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According to the latest Suspicious Activity Reports (SARs) by the National Crime Agency in 2022, records were set in the last financial year with 901,255 SARs being received, which is a 21% increase on the previous year.
SARs are submitted by people working in sectors like legal services, financial services and banking when there is a suspicion that transactions could be concealing criminal activity or money laundering.
Money laundering is what enables and underpins the majority of organised crime. It means that crime groups can conceal assets and fund further operations. Due to the nature of these crimes, there are no specific figures. However, many people suspect there are billions of pounds laundered in the UK each year.
Understanding anti-money laundering (AML)
Anti-money laundering (AML) refers to laws, regulations and procedures that are designed to prevent the illegal generation of income and the subsequent conversion of it into legitimate assets. The main objective of AML is to detect and deter these activities. It is crucial for many reasons, including:
Protecting financial institutions
With AML safeguards in place, financial institutions and the financial system as a whole maintains its integrity. This reduces the risk of financial losses and reputational damage.
AML is an international business as money laundering often crosses borders. International AML efforts must be coordinated to address issues effectively. In the UK, businesses are subject to AML regulations. They must legally implement measures to prevent and detect money laundering activities.
The legal obligations include:
- The Proceeds of Crime Act 2002 (POCA): This is the legal framework that tackles money laundering in the UK. It criminalises the act and sets out the powers of law enforcement to confiscate any assets derived from crime.
- The Money Laundering Regulations (MLR): This is the regulatory framework for AML compliance. This places obligations on various entities like financial institutions, accountants, solicitors and estate agents. They must implement robust procedures, including due diligence and the recording and reporting of suspicious activities.
- Financial Conduct Authority (FCA) oversight: Financial institutions like banks are regulated by the FCA. This authority has specific rules and guidelines that institutions have to follow to comply with AML regulations.
- Customer Due Diligence (CDD): Businesses must conduct CDD to verify the identity of their customers and assess the risk of potential money laundering. Many places follow Know Your Customer (KYC) procedures, including online betting sites and casinos.
The consequences of non-compliance
Non-compliance with AML regulations can have severe legal and financial consequences for businesses. Regulatory authorities around the world, including those in the UK, impose strict AML requirements. Failing to comply can come with significant penalties. These include:
Regulatory bodies can impose substantial penalties in the form of fines on any business that doesn’t comply with AML regulations. The size of the fine can vary depending on the severity of the violation, the size of the business and the specific circumstances. In the UK, it is the FCA that will usually levy fines.
In some cases, regulatory bodies might seek to confiscate any illegally gained profits. This is intended to deprive businesses of the financial gains associated with their money laundering activities.
Non-compliance with regulations means a loss of trust with customers, investors and stakeholders. The business’s reputation can suffer immensely, which impacts on its ability to attract clients. Ultimately, it damages its long-term viability.
Negative publicity from the media can also harm a business’s reputation and this can have long-lasting effects, making it difficult for the business to recover.
Businesses and their executives could face civil and criminal liability for AML violations. As well as fines, individuals involved in non-compliance can be subject to legal action, including imprisonment.
Regulatory authorities also have the right to revoke permits and licences, which could mean the loss of a banking licence, for example.
Increased regulatory scrutiny
Non-compliance can often trigger increased scrutiny like more frequent audits and inspections. The business’s activities might be monitored more closely to ensure compliance. They may also be subject to additional reporting requirements and obligations.
Know Your Customer (KYC) procedures
Know Your Customer (KYC) procedures are an important part of anti-money laundering compliance. They help businesses prevent and detect suspicious and illicit financial transactions. KYC procedures help businesses to assess the risk associated with their customers because they:
- Verify their identities by using photo ID, proof of address and redacted copies of payment cards.
- Assess the risk associated with each customer based on their location, business relationships and financial activities.
- Ensure businesses are complying with regulatory requirements.
- Prevent money laundering and terrorism financing by helping to detect unusual activities.
- Help businesses to maintain their reputation and the trust placed upon them.
In order for businesses to develop and maintain robust processes of KYC procedures, they should have clearly defined policies and procedures that are tailored to the specific risks and characteristics of their business.
There should be continuous monitoring of transactions and behaviour with automated alerts set up when suspicious or unusual activity occurs. Employees need to be trained and kept informed about any updates to procedures or the latest techniques used by money launderers.
Risk assessments are a crucial component of anti-money laundering compliance. These help to identify and evaluate potential money laundering and terrorist financing risks and are specific to the business in terms of its nature, size and complexity. A bank will have different risk assessments to an online casino facility, for example.
Here are the reasons why risk assessments are essential:
- They tailor controls to specific risks. This allows businesses to understand their unique vulnerabilities and set appropriate control measures.
- They allow businesses to optimise their resource allocation. They can then focus efforts and investments on areas that pose higher risks.
- They ensure that the business meets regulatory requirements and standards.
- They prioritise customer due diligence (CDD). This means higher-risk customers might have more thorough scrutiny and ongoing monitoring.
- They improve transaction monitoring as businesses understand the specific risks associated with their business type.
- They allow for quicker adaptation to change. Risk assessments are reviewed regularly to account for emerging risks and other changes like alterations in regulations.
Employee training and awareness
For anti-money laundering compliance to be effective, employees must be made aware and trained appropriately on procedures as well as what to look for.
Employees must be educated on the laws that apply to their industry and must know how to identify red flags associated with money laundering and illicit activities. This includes recognising patterns of transactions that could indicate suspicious behaviour.
Those in customer-facing roles must also be trained on conducting thorough customer due diligence like verification of identities and assessing the risk level of each customer. It’s not only new customers that employees need to consider; they should also monitor existing customer transactions for unusual activities.
In businesses where AML technology is used, employees need to be familiar with the systems and how they work. Above all else, there should be a culture of compliance within the whole organisation. There should be no slacking on procedures as this is how mistakes are made.
When employees know their specific responsibilities, it means they’re more likely to report suspicious activities.
Reporting suspicious activities
A crucial part of anti-money laundering compliance is the actual reporting of suspicious activity. This means that authorities can investigate and take action.
Red flags include:
- Unusual transactions like large, frequent or quick transactions that aren’t typical for the customer or their line of business.
- Incomplete or altered identification documents.
- High-risk customers like people from high-risk jurisdictions or working in high-risk industries.
- Unexplained income or wealth.
- Layering and structuring of transactions that aim to obscure the origin or destination of funds.
- Frequent large cash transactions, especially when it is not consistent with their line of work.
- Sudden changes in customer behaviour.
Any suspicious activity should be reported via the appropriate channels. Depending on the nature of the business, the reporting process might look like this:
- Document the suspicious activity and include details of the customer, the transactions and any red flags.
- Follow the internal reporting procedures as outlined in the policy. This might include notifying a specific person in charge of AML compliance.
- Ensure confidentiality during the reporting process and only share information with those who need to know.
- Use reporting channels as established by regulatory authorities.
- Submit a Suspicious Activity Report (SAR) with all relevant information and supporting documentation.
- Cooperate with any follow-up investigations by the authorities.
Third-party due diligence
Another critical component of AML compliance is to conduct due diligence on suppliers and other third parties involved with the business. This helps organisations to mitigate the risks associated with illicit activities and money laundering.
Third-party due diligence allows businesses to assess the AML risks associated with suppliers and partners. This includes evaluating the risks of these organisations being involved in financial crimes or money laundering. Businesses are often held responsible for the actions of their third-party partners. Conducting due diligence means they reduce the risk of legal consequences for the organisation.
If a third party is found to be involved in money laundering, it can harm the organisation itself. Third-party due diligence helps prevent damage to the organisation’s reputation.
Assessing the financial stability of third-party organisations helps ensure that they’re financially sound and less likely to engage in illicit financial activities. This also means that businesses protect themselves from any legal liabilities if their third-party partners are involved in fraud or money laundering.
Continuous transaction monitoring plays an important role in detecting potential money laundering. Nowadays, technology significantly enhances the effectiveness of transaction monitoring as it provides tools that can analyse large amounts of data in real time.
Continuous monitoring can:
- Detect suspicious activity early by recognising suspicious patterns of behaviour.
- Help organisations to mitigate risks proactively.
- Help organisations to comply with regulations.
- Help organisations to adapt to emerging risks and adjust their AML approach accordingly.
- Help reduce false alerts through the use of technology.
- Facilitate a more comprehensive understanding of typical customer activities.
The role of technology in transaction monitoring
Technology can analyse huge amounts of data in real time, quicker than any human or group can. Big data analytics detects complex financial patterns and relationships that individuals wouldn’t see.
Machine learning and artificial intelligence (AI) can be used to identify anomalies and patterns. It can help with behavioural analytics that assess normal patterns of behaviour to identify deviations and trigger alerts.
Technologies also provide scenario modelling. This involves creating models that are based on known typologies. They test transactions against these scenarios to refine the monitoring and alerts.
Up-to-date documentation is important when it comes to AML compliance. Businesses that organise their compliance documentation will show commitment to anti-money laundering. Robust documentation procedures also demonstrate commitment and transparency.
Compliance documentation should include the recording of risk assessments, employee training information and records, customer due diligence activities, SAR documentation and records, transaction monitoring records and all of the business’s AML policies and procedure documents.
All of this documentation is invaluable for audits. Historical documentation serves as a trail that allows auditors to trace AML activities. It can also provide evidence of compliance and facilitate regulatory reviews, thus minimising disruptions to business operations.
Essentially, documentation helps to establish accountability too. It provides AML process transparency and identifies any areas for improvement.
What’s more, should there ever be any investigations or legal challenges, well-documented compliance records can help with defence as they can be used to refute negligence or allegations.
Regulatory changes and updates
Staying up to date with regulatory changes is essential, as regulatory frameworks evolve in response to emerging risks around the globe.
Money laundering and illicit financial activities are continually evolving. As such, criminals are continually adapting their tactics to exploit vulnerabilities in financial systems. Regulatory changes aim to close any loopholes. Staying informed about changes helps businesses ensure continued AML compliance while identifying and mitigating emerging threats.
Regulatory changes can also impact customer due diligence requirements. Staying informed means businesses can adjust as appropriate. AML regulations often align with international standards that are set by organisations like the Financial Action Task Force (FATF) so it’s important for those in charge to keep abreast of international changes and threats.
Failing to adapt to changes can lead to increased scrutiny. Updating compliance practices minimises the risks of regulatory investigations and sanctions.