What is Anti-Money Laundering (AML)?

July 14, 2020

Financial District

Anti-money laundering (AML) is the process of combatting money laundering — where criminals work to make their illegal – or “dirty” – money look clean.  Laundering involves taking illegally acquired gains and disguising  the sources so the money can be used for other activities or continue to flow through the financial system to become legitimate-looking funds.

Financial Intelligence Units (FIUs) in individual countries use regulations to help give financial institutions and other types of businesses the financial tools to fight criminals who use a variety of techniques to make illegally obtained funds appear clean. Of course, the profits of crime can never be truly clean, but the criminals can make it much more difficult to track down the actual source of their money.

Governments and financial businesses around the world have increased efforts to combat money laundering in recent decades, with regulations that require financial institutions to put systems in place to detect and report suspicious activity through Suspicious Activity Reports (SAR) or Suspicious Transaction Reports (STR). Then, law enforcement takes those reports as the basis to start their local investigations.

Laundering costs global economy trillions

The worldwide scope of money laundering is beyond huge: According to a 2018 survey from PwC, global money laundering transactions account for up to $2 trillion annually, or some two- to five percent of global GDP.

The first real legislation to track criminal activities came into place in the United States in 1970 with the Banking Secrecy Act (BSA). It required financial institutions to report certain suspicious transactions to the Department of the Treasury.

The information the banks provide to the Treasury Department is used by the Financial Crimes Enforcement Network (FinCEN), which shares it with law enforcement agencies. Similar regulations are used in other countries.

Laundering in U.S. became illegal in 1980s

Money laundering wasn’t made illegal in the United States until 1986, with the passage of the Money Laundering Control Act. So the criminals have had a long head start to polish their methods.

The USA Patriot Act expanded money-laundering efforts after the attacks on Sept. 11, 2001 by allowing investigative tools designed for organized crime and drug trafficking prevention to be used in terrorist investigations.

Anti-money laundering (AML) refers to a set of laws, regulations, and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income. Though these laws cover a relatively limited range of transactions and criminal behaviors, their implications are wide-reaching.

AML regulations require that banks and other financial institutions that issue credit or allow customers to open deposit accounts follow rules to ensure they are not assisting in the practice of laundering.

AML now a growing battleground

AML systems are now designed to assist institutions in their fight against both money laundering and terrorist financing. In many jurisdictions, government regulations require financial institutions, including banks, securities dealers and money services businesses, to establish such programs.

According to ACAMS (Association of Certified Anti-Money Laundering Specialists), anti-money laundering programs should include at a minimum:

  • Written internal policies, procedures and controls;
  • A designated AML compliance officer;
  • On-going employee training; and
  • Independent review to test the program.

Predicate offences are often bloody

It is important to remember that the crimes that lead to money laundering are not simply shuffling currencies across borders – the predicate offences as they are called often leave innocent blood spilled. Illegal arms sales, smuggling, and the activities of organized crime, including, for example, drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can produce large profits and create the incentive to legitimize the illegal gains through money laundering.

When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

In some respects, laundering became easier with the advent of online banking and the privacy-driven cryptocurrencies which can allow criminals to transfer and withdraw money with a lower chance of detection.

A good source of information about money laundering is the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog. – Money laundering facts

For a list of Frequently Asked Questions about Money laundering, see the answers here.


How money is laundered, the three stages  

In the placement stage of money laundering, the illegal profits are entered into the financial system by breaking up large amounts of smaller sums that are then deposited into a bank account. This can also be done by buying checks or money orders that are deposited into accounts at other locations. It is common to see amounts of less than $10,000 as this is a common amount that triggers reporting of transactions.

The layering – stage takes place after the funds have entered the financial system. This where the launderer moves the funds to distance them from their source.

Launders try to find legitimate vehicles to move the money as banks are required to report large cash transactions and other suspicious activities.

They may also disguise the transfers as payments for goods or services to give them a legitimate appearance.

The final phase is integration – where the funds enter the legitimate economy. The launderer might choose to invest the funds into real estate, high-end assets, or businesses.


Money Laundering topologies for moving money

There are many common types of money laundering schemes, including casino, cash business, smurfing and foreign investment/round-tripping schemes. Here is how some of them work:

  • Casino scheme works converting cash into casino chips, converted back into cash after they are played or just held by the launderer for a short time.
  • Cash-business scheme is used for laundering large amounts of cash. There are many businesses who handle most of their transactions in cash and allow illicit cash to be inserted among their legitimate business transactions.
  • Smurfing refers to distributing small amounts of a larger cash amount to a series of partners who then deposit the money in increments. This gets around the currency reporting requirements in many countries. Smaller deposits from many partners are less likely to trigger reports.
  • Foreign investment schemes occur because many countries are encouraged to invest in U.S.-based businesses. The launderer delivers the cash to the foreign investor, who then returns it by making an investment into the launderer’s own business.
  • Bank Capture occurs when the money launderers own or run the financial institution. The money can be moved through the bank and legally transferred to other banks without investigation
  • Real estate laundering occurs when a piece of property is purchased with cash, and then sold again – usually after a short time. Any profits made would be associated with the sale and are legal.
  • Black salaries are paid where a company may have unregistered employees without written contracts and get paid in cash using dirty money.
  • Tax amnesties can legalize previously unreported cash or assets. This happens in so called tax havens.

Using technology to combat money laundering

Alessa provides all the anti-money laundering (AML) capabilities that banks, money services businesses (MSBs)Fintechscasinos and other regulated industries need – all within one platform. The solution integrates with existing core systems and includes:

Real-time due diligence

Transaction monitoring and screening

Sanctions screening

Automated regulatory reporting

Advanced analytics like anomaly detection and machine learning

Dashboards, workflows and case management

Speak to one of our risk specialists today to determine how Alessa can help your company.


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