Anti-Money Laundering (AML) refers to the web of laws, regulations, and procedures aimed at uncovering efforts to disguise illicit funds as legitimate income. It is a set of regulations, laws, and procedures that detect and prevent criminals from disguising illegal funds as legitimate income. AML regulations require financial institutions to develop sophisticated customer due diligence plans to assess money laundering risks and detect suspicious transactions. The purpose of the AML rules is to help detect and report suspicious activity, including the predicate offenses to money laundering and terrorist financing, such as securities fraud and market manipulation.
Banks and other financial institutions are legally obligated to follow AML regulations to ensure that they do not support money laundering activities. Financial institutions are required to develop and implement a written AML compliance policy, which must be approved in writing by a member of senior management and overseen by a designated AML compliance officer. The AML process is critical for the financial and reputational standing of banks.
The AML process involves four key areas that banks must address with their anti-money laundering compliance program:
- Know Your Customer (KYC)
- Customer due diligence (CDD)
- Customer and transaction screening
- Suspicious activity reporting
KYC involves identifying and verifying a customer’s identity when they open a bank account. Customer due diligence (CDD) is the process of assessing the risks associated with a customer and their transactions. Customer and transaction screening involves monitoring customer transactions to detect suspicious activity. Suspicious activity reporting involves reporting suspicious activities to the government via suspicious transaction reports (STRs) and suspicious activity reports (SARs).
AML compliance programs consist of all controls and directives applied to ensure that banks comply with AML regulations and manage money laundering risks. Failures in the AML compliance program can result in banks being punished by the regulators.
