The financial world is constantly evolving, making it fertile ground for both innovation and fraud. Money laundering is a sophisticated crime that poses a significant threat to financial systems and the economy at large. Financial crimes continue to dominate headlines and governments and regulatory bodies are increasing their efforts to counter Anti-Money Laundering with more robust compliance measures – Santander’s failings are the most recent high-profile case that still draws attention.
In this article we will;
- explore the key concepts that make up what AML compliance is,
- the importance of its role,
- and, discuss how to execute an effective AML compliance program.
Understanding Anti-Money Laundering (AML)
AML refers to a set of policies, procedures, and regulations designed to prevent the use of financial systems for the purpose of money laundering. The term "money laundering" refers to the process of disguising the proceeds of illegal activity as legitimate funds.
For a fun overview of the origins of AML, check out this video 👀 from the Ted-ED team 👇
(you can also learn more in our free AML Training Courses – designed specifically for accountants).
When it comes to ‘AML compliance’ in essence we’re talking about a company's adherence to these laws and regulations, with the ultimate goal of preventing and reporting activities that may suggest money laundering is taking place. AML compliance programs help to ensure that any money from illegal activities does not enter the legitimate financial system, therefore reducing the risk of financial crimes.
The importance of AML compliance
Whilst AML compliance may feel like a necessary evil, it’s by no means a ‘nice-to-have’ – it’s an obligation you have as an accounting firm. In fact, all regulated entities such as banks, financial and money services businesses all have AML obligations. Compliance with these regulations creates a safety net that helps to ensure any of these types of businesses (and their clients) are not used to facilitate financial crimes.
Preventing money laundering through robust AML compliance programs is important, but it’s important to appreciate the bigger picture. The implications of money laundering extend beyond the financial sector, impacting society's stability and security as a whole. AML compliance is crucial for maintaining the integrity of markets and financial institutions; it helps to dampen corruption, tax evasion, theft, fraud, and numerous other crimes. Ultimately contributing positively to society through the legitimate use of funds and a clean financial system.
Non-compliance isn’t really an option, though can sometimes be accidental due to the number of supervisory bodies, and the complexity of regulation. This is why it’s important to ensure your Money Laundering Reporting Officer (MLRO) is on top of all things AML. The non-compliance penalty can be harsh, including substantial fines, loss of licenses, and even criminal charges, so AML measures should be considered a fundamental business necessity as opposed to a legal obligation.
The fundamentals of AML
Whilst AML laws & regulations vary depending upon your jurisdiction, there is a global incentive to reduce any corruption in the financial system, which means a fair amount of similarities amongst AML laws.
A well-structured AML compliance program is a powerful tool to detect and prevent illicit financial activities. Such a program generally comprises customer due diligence (CDD), ongoing monitoring, suspicious activity reporting (SAR), and employee training. It's designed to be a holistic approach, encompassing regulatory compliance, risk management, and a robust internal control system.
UK businesses are primarily guided by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, commonly known as the Money Laundering Regulations. These directives are enforced by the Financial Conduct Authority (FCA), which has the power to penalise firms that fail to comply. There are also other pieces of legislation that impact what AML compliance measures must be taken such as the Proceeds of Crime Act 2002 (POCA). In addition to this, in an accounting context, you also have to meet the requirements of your supervisory body. They are mostly there to ensure you are meeting your overall legal obligations, but in order to monitor that they often require you to submit specific reports or documents to demonstrate what AML compliance measures you are taking.
Here are some fundamentals you should have in place to ensure you’re meeting your compliance obligations.
1️⃣Have a documented AML compliance policy
This is a formal document that details your firm's commitment to preventing money laundering and complying with AML laws, and should include guidance on things like what steps to take when you suspect there might be some suspicious activity or transactions.
2️⃣Conduct thorough risk assessments
Identify and assess the potential money laundering risks associated with your customers, products, and services, keeping an eye out for things like relationships with countries known for corruption.
3️⃣Implement customer due diligence (CDD) procedures
This is a fundamental component of any AML program. Make sure you’re verifying the identity of your customers and understanding their financial behaviours, and when there is even an inkling of something unusual, be sure to implement enhanced due diligence measures – when to do this should be included in your AML policy document.
4️⃣Regularly train your employees
Equip your team with the necessary skills and knowledge to identify suspicious activities and stay up to date with AML legislation – this is a requirement, and your employees should be completing AML training at least once a year.
5️⃣Implement ongoing monitoring and reporting
Implementing transaction monitoring, and regularly reviewing customer transactions can make spotting any suspicious activities easier to identify.
What next for AML compliance?
In an era of digital banking and cryptocurrencies, AML compliance is going to need to continually evolve, as will legislation. However, the core principles remain the same: to detect, deter, and disrupt money laundering activities, and the fundamentals of any AML program will still hold up. As regulatory technology advances, there will be more tools available to help businesses navigate the complexities of AML compliance more effectively.
To stay ahead in the compliance game, businesses must understand the evolving nature of financial crimes and be proactive in enhancing their AML policies, training staff and being vigilant to any red flags. The future will likely see stricter regulations and smarter money launderers, making the role of AML compliance more important than ever.
(NB: This article doesn't constitute legal advice and is intended for general informational purposes only. Always consult with a legal expert or compliance consultant for guidance specific to your firm.)
