Anti-Money Laundering: What & Why
Introduction
Anti-money laundering (AML) refers to the activities that are performed by financial institutions to achieve compliance with legal requirements and to actively monitor for and report suspicious activities.
AML includes a set of policies and practices to ensure that financial institutions and other regulated entities prevent, detect, and report financial crime and especially money laundering activities.
Money laundering is a type of financial crime which involves taking criminally obtained proceeds (dirty money) and masking their origins so they’ll appear to be from a legitimate source.
Anti-Money Laundering is often associated with the action against terrorism financing, or Combating the Financing of Terrorism, using the acronym AML-CFT. In addition, arrangements intended to ensure that banks and other relevant firms duly report suspicious transactions (also known as AML supervision), the AML policy framework includes financial intelligence units and relevant law enforcement operations.
It is estimated that amount of money laundered globally in one year is 2% to 5% of global GDP and supposed to be it is even more. Money laundering often accompanies activities like smuggling, illegal arms sales, embezzlement, insider trading, bribery and computer fraud schemes. It’s also common with organised crime including human, arms or drug trafficking, and prostitution rings.
History of Anti-Money Laundering
The global Financial Action Task Force (FATF) was established in 1989 to devise and promote international standards to prevent money laundering. AML guidelines came into prominence globally as a result of the formation of the Financial Action Task Force (FATF) and the promulgation of an international framework of anti-money laundering standards. These standards began to have more relevance in 2000 and 2001, after that FATF began a process to publicly identify countries that were deficient in their anti-money laundering laws and international cooperation, a process colloquially known as “name and shame”.
Importance of Anti-money laundering (AML)
Anti-money laundering is closely related to counter-financing of terrorism (CFT), which financial institutions use to combat terrorist financing. AML regulations combine money laundering (source of funds) with terrorism financing (destination of funds).
Beyond the moral imperative to fight money laundering and terrorist financing, financial institutions also use AML tactics for:
- Compliance with regulatory guidelines that require them to monitor customers and transactions and report any suspicious activity.
- Protection of their brand reputation and shareholder value.
- Avoidance of consent orders as well as civil and criminal penalties that could be levied because of noncompliance or negligence.
- Reduction of costs related to fines, employee and IT costs, and capital reserved for risk exposure.
An effective AML program requires a jurisdiction to criminalise money laundering, giving the relevant regulators and police the powers and tools to investigate; be able to share information with other regions/countries as appropriate; and require financial institutions to identify their customers, establish risk-based controls, keep records, and report suspicious activities.
Role of Financial Institutions
Today, most financial institutions and many non-financial institutions are required to identify and report a suspicious transaction to the financial intelligence unit in the respective country.
For example, a bank must verify a customer’s identity and, if necessary, monitor transactions for suspicious activity. This process comes under “know your customer” measures, which means knowing the identity of the customer and understanding the kinds of transactions in which the customer is likely to engage.
Bank employees, are trained in anti-money laundering and are instructed to report activities that they deem suspicious. Apart from that, anti-money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies may be any sudden and substantial increase in funds, a large withdrawal, or moving money to a bank secrecy jurisdiction. Smaller transactions that meet certain criteria may also be flagged as suspicious. For example, structuring can lead to flagged transactions. The software also flags names on government “blacklists” and transactions that involve countries hostile to the host nation. Once the software has mined data and flagged suspect transactions, it alerts bank management, who must then determine whether to file a report with the government.
Global Organisations
Formed in 1989 by the G7 countries, the Financial Action Task Force on Money Laundering (FATF) is an intergovernmental body, headquarters of the OECD in Paris. As of 2014 its membership consists of 36 countries and territories and two regional organizations. FATF works in collaboration with a number of international bodies and organizations. Its three primary functions with regard to money laundering are:
- Monitoring members’ progress in implementing anti-money laundering measures,
- Reviewing and reporting on laundering trends, techniques, and countermeasures, and
- Promoting the adoption and implementation of FATF anti-money laundering standards globally.
Apart from that, the World Bank has a website that provides policy advice and best practices to governments and the private sector on anti-money laundering issues.
The Basel AML Index is an independent annual ranking that assesses the risk of money laundering and terrorist financing around the world.
AML in India
In 2002, the Parliament of India passed an act called the Prevention of Money Laundering Act, 2002 with objectives to prevent money-laundering as well as to provide for confiscation of property either derived from or involved in, money-laundering.
Section 12 (1) of this Act describes the obligations that banks, other financial institutions, and intermediaries have to:
(a) Maintain records that detail the nature and value of transactions, whether such transactions comprise a single transaction or a series of connected transactions, and where these transactions take place within a month.
(b) Furnish information on transactions referred to in clause (a) to the Director within the time prescribed, including records of the identity of all its clients.
Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished. It is handled by the Indian Income Tax Department.
The provisions of the Act are frequently reviewed and various amendments have been passed from time to time.
Most money laundering activities in India are through political parties, corporate companies and the share market. These are investigated by the Enforcement Directorate and Indian Income Tax Department. According to Government of India, out of the total tax arrears of ₹2,480 billion, about ₹1,300 billion pertain to money laundering and securities scam cases.
Bank accountants must record all transactions over Rs. 1 million and maintain such records for 10 years. Banks must also make cash transaction reports (CTRs) and suspicious transaction reports over Rs. 1 million within 7 days of initial suspicion. They must submit their reports to the Enforcement Directorate and Income Tax Department.
Frequently Asked Questions (FAQ)
What is Anti-money laundering (AML)?
It refers to the activities (set of policies and practices) that are performed by financial institutions to achieve compliance with legal requirements and to actively monitor for and report suspicious activities.
The global Financial Action Task Force (FATF) was established in year?
1989.
Money laundering activities in India are investigated by which agency?
Enforcement Directorate and Indian Income Tax Department.
Section 12 (2) of Prevention of Money Laundering Act, 2002 prescribes that the records referred to in sub-section (1) about transaction records must be maintained for?
10 years after the transactions finished.
What is Basel AML Index?
It is an independent annual ranking that assesses the risk of money laundering and terrorist financing around the world.