Anti-Money Laundering (AML)
What Is Anti-Money Laundering (AML)
Anti-Money Laundering (AML) laws and procedures are put in place to prevent criminals from disguising the origins of illegally obtained money. The main goal of AML is to prevent money laundering by monitoring and reporting suspicious financial activities, which makes it harder for criminals to profit from their illegal activities. These measures are crucial for keeping financial systems safe and ensuring they aren’t used for crimes like terrorism financing, drug trafficking, corruption, among others.
Money laundering is the process of hiding where illegal money comes from, making it look like it came from a legal source. This usually happens in three steps: first, placement, where the illegal money is put into the financial system in small amounts to avoid being noticed; second, layering, where the money is moved around through various transactions to hide its origin; and third, integration, where the laundered money is reintroduced into the economy, appearing legitimate.
A key part of AML is the Know Your Customer (KYC) process, which requires financial institutions to verify the identity of their clients before conducting business with them. This helps prevent criminals from using the financial system by confirming who the clients are and where their money comes from. Financial institutions are also required to file Suspicious Activity Reports (SARs) when they notice unusual or potentially illegal activities, which are then sent to authorities for further investigation and action.
Another important aspect of AML is Customer Due Diligence (CDD), where financial institutions assess the risk associated with each customer. This involves gathering information about the customer’s business and financial activities. For higher-risk customers, Enhanced Due Diligence (EDD) may be needed, which involves more detailed checks and ongoing monitoring. Politically Exposed Persons (PEPs), who are individuals in prominent public positions or closely connected to them, are also subject to stricter scrutiny under AML rules because they are at higher risk of involvement in corruption.