Money laundering is a serious crime that can have dire consequences for a country's economic stability as well as the businesses and individuals involved. It's estimated by Eurojust that money launderers worldwide process around $2 trillion each year (approximately 2%-5% of global GDP), making it one of the most profitable — and destructive — forms of organized crime in the financial system.
In this article, we'll dive deeper into the fundamentals of anti-money laundering (AML) compliance, the challenges risk management teams can face, and best practice tips for how your organization can improve its AML compliance and mitigate the risks associated with implementing its strategies and tools.
Understanding AML compliance is an important step in combating money laundering and helping to make your commercial transactions more secure. With this information, your team will be better equipped to protect your customers, your finances, and your corporate reputation.
What Does AML Compliance Look Like?
An AML compliance program is a set of risk-based procedures, protocols, and monitoring systems your organization must follow to detect, report, and prevent money laundering activities.
The main objective of the program is to make sure your company complies with all applicable laws and regulations related to money laundering. It's essential for protecting businesses of all sizes from criminal activity and legal repercussions.
Regulatory requirements for AML programs vary by jurisdiction. In the U.S., for example, all AML compliance requirements are covered by the Anti-Money Laundering Act (AMLA) of 2020, which is governed by the Financial Crimes Enforcement Network (FinCEN).
This new law stems from the Bank Secrecy Act (BSA) of 1970, which was later expanded by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, following the 9/11 terrorist attacks — this mouthful is otherwise known as the USA PATRIOT Act.
Regardless of jurisdiction, global financial organizations are expected to maintain an AML compliance program that meets the standards set by regulators. This includes:
- Making sure that the policies you have in place are adequate for detecting and reporting suspicious activity
- Allowing for ongoing monitoring and due diligence into customers and partners
- Conducting continuous training for employees
- Having regular independent audits of the program
- Designating a supervisory AML compliance officer or team to oversee your compliance program
For any organization that carries out international financial transactions, an AML compliance program is an essential part of your third-party risk management process. By stopping the potential flow of dirty money through your business, you play your part in reducing nefarious activities like terrorist financing and large-scale fraud.
Who Needs to Comply?
Before you break out into a cold sweat, it's important to note that not all organizations need to legally comply with all the complex rules and regulations of AML compliance in the U.S.
If you run a financial institution — whether it's a bank, credit union, or insurance company — it should be clear that the existing BSA and PATRIOT Act both require you to implement a robust AML compliance program. With the introduction of AMLA, however, the definition of "financial institution" has expanded to include businesses that trade in antiquities and crypto.
On top of that, the AMLA also includes a new section called the Corporate Transparency Act (CTA), which requires all U.S.-based companies, as well as companies registered to do business in the U.S., to report all details about their beneficial owners (i.e., shareholders with significant powers of control or at least a 25% stake in the business) to FinCEN's database by January 1, 2025.
With that being said, there are exceptions. According to a factsheet from law firm Willkie Farr & Gallagher, your organization doesn't have to comply with the AML requirements around beneficial ownership if it is:
- A publicly traded company
- A tax-exempt non-profit, political organization, utility company, or trust
- Already subject to SEC regulations, i.e., those in the financial services industry
- A larger company that has a physical U.S. office, employs at least 20 full-time employees in the U.S., and makes at least $5 million in annual revenue
As we can see, the scope is fairly broad and will vary between organizations depending on their size and structure. But even if your organization isn't required to comply with AMLA, that doesn't mean you should treat it as a low-priority task — as the potential reputational and legal risks can be significant.
What Are the Penalties for Non-Compliance?
Non-compliance with anti-money laundering regulatory requirements can be costly in many ways. The penalties for not following the regulations vary by jurisdiction, but generally, entities and individuals can face sanctions like large fines, criminal charges, and even having their assets seized.
In the U.S., if your business is negligent in allowing money laundering activities either to or from a financial institution, the penalties can be as high as a $1 million fine or a 10-year jail sentence — or both.
To stay compliant, your organization should consider implementing the below suggestions for an effective risk management strategy, which includes building your awareness of the risks associated with third-party relationships and leveraging third-party lifecycle management software, like Certa, to help you stay on track with your AML obligations.
Elements of an Effective AML Program
An effective AML risk management program helps you reduce risk by identifying and intercepting money laundering activity to curb potential criminal activities. By having an effective program in place, your business reduces its exposure to fines, minimizes the risk of reputational damage courtesy of unethical partners, and avoids unnecessary disciplinary actions from regulatory bodies.
For maximum effectiveness, here's what your AML compliance program should include:
- Enhanced vetting practices: When it comes to your third-party relationships, you should carry out enhanced due diligence on any partners you're intending to do business with, especially if they operate in high-risk jurisdictions or work with governmental organizations.
- Know your (suppliers') customers: Do your partners conduct thorough customer due diligence (CDD) or know your customer (KYC) processes of their own to prevent suspicious activities? Make sure you collect enough information to understand their policies so you know you're covered — especially if they're operating outside your own country's jurisdiction.
- Monitoring and reporting systems: Bring the right technology on board so you can detect and report suspicious activity promptly. To boost your efforts, Certa's all-in-one platform can integrate with your existing third-party risk management processes to help you centralize data and monitor activity efficiently.
- Risk assessment: When onboarding new service providers, it's vital to perform risk assessments to understand their risk profiles and identify any red flags. This will help you identify potential high-risk partners and mitigate the associated AML risk.
- Training and awareness: Make sure you have your AML policies documented and easily accessible so your team knows how to spot the signs of suspicious transactions. Provide proper training for all employees on AML policies and procedures — with periodic refreshers to keep their knowledge current.
- Senior management buy-in: This will support your efforts in allocating enough resources for maintaining an effective AML compliance program, including the resources you'll need to keep up with the changing regulations.
All companies subject to AML laws must have a proper risk management system in place, which includes the evaluation of third-party risks. And understanding where you need to focus your efforts in your AML compliance program is an important part of third-party risk management.
The Challenges of AML Compliance
Governments around the world have implemented various AML regulations in an attempt to stop shady characters from disguising their ill-gotten gains in an air of legitimacy. This has been successful in preventing and prosecuting many instances of money laundering, but the complexity of the associated regulatory compliance can be a major challenge for any organization.
For smaller organizations, it's often difficult to know where to start with your program requirements — after all, AML compliance is a specialist area that's still developing as global legislators react to shady shell corporation dealings. As a result, many companies can struggle to fill key roles within their compliance teams.
Without the right expertise in-house, it can be difficult for businesses to understand all the regulatory nuances to be considered when vetting new business partners or third-party vendors.