easy to convert black money into white if a banking channel has poor verification services.
Anti-money laundering is linked with Counter Terror Financing because both of them use the same ways of money transfer. Money is laundered by hiding its original sources. The original money sources of money laundering are all illegal like drug trafficking, human trafficking, weapons sale, or corruption.
Money collected through illegal means is very difficult to use in the financial system. Because whenever a huge amount of money is funded or banked, the banks and local financial authorities always demand the source of the money. By not presenting an authentic and legitimate source of money, money launderers can be caught.
Anti Money Laundering Compliance
So to use this money in the financial system without leaving a mark, the illicit money is converted into white by giving it a legal source. The traces of illegal means with the money are removed. This is done by layering the black money with several transactions. Terror financing is also done like this. If a person finances a terrorist organization directly, he will get caught easily by law enforcement agencies. To finance the terrorist organization smoothly without leaving a trail, the money is circulated in the financial system. After doing several transactions this money becomes an easy source to fund terrorists.
Banks are obliged to make an efficient anti-money laundering program. By not having one they can be fined or blacklisted by local and international regulatory authorities. Heavy fines have been paid by financial institutions for not having an AML in banking program or having a poor AML program.
Customer Due Diligence
All the customers who are going to open a bank account must be identified and verified. The identification of the customer helps in the mitigation of identity theft. Customer Due Diligence is performed in the below steps:
Customer identity is verified such as his name, father’s name, date of birth, nationality, and address. The verification of this information is done through the customer’s government-issued identity documents that include an ID card, passport, and driving license. The authenticity of the documents is also checked because there is a chance that some criminals try to open a bank account by faking some legitimate person. For example, a criminal steals the ID card of a person that looks similar to him and then performs a transaction through that ID card. This is done to complete the transaction smoothly without getting directly involve in it.
Identify only tells that the person is genuine but to check that the person is not involved in financial crimes before, a screening on that person is performed. Global and local watchdogs periodically issue sanction lists that are also known as Politically Exposed Persons (PEPs). The customer who is trying to onboard is the screen through these lists and is allowing only after clearance.
PEP’s are high-risk entities that could be high officials of financial institutions or prominent figures and have been involved in money laundering activities.
Identifying and screening do not combat money laundering alone. Background screening and ongoing monitoring must be performed on every transaction processing through banking channels. It is also knowing as Suspicious Activity Reporting (SAR). FATF sets the limit of SAR i.e. every transaction that exceeds $1000.
In a world where thousands of millions of transactions in one day, customer due diligence can only be performed by automated AML software. An Anti Money Laundering screening software identifies, screens, and monitors all the processing of banks and can deliver the results in seconds. Banks should use this robust software to combat any risk of illegal finance involvement in their channels.