Anti-money laundering (AML) refers to a set of laws, rules, and regulations aimed to prevent fraudsters from trying to disguise illegal money as legally earned money. Over time, anti-money laundering laws have changed drastically. With banking technology going digital, banks and businesses need to keep track of the comings and goings of the money. While the financial landscape is becoming customer-focused, it makes sense that banks focus on removing fraud from the process. Financial institutions have to comply with AML rules and regulations as they’re legally obligated, which in turn helps in preventing money laundering.
Reasons for Complying with AML Laws
- Regulatory Action: Regulatory bodies have been trying their best to legally enforce regulatory laws such as KYC compliance and AML. Non-compliance with AML laws causes banks to face heavy fines. Regulatory bodies and regulators have levied over $32 billion as AML Fines to banks for non-compliance since 2009.
- Threat Evolution: Not just financial infrastructure, but the methods used by fraudsters have also improved. Fraudsters have been building new techniques and methods to trick banks and financial institutions. Criminals can be individuals, selling weapons and vehicles, cybercriminals trying to exploit technologies, or criminals who use e-commerce technologies. This is the reason why AML compliance requires updating regularly.
- Reputational Risk: Financial institutions are nothing if they lose their reputation in the eyes of customers. Any money laundering crisis can hurt a business’s reputation. As market values are becoming high, businesses can potentially lose a lot. It makes sense for customers to lose trust in financial institutions that have been constantly investigated for non-compliance. To retain customers and protect brand reputation, banks need to follow KYC and AML regulations.
- Rising Costs: To successfully comply with AML regulations, banks have to spend a lot of manual effort. This effort makes the business operations inefficient and makes it challenging to scale. In 2018, the USA financial institutions spent about $23.3 billion to prevent money laundering risks.
- Poor Client Experience: Not having an efficient and seamless customer experience can reduce the customer experience. The compliance process needs a business to contact more than one customer. Banks and financial institutions lose 70% of their customers because of slow and inefficient processes.
- Financial Crime: Financial crime is only evolving with time. Financial institutions and regulatory bodies have been trying their best to prevent the flow of money laundering. Even with the high level of scrutiny, fraudsters still have been increasing their rate of fraud. This means that the need for AML regulations is growing.
Fines Revolving Around Anti-Money Laundering
Even with endless technologies around to help, banks and financial institutions globally fail to comply with AML laws. Either banks and FIs don’t leverage technologies available to them, or they don’t leverage the technologies efficiently. Manually complying with KYC and AML compliance can be a headache, which is why most firms fail to comply. The failure of compliance also leads to an increasing number of money laundering fraud. Even in 2022, the number of AML fines is growing at an alarming rate. Money laundering, terrorist financing, corruption, fraud, bribery, and other types of financial crimes may have severe consequences.
With the improvement of technologies, access to financial services has become much easier. It has created various opportunities for criminals to access financial services much easier. Compared to AML penalties 5 years ago, the number is much higher today. While the AML penalties in 2018 were around $4 billion, the AML penalties in 2019 rose to $8 billion.
AML Compliance in Different Sectors
AML compliance is necessary and not only financial institutions are forced to comply with it. These institutions are in different sectors. The amount of money handled on a daily basis isn’t the same as banks. Also, the client group differs from each other and the level of risk isn’t the same for all types of organizations. A common example of these institutions are:
- Banking industry
- Money transfer
- Casinos and gaming industry
- Real estate industry
- Currency exchange
- Payment industry
- Investment industry
- Insurance industry
Regulatory Compliance
Regulatory compliance means following the regulations set out by regulatory bodies. It is in a state where regulatory requirements are needed to be met as they’re required by the regulatory agencies. It is vital to meet regulatory requirements for all the businesses that are part of a regulated industry. The regulatory agencies make these regulations throughout the globe, with the sole aim of minimizing the flow of money laundering.
Importance of AML Compliance Officer
An AML compliance officer’s main role is to implement an AML program and make sure that it’s followed ideally. Without an ideal AML compliance program, businesses can lose a lot of business to fraudsters, fines, and reputational damage. Here are all the responsibilities of an AML compliance officer:
- Determining the risk levels of customers while opening an account implementation of the company’s anti-money laundering compliance policies.
- Keep up to date with AML regulations and laws and comply with them.
- Build a proactive strategy against financial crimes
- Keeping high-risk customers under monitoring to detect and report suspicious transactions.
- Built internal control methods
- Create monitoring compliance methods
- Evaluate business activities to assess compliance risk