Over the past few years, money laundering has turned into a disaster for firms and institutions associated with the financial sector. As a result, governments have been actively looking for innovative ways to fight against money launderers. They are putting various policies in place to prevent money laundering called anti-money laundering policies.
In this post, we will learn about what exactly is anti-money laundering (AML)? Which industries are affected by AML, and what does it do in Practice? So, without any further delay, let’s get started.
What is Anti-Money Laundering?
Anti Money Laundering or AML is a term used across the globe for a set of laws and regulations designed to stop criminals from disguising illicitly acquired funds as lawful profits.
As per AML law, financial institutes such as banks, investment firms and real estate are required to monitor their customers proactively to prevent any possible money laundering and corruption.
Initiatives for anti-money laundering were first observed in the year 1989 when numerous organizations across the world formed FATF (Financial Action Task Force). The primary aim of this task force is to establish universal standards for combating money laundering and encouraging the application of those standards within organizations.
Industries Affected by AML
By now, you must have understood that firms that come under the financial sector, such as banks, payment processing companies, and insurance firms need to comply with AML regulations. However, there are some other companies that need to follow AML regulations. These include:
- Law firms
- Real estate brokers
- Tax advisors
- Casino & gambling operators
- Virtual currency exchange
- Loan companies
- Payment providers
- Exchange service providers
As per the European Union anti money laundering authoritative instructions, all the companies mentioned above need to employ e-KYC or electronic identity verification to validate their customers remotely. This verification can be done via both selfie-based or video-based ID verification.
Effects of Money Laundering
Worldwide, a lot of people strive to launder money to manipulate financial systems and gain an illegal benefit. Such unlawful acts are not only a threat to the financial stability of a country but also give birth to various social and security-related issues. Money laundering plays a significant role in powering corrupt public officials, terrorists, and arms dealers.
Let’s analyze the adverse effects of money laundering on the society and economy.
Money launderers make companies less productive, which leads to a lower level of tax revenue for the country. Imagine even if 25% of companies in a country are involved in money laundering acts, how much negative impact it will make on the overall tax revenue of the country.
In addition to this, businesses involved in laundering have an unfair business advantage. Such businesses can afford to sell their products at a lower price, which is the biggest threat to the existence of small-scale businesses. Small companies lose customers as they can’t compete this way.
If money laundering acts are not coped successfully, it may have political and social consequences as well. Money launderers can infiltrate and take control of prominent financial institutions of the country by making investments and offering bribes to public officials.
Thus governments and legal authorities will have to spend more funds on law enforcement and AML regulations that will reduce public spending.
What Does AML do in Practice?
Anti-money laundering laws and regulations are intended to keep an eye on illicit activities that include trading in illegal goods, misuse of public funds, tax dodging, and market manipulation.
Criminals often try to “launder” the money they earn via unlawful acts such as drug trafficking. One of the primary techniques they use to disguise their illegal cash is, they run their money through a legitimate business. Consequently, every company is advised to detect and prevent illicit transactions.
While anti-money-laundering laws are applicable to certain types of payment transactions and criminal behaviors, it should be practiced in every financial firm to detect and prevent illicit activities.
Companies associated with the financial sector must verify the identity of their customers and monitor their transactions. They are not just accountable for monitoring transactions but also report suspicious activities such as a sudden increase in funds or withdrawal to the authorities. This entire process is the part of KYC (Know Your Customer).
All the financial institutes like banks, payment processing companies, and insurance companies need to comply with KYC guidelines to prevent their businesses from being used by criminals for money laundering activities.
The KYC process usually involves identifying and verifying the identity of customers via trustworthy sources of data, documents, or information. To comply with KYC, a customer may need to provide proof of address, recent photographs, and a valid identity document.
Undoubtedly, complying with AML is important for all businesses. However, not every company has a budget for the implication of the AML setup. According to a report from the Financial Times, corporates and prominent financial institutes spend millions every year to prevent money laundering, which is not possible for startups and small-scale businesses.
So what’s the solution? Well, such businesses can invest in advanced technology that can improve their AML defense mechanism without breaking their bank.
Fortunately, there are some AML compliance software solutions out there that not just simplify the complicated AML compliance process but also are pocket-friendly.
For those who don’t know, AML software is a computer program that lets businesses analyze consumer records, and identify fraudulent transactions. This program filters customer data and categorizes it as per the level of suspicion.
So, if you are in a business that needs you to comply with AML regulations, you can invest in pocket-friendly AML software that protects your business from financial crimes. Don’t forget that financial crimes are changing with the change in technology. Therefore, a reliable AML defense system is needed for every business.
We at iDenfy provides a wide range of identity verification solutions such as face recognition, liveness detection, identity document check, anti money laundering check and more. You can give our services a try to develop an effective, cost friendly AML compliance program within your organization.