Since the AML ACT of 2020, there has been an overall shift in the U.S. regulatory regime toward global public and private partnerships focused on fighting financial crimes. Has your institution revamped and strengthened the AML department to comply with current federal requirements while anticipating future requirements?
We’ve put together this resource to help you align with modern AML strategies for banking and finance to keep pace with regulatory changes and maintain the most efficient AML programs.
But first, let’s dig into the relationship between banks, money laundering and AML a bit more.
What is Money Laundering?
According to FinCEN, “money laundering is the process of making illegally-gained proceeds (“dirty money”) appear legal (“clean”).”
As you may know, money laundering typically involves three steps:
- Placement, to add “dirty money” to financial systems.
- Layering, to conceal the source.
- Integration, to make those funds legitimate.
Since money laundering poses a significant threat to banks, due to financial transactions that they facilitate every day, AML comes in as the antidote.
How AML Compliance Benefits Banks
In order to deter money launderers, Anti Money Laundering (AML) programs for screening and monitoring risks are implemented to reduce the risk of money laundering.
A well-rounded AML compliance program will achieve the following results:
- Creates a safe and secure environment
- Potentially reduces fines through regulatory compliance
- Builds trust in the public eye
- Increases customer confidence
A Brief History of AML in Banking
Over the past 50 years, legislations passed to detect and curtail money laundering have shaped how AML is handled today. Financial institutions must adhere to these provisions to safeguard the financial system from abuse.
In case you needed the reminder, below is a list of AML milestones, along with a summary of key reforms:
- 1970: Bank Secrecy Act
- Required banks to (1) report cash transactions over $10,000 using the Currency Transaction Report; (2) correctly identify persons conducting transactions; and (3) maintain a paper trail by keeping appropriate records of financial transactions
- 1986: Money Laundering Control Act
- Established money laundering as a federal crime
- 1988: Anti-Drug Abuse Act
- Required the verification of the identity of purchasers of monetary instruments over $3,000
- 1994: Money Laundering Suppression Act
- Required Money Services Businesses (MSB) to be registered by an owner or controlling person
- 1998: Money Laundering and Financial Crime Strategy Act
- Required banking agencies to develop anti-money laundering training for examiners
- 2004: Intelligence Reform & Terrorism Prevention Act
- Amended the BSA to require the Secretary of the Treasury to prescribe regulations requiring certain financial institutions to report cross-border electronic transmittals of funds
- 2020: AML Act
- Formally broadened the mission or purpose of the BSA Act to include national security
Formalized the risk-based approach for compliance programs
How AML in Banking is Evolving
With regulatory requirements growing in complexity, there are four key areas banks are modernizing when it comes to Anti-Money Laundering compliance program:
- Know Your Customer (KYC)
- Customer due diligence (CDD)
- Suspicious activity reporting (SAR)
- Customer and transaction screening
Let’s break down some of the latest trends in AML programs across each of these four key areas.
1. Know Your Customer (KYC)
Know Your Customer (KYC) is the process of gathering data, verifying identities, and analyzing risks associated with a customer you’re doing business with.
Key components of KYC are:
- Identity verification: Verifying a customer is who they say they are through validated documents.
- Watchlist screening: Monitoring for sanctioned entities, Politically Exposed Persons (PEPs), and negative news.
- Customer Risk Rating: A rating based on different risk factors for money laundering.
Since KYC is the first step to transacting with any bank, it’s important to ensure the process is streamlined. To avoid losing clients to other banks, the customer onboarding experience is a top priority. Consolidated technology, improved data quality and ongoing risk monitoring capabilities are some of the ways to reduce friction during onboarding KYC.
2. Customer Due Diligence (CDD)
Complying with FinCen’s CDD Rule means banks must verify the identity of beneficial owners of customers. The aim is to improve financial transparency and avoid criminal exposure from persons who use, or attempt to use the bank’s products and services for illicit purposes.
Leading organizations are leveraging AI, ML and big data analytics to make CDD more accurate and cost-effective. Having comprehensive data for both ad hoc and ongoing customer due diligence is essential to quickly uncovering risks and preventing reputational damage.
Another way banks are enhancing CDD and gaining deeper customer insights is by analyzing news sites, social media platforms and other publicly available information.
3. Suspicious Activity ReportING (SAR)
SARs are a tool for financial fraud prevention from the Annunzio-Wylie Anti-Money Laundering Act of 1992. Through SARs, financial institutions assist U.S. government agencies in detecting and preventing money laundering.
The following measures are required:
- Keep records of cash purchases
- File reports of cash transactions exceeding $10,000
- Report suspicious activity that might signal money laundering
Many institutions are using AI and ML algorithms to identify suspicious activity patterns to reduce manual work, which is also proving useful in tackling emerging threats, like cybercrimes and terrorism financing.
Being able to automate suspicious activity detection saves time, captures risk more accurately, and helps avoid false positives.
4. Transaction Monitoring
Transaction monitoring refers to monitoring customer accounts and activities for illegal behavior. Key components of effective transaction monitoring are advanced detection, data enrichment, and fewer false positives.
Banks are now merging intelligence derived from internal data sets with external insights in order to get a 360° risk assessment of any given customer. The next frontier of total risk monitoring requires a strong data foundation that is refreshed in real time, as well as integrated technology to transform big data into succinct and actionable risk insights.
Other Ways Banks Can Enhance AML Compliance
Banks are multi-faceted organizations with complex FinCrime requirements. Shifting away from legacy players to modern risk intelligence tools, that are tailored to meet banking requirements, can help transform processes.
Some ways banks are forging ahead to improve accuracy, velocity and cost-effectiveness of their AML programs includes:
- Accessing live data foundations that refresh in real-time and are flexible enough to ingest data quickly
- Consolidating fragmented or expensive legacy technology through orchestration platforms with simpler setups
- Expanding risk awareness by exploring new data sources for open-source intelligence
- Risk-driven reviews for Perpetual KYC, rather than periodic reviews that can leave banks vulnerable
- Combining internal and external data analysis for a complete picture of risk
- Using knowledge-graph technology to speed up KYCC and network risk investigations
Global organizations looking for ways to improve lagging AML processes are investing in technology to update current risk management systems and improve cost-effectiveness. In addition to meeting the needs of today, checking the box on automation, flexibility and scalability can future-proof your AML program for years to come.
Transform your team from data gatherers into true risk managers. Discover why large financial institutions are choosing Sigma to solve their complex AML compliance challenges. Watch a demo today.
