What are anti-money laundering (AML) policies?

Anti-money laundering policies refer to the framework of laws, regulations and procedures aimed at uncovering efforts to disguise illicit funds as legitimate income. Anti-money laundering legislation was a response to the growth of the financial industry, the removal of international capital controls and the increasing ease of carrying out complex chains of financial transactions. Let's see what anti-money laundering policies consist of. 

What are anti-money laundering (AML) policies?

Anti-money laundering policies refer to the framework of laws, regulations and procedures aimed at uncovering efforts to disguise illicit funds as legitimate income. Money laundering seeks to conceal crimes ranging from small-scale tax evasion and drug trafficking to public corruption and the financing of groups designated as terrorist organizations. Anti-money laundering legislation was a response to the growth of the financial industry, the removal of international capital controls and the increasing ease of carrying out complex chains of financial transactions. A high-level United Nations panel has estimated annual money laundering flows at $1,6 trillion, which will represent 2,7% of global GDP in 2020.

How AML Policies Work

For banks, compliance begins with verifying the identity of new customers, a process sometimes called “Know Your Customer” (KYC). In addition to establishing the identity of the customer, banks must understand the nature of the customer's activity and verify that the deposited funds come from a legitimate source. 

Know your customer

For banks, compliance begins with verifying the identity of new customers, a process sometimes called “Know Your Customer” (KYC). In addition to establishing the identity of the customer, banks must understand the nature of the customer's activity and verify that the deposited funds come from a legitimate source. The KYC process also requires banks and intermediaries to check new customers against lists of criminal suspects, individuals and companies subject to economic sanctions, and “politically exposed persons”, i.e. foreign public officials, their families and associates. Money laundering can be divided into three stages:

1. Deposit of illicit funds in the financial system
2. Transactions designed to conceal the illicit origin of funds, known as “stratification”
3. Use of laundered funds to acquire real estate, financial instruments or commercial investments.

Customer Due Diligence

Customer due diligence is an integral part of the CSC process, for example ensuring that the information a potential customer provides is accurate and legitimate. But it's also an ongoing process that extends to old and new customers and their transactions. Customer due diligence requires an ongoing assessment of the money laundering risk posed by each customer and the use of that risk-based approach to conduct closer due diligence on those identified as being at highest risk of non-compliance. This includes identifying clients as they are added to sanctions lists and other anti-money laundering lists. This process seeks to detect money laundering strategies, such as layering and structuring, also known as "smurfing", that is, the division of large money laundering transactions into smaller ones to circumvent reporting limits and avoid scrutiny.