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Did you know that the United Nations estimates that between 2% and 5% of the global GDP is generated by money laundering? AML, or anti-money laundering, is a fundamental tool in this battle.

In this article, we will detail what AML is, who is responsible for dictating related regulations, how these regulations are applied, and the relationship between AML and KYC (Know Your Customer). Additionally, we will discuss how automated KYB and KYC process solutions play an essential role in compliance with these regulations, helping to prevent illegal financial activities and protect the integrity of the global economic system.

So, without further ado, let’s dive into the world of AML and discover its importance in the security and transparency of the financial sector.

What is AML (Anti Money Laundering)?

The acronym AML stands for Anti Money Laundering, which prevents money laundering. It involves the illegal practices used to conceal or disguise the origin of illicit money to make it appear to come from legitimate sources.

Money laundering involves transforming illicit funds into apparently legal ones, allowing criminals to enjoy the benefits of their illegal activities without raising suspicion.

AML laws, also known as anti-money laundering regulations, are regulations designed to prevent and detect such illegal activities and punish those who engage in them. The main objective of these regulations is to protect the financial system’s integrity and stop criminals from using it to launder money.

According to the High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI Panel), one-tenth of the world’s wealth could be hidden in offshore financial assets, hindering governments’ fair tax collection. This colossal amount underscores the seriousness of the problem and the importance of AML measures to address it.

Money laundering involves various criminal activities, including smuggling and illegal arms sales, embezzlement, insider trading, bribes, computer fraud, and much more. It is a severe crime in many countries, and its combat is essential to maintaining the integrity and trust in the global financial system.

What are the three stages of money laundering?

To better understand how money laundering works, it is essential to know the three main stages that typically characterize this process:

  1. Placement Stage: In this first stage, criminals attempt to introduce illegally obtained money into the financial system. To avoid detection by authorities, they employ strategies such as depositing small amounts into bank accounts or inflating invoices in commercial transactions.
  2. Layering Stage: In this stage, the goal is to remove evidence of the illegal origin of the money reintroduced into the financial system. This is achieved through multiple bank transfers between branches, acquisition of assets, loan applications, overseas investments, and other techniques that ultimately provide anonymity to criminals.
  3. Integration Stage: In this final stage, the money laundering process is completed. The objective of converting illicit money into legal money is achieved, and this is where a credible explanation must be provided to justify the acquisition of those funds, allowing their use in the financial system without raising suspicions.

Anti-money laundering (AML) regulations are designed to prevent and combat this money laundering, a crime involving transforming illegally obtained money into seemingly legitimate funds.

Which sectors does AML apply to?

While the term AML (Anti Money Laundering) and its counterpart KYC (Know Your Customer) are more commonly associated with the financial and legal sectors, their scope extends beyond these specific areas.

These controls and regulations are fundamental to prevent, identify, and report potential suspicious activities related to money laundering in a variety of sectors. Below, we explore in which other areas AML is applicable:

  • Financial Sector: The financial sector is the focal point of AML regulations. Banks, financial institutions, currency exchanges, and investment firms are legally obligated to implement robust AML programs to detect and prevent money laundering and related illegal activities.
  • Legal Sector: Legal professionals, such as lawyers and notaries, must also comply with AML regulations. This is because they may be involved in financial transactions that require careful scrutiny to avoid involvement in illicit activities.
  • Real Estate Sector: Buying and selling properties often involve large sums of money, making it a potential target for money laundering. In many countries, real estate companies must comply with AML regulations when conducting real estate transactions.
  • Gambling Sector: Gaming houses and casinos are subject to AML regulations to prevent criminals from using these establishments to launder illegally obtained money.
  • Art and Antiquities Sector: Given the discreet and often opaque nature of art and antiquities transactions, some countries have implemented AML regulations to prevent the use of these transactions as a means to launder money.
  • Luxury Real Estate Sector: Luxury properties can be attractive to those looking to launder money due to their high value and the anonymity they can provide. As a result, specific AML regulations have been established for this segment of the real estate market in some places.
  • Technology and Cryptocurrency Sector: With the growth of cryptocurrencies and financial technologies (FinTech), specific AML regulations are being developed to ensure transparency and legality in digital transactions.
  • Auctions and Art Trading Sector: Art auctions and trading valuable artworks may be vulnerable to money laundering. Therefore, some jurisdictions have implemented AML regulations to oversee these activities.

Who dictates AML regulations?

Internationally, the Financial Action Task Force (FATF), an organization operating under the auspices of the Organisation for Economic Co-operation and Development (OECD), plays a central role in creating requirements and standards that influence virtually all countries, territories, and jurisdictions worldwide.

FATF is dedicated to combating money laundering and terrorist financing by establishing guidelines that member countries must follow to strengthen their prevention systems.

However, it is important to note that specific regulatory frameworks can vary significantly from one jurisdiction to another. Each country has its own bodies responsible for enforcing AML regulations and overseeing compliance by financial institutions. For example:

  • United States: The Financial Crimes Enforcement Network (FinCEN) is the entity responsible for overseeing and enforcing AML regulations. FinCEN works closely with other federal agencies to maintain the integrity of the US financial system.

These agencies have the authority to impose fines, sanctions, and other disciplinary measures on financial institutions that do not comply with AML regulations.

In addition to regulations at the national level, the European Union also plays an important role in enacting directives and regulations that affect its member states, such as EU Directive 2018/843.

What are AML (Compliance) regulations?

In recent years, anti-money laundering (AML) practices have experienced extensive legislation at both global and European levels.

These regulations have become an unavoidable legal requirement for companies, organizations, and institutions to carry out their activities.

Complying with AML standards is no longer a choice but a legal obligation.

Anti-money laundering legislation aims to guide regulated sectors on how they should operate and proceed.

Compliance departments play an essential role in ensuring that all company processes comply with the requirements established by AML standards.

Fifth AML Directive

One of the key regulations in this context is the Fifth Anti-Money Laundering Directive, which came into effect on January 10, 2020. This European directive imposes a series of standards on a wide range of organizations, particularly those in the financial sector. This regulation not only reinforces existing obligations but also expands the list of obligated entities to carry out AML compliance checks in their processes.

A highlight of this directive is that it allows companies to conduct hiring, sales, and customer onboarding processes entirely online while ensuring the security and legality of these operations.

Due to its relevance and characteristics, the Fifth AML Directive has become the reference regulatory framework for other legislations in anti-money laundering (AML) worldwide. Companies and institutions in Asia or America, for example, adhere to AML regulations in their respective countries by taking this directive as a global standard.

Sixth AML Directive

The Sixth Anti-Money Laundering Directive represents a significant evolution in anti-money laundering regulation in the European Union. Its main objective is to eliminate gaps in the national legislation of Member States by harmonizing the definition of AML compliance throughout the EU. A significant milestone is that, for the first time in AML policy, cybercrime is included as an underlying offence.

These new AML compliance regulations to combat money laundering advance and complement what was established in previous editions. They focus on strengthening jurisdiction and imposing stricter sanctions on companies that do not comply with required AML controls. Additionally, the Sixth Directive addresses the evolution of corporate responsibility and establishes clear guidelines for addressing cybercrime.

What relationship do AML and KYC have?

The relationship between AML (anti-money laundering) and KYC (Know your customer) is essential in the realm of financial regulation and preventing money laundering. These two concepts are closely interconnected and complement each other in compliance with regulations and protection against illicit financial activities. Let’s explore the relationship between AML and KYC:

KYC as a Requirement within AML Regulations:

KYC is considered a fundamental requirement within the framework of AML or anti-money laundering regulations. While AML encompasses a wide range of regulations related to money activity and its flow, KYC focuses on techniques aimed at knowing and verifying customers’ identity and relevant information.

KYC for Establishing a Solid Customer Base:

Identity verification or KYC processes play a crucial role in building a solid and reliable customer base from the outset. By obtaining accurate information about customers and validating their identity, businesses can prevent fraud and ensure they are dealing with legitimate individuals. This, in turn, facilitates compliance with anti-money laundering regulations.

AML and its Influence on Routine Processes:

AML consists of procedures and guidelines that directly affect the routine business processes of various organizations and institutions, such as financial institutions, banks, real estate companies, insurance companies, or telecommunications companies. These procedures include detecting, preventing, and reporting suspicious activities related to money laundering and financial crimes.

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