Anti–money laundering
Anti–money laundering refers to a set of laws, regulations and institutional practices designed to help financial institutions and other regulated entities prevent, detect, and report money laundering and related financial crime. In addition to regulatory and supervisory arrangements intended to ensure that banks and other relevant firms implement AML controls and file suspicious transaction reports, the AML policy framework typically also involves financial intelligence units and relevant law enforcement agencies.
Overview
Anti–money laundering guidelines came into prominence globally as a result of the formation of the Financial Action Task Force and the promulgation of an international framework of anti–money laundering standards. These standards began to have more relevance in 2000 and 2001, after 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".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 countries as appropriate; and require financial institutions to identify their customers, establish risk-based controls, keep records, and report suspicious activities.
Strict background checks are necessary to combat as many money launderers escape by investing through complex ownership and company structures. Banks can do that but proper surveillance is required on the government side to reduce this.
Over recent years, the rise in anti–money laundering mechanisms has been attributed to the use of big data and artificial intelligence. Traditional anti–money laundering systems are falling behind against evolving threats and new technologies are helping AML compliance officers to deal with: poor implementation, expanding regulation, administrative complexity, false positives.
Criminalization
The elements of the crime of money laundering are set forth in the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and Convention against Transnational Organized Crime. It is defined as knowingly engaging in a financial transaction with the proceeds of a crime for the purpose of concealing or disguising the illicit origin of the property from governments.18 U.S.C. 1956 and 1957, the two most prominent U.S. Money Laundering crime statutes makes it criminal to "engage in a financial transaction involving the proceeds of certain crimes in order to conceal the nature, source, or ownership of proceeds they produced..." Money laundering is “the act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced."
Role of financial institutions
While banks operating in the same country generally have to follow the same anti–money laundering laws and regulations, financial institutions all structure their anti–money laundering efforts slightly differently. Today, most financial institutions globally, and many non-financial institutions, are required to identify and report transactions of a suspicious nature 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. By knowing one's customers, financial institutions can often identify unusual or suspicious behaviour, termed anomalies, which may be an indication of money laundering.Bank employees, such as tellers and customer account representatives, are trained in anti–money laundering and are instructed to report activities that they deem suspicious. Additionally, anti–money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies include 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.
Enforcement costs and associated privacy concerns
The financial services industry has become more vocal about the rising costs of anti–money laundering regulation and the limited benefits that they claim it brings. One commentator wrote that "ithout facts, legislation has been driven on rhetoric, driving by ill-guided activism responding to the need to be "seen to be doing something" rather than by an objective understanding of its effects on predicate crime. The social panic approach is justified by the language used—we talk of the battle against terrorism or the war on drugs". The Economist magazine has become increasingly vocal in its criticism of such regulation, particularly with reference to countering terrorist financing, referring to it as a "costly failure", although it concedes that other efforts may still be effective at combating money laundering.There is no precise measurement of the costs of regulation balanced against the harms associated with money laundering, and given the evaluation problems involved in assessing such an issue, it is unlikely that the effectiveness of terror finance and money laundering laws could be determined with any degree of accuracy. The Economist estimated the annual costs of anti–money laundering efforts in Europe and North America at US$5 billion in 2003, an increase from US$700 million in 2000. Government-linked economists have noted the significant negative effects of money laundering on economic development, including undermining domestic capital formation, depressing growth, and diverting capital away from development. Because of the intrinsic uncertainties of the amount of money laundered, changes in the amount of money laundered, and the cost of anti–money laundering systems, it is almost impossible to tell which anti–money laundering systems work and which are more or less cost effective.
Besides economic costs to implement anti–money-laundering laws, improper attention to data protection practices may entail disproportionate costs to individual privacy rights. In June 2011, the data-protection advisory committee to the European Union issued a report on data protection issues related to the prevention of money laundering and terrorist financing, which identified numerous transgressions against the established legal framework on privacy and data protection. The report made recommendations on how to address money laundering and terrorist financing in ways that safeguard personal privacy rights and data protection laws. In the United States, groups such as the American Civil Liberties Union have expressed concern that money laundering rules require banks to report on their own customers, essentially conscripting private businesses "into agents of the surveillance state".
Many countries are obligated by various international instruments and standards, such as the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the 2000 Convention against Transnational Organized Crime, the 2003 United Nations Convention against Corruption, and the recommendations of the 1989 Financial Action Task Force on Money Laundering to enact and enforce money laundering laws in an effort to stop narcotics trafficking, international organized crime, and corruption. Mexico, which has faced a significant increase in violent crime, established anti–money laundering controls in 2013 to curb the underlying crime issue.
Organizations
Formed in 1989 by the G7 countries, the Financial Action Task Force on Money Laundering is an intergovernmental body whose purpose is to develop and promote an international response to combat money laundering. The FATF Secretariat is housed at the headquarters of the OECD in Paris. In October 2001, FATF expanded its mission to include combating the financing of terrorism. FATF is a policy-making body that brings together legal, financial, and law enforcement experts to achieve national legislation and regulatory AML and CFT reforms. its membership consists of 36 countries and territories and two regional organizations. FATF works in collaboration with a number of international bodies and organizations. These entities have observer status with FATF, which does not entitle them to vote, but permits them full participation in plenary sessions and working groups.FATF has developed 40 recommendations on money laundering and 9 special recommendations regarding terrorist financing. FATF assesses each member country against these recommendations in published reports. Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions.
FATF's 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.
The United Nations Office on Drugs and Crime maintains the International Money Laundering Information Network, a website that provides information and software for anti–money laundering data collection and analysis. 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.