Money laundering is undoubtedly a scourge on our modern world, and, as we saw in the previous article, What is Money Laundering, accounts for a significant proportion of world-wide GDP, quite apart from the appalling human suffering that it causes. It can sometimes seem from the bold promises of a brighter future that we often see in the press, and the sales-speak of some financial institutions that we are on the verge of stamping out money laundering through some form of amazing technology, methodology or legislation.
In this article, you will see that there are countless valuable processes being put into practice to curb money laundering; however, it would be naïve to suggest that any of these are a magic bullet which will rid the world of the criminal activities that form the network of this vast iceberg of illegal money processing. Perhaps it is fairest to say at this juncture that increasingly aggressive anti-money laundering (AML) enforcement can at best only aim to contain the flow, rather than stop it entirely.
Standing Against Money Laundering
Around the world, governments and wider political groupings have gradually increased their efforts to stand up to money laundering over recent decades. This has been most apparent in legislation that requires all financial institutions to develop and maintain systems to detect and report activity that is out of the ordinary and could indicate money-laundering trails. In the late eighties, the G7 (Group of Seven) set up an international committee called the Financial Action Task Force (FATF) to try to fight money laundering at the international level. The remit of this task force was later expanded to include combating the financing of terrorism. Much further work has been done by the European Community in terms of both legislative provision and cooperative international organisation to hinder money laundering.
In the United States, the Bank Secrecy Act of 1970 required the reporting of transactions in a Suspicious Activity Report (SAR). This information, shared with the Department of the Treasury, was then used by the Financial Crimes Enforcement Network (FinCEN) to inform domestic criminal investigations and support work in international bodies and other foreign financial intelligence units, all seeking to track criminal activity. Money laundering, however, was not made illegal in the US until 1986, and it was not until the passage of the USA Patriot Act shortly after the 2001 terrorist attacks that expanded money-laundering efforts allowed investigative tools to be used to prevent organised crime and drug trafficking connected with terrorist investigations.
Now in most western countries, and many other places around the world, professionals can be trained and certified as anti-money laundering specialists to work as bank secrecy officers, financial intelligence unit managers, surveillance analysts and financial crimes investigative analysts. All of these positions, and a slew of further titles and roles, all work to detect and break the lines of funding for global money laundering and its terrorist connections.
Today, financial institutions in almost all developed and many developing nations are required to implement a written AML compliance policy to be overseen by a designated AML compliance officer. These programs must specify ‘risk-based procedures for conducting ongoing customer due diligence’ and conduct ‘ongoing monitoring to identify and report suspicious transactions’. There are also some AML requirements that extend to individuals. Here, typically, there is a requirement to report and justify receipts of larger amounts of cash or multiple related transactions.
Prevention Processes
In practical terms, the most visible and common forms of preventative activity that institutions undertake under the broad title of anti-money laundering (AML) are Customer Due Diligence (CDD), Know Your Customer/Client (KYC) and Combatting the Financing of Terrorism (CFT). In a little more detail, these titles outline processes that are used to detect, to hinder and to ‘publish’ illegal activity.
AML: This is really the broad title for the laws, rules and procedures that are designed to deter money laundering. AML includes CDD and KYC, and further operates through the use of sanctions and the recognition of those persons who are more likely to be risk concerns.
CDD: These are the scrutiny processes that financial institutions are required to perform to identify, report and attempt to prevent violations. It is integral to the KYC process, as it seeks to ensure that the information a potential customer provides is accurate and legitimate. It is both a one-off process for new customers and a continuing process which extends to all customers and their transactions. It assesses the risk of money laundering posed by each client, and then looks in more detail at those identified as higher non-compliance risks. This can also include identifying customers as they are added to sanctions and other AML lists. CDD further seeks to detect money laundering strategies, including layering and structuring (sometimes called ‘smurfing’) which break up larger sums of money into smaller transactions to evade reporting limits and avoid scrutiny.
KYC: Know your client rules apply the CDD process to the task of screening and verifying prospective clients. This is really the starting point of compliance for financial institutions. By knowing the client, these institutions can understand the nature of a client’s activities and verify whether deposited funds are from a legitimate source or not. The process also means that new customers are screened against lists of crime suspects, those under economic sanctions and ‘politically exposed persons’. KYC effectively seeks to stop money laundering schemes at the first deposit step.
CFT: Combating the Financing of Terrorism is a collection of regulations and other practices that are intended to restrict access to funding and financial services for those whom a government describes as terrorists. By tracing the sources of funding for terrorist activities, it may be possible to prevent some terror activities from happening.
Technology: Friend or Foe?
Unfortunately, the process of anti-money laundering and other forms of compliance is never-ending, since the creativity and ambition of criminals to maximise their profits, and their ability to hide their illicit gains are in a constant process of evolution. The growing use of technology to make our lives easier has a corresponding result in opening up new ways for money to be laundered. AML laws have also been slow to catch up with newer forms of cybercrime. However, there are certainly some encouraging developments that could help in this ever-changing process.
Artificial intelligence may well help in the struggle against money laundering. It can detect the development of criminal typologies in the earliest stages of evolution and can also anticipate emerging patters of criminal behaviour in ways that structured systems find much more difficult. AI is also much more efficient and accurate in processes such as screening payments and entities. It can process a vast amount of material and can particularly discount the overwhelming volume of false positives generated.
Moving Forward
It is probably a sad truth to relate here, but it is unlikely that all money laundering can be stopped. However, with some key actions in place and the following good principles at work, progress will mean that much more damage can be prevented and far fewer lives will be blighted by the evils that both stimulate and feed off of money laundering activities worldwide:
- Maintain transparent client relationships based on good KYC and CDD principles.
- Put in place strong training programs for all involved in client work in finances.
- Build systems which can effectively monitor all client data, transactions and accounts.
- Always maintain a risk-based approach with clients and organisations
- Train, support and promote anti-money laundering officers into stronger roles in organisations, to raise the profile of this crucial area of work.