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Knowledge Base » Business » The Role of Financial Institutions in Detecting and Reporting Money Laundering

The Role of Financial Institutions in Detecting and Reporting Money Laundering

Money laundering in the UK is estimated to cost the economy more than £100 billion every year. In 2022, Credas rated the UK as number two on the list of global money laundering hotspots. With money laundering being a significant issue across the world and an increasing cause for concern in the UK, financial institutions play an essential role in detecting, reporting and preventing money laundering. 

Not only can anti-money laundering help to protect financial institutions and their legitimate customers and maintain public confidence, but it can also protect your financial integrity and the UK economy and prevent criminal activity.

Understanding money laundering

Money laundering occurs when an individual or organisation conceals the origins of money that has been obtained illegally, typically by making transfers involving foreign banks or legitimate businesses. People engage in money laundering to try and make illegally gained funds appear legitimate and to try and avoid attention from law enforcement agencies.

Money laundering typically involves large amounts of money that was obtained through criminal activity, such as drug trafficking, terrorist activities, theft or extortion. This money is considered dirty and the process of laundering is designed to make it appear clean. 

There are typically three stages involved in money laundering:

  • Placement: This involves illegally obtained funds being introduced into the financial system. This can be done by various methods, such as depositing cash into banks, purchasing assets or using multiple financial instruments.
  • Layering: This stage involves hiding the source of the funds. Financial transactions may be made through a complicated series of transfers and transactions, often involving multiple accounts or financial institutions. This stage is designed to create confusion and make it difficult for authorities to trace the money.
  • Integration: The funds are now reintroduced into the economy and used to make legitimate purposes, such as property or other assets or investments. At this stage, the laundered money now appears to be legal and its criminal origins are hidden.

There is a wide range of money laundering techniques that criminals frequently use, with some being relatively simple transactions and others being more complex. For criminal organisations wanting to use illegally obtained money, money laundering is an effective practice. 

Some examples of common money laundering practices include:

Using a cash-based business as a front 

A business, such as a takeaway restaurant or a barber shop, is owned by a criminal organisation and they will increase the daily cash receipts to launder illegal cash through the business. 

Smurfing

Also known as structuring, this is when large amounts of money are broken up into smaller amounts and deposited into many different bank accounts to avoid detection. In the UK, deposits smaller than £5,000 are not usually flagged. 

Cash smuggling

Cash is smuggled by ‘cash mules’ across the border and then deposited into a foreign bank account in a country where money laundering laws or enforcement is less strict.

Shell companies

This is another popular money laundering strategy where illegal funds are concealed using a complex series of fake transactions. For example, dirty money is transferred to a foreign account and a number of transfers are made using multiple accounts and financial tools, which obscures the money’s illegal origins. The money is then transferred back to the UK using a complex series of transactions and then enters the economy. 

Round-tripping

Some money launderers invest in gold, gems, art or other valuable items that can be easily moved between different countries and different jurisdictions. Alternatively, they invest in valuable assets, including real estate, cars and boats. These provide a safe investment that can be sold on when necessary. 

Investing

A shell company is an inactive company or corporation with no active business operations that is used to hide illegal funds or to disguise the origin of illegal funds. 

Cryptocurrency

This involves converting illegal money into casino chips, playing a small amount of chips in multiple games and then cashing out with clean money. Because many casinos offer anonymity, gambling is an effective way of money laundering without being flagged. 

Gambling and casino laundering

Because cryptocurrency is less regulated than other forms of investment, it is a popular choice for money launderers. A cryptocurrency account can be opened in less than a minute and the blockchain is anonymous. Various methods can be used to launder money through crypto. For example, cryptocurrency tumblers and mixing services can break down illegal funds into small amounts, distribute them to various accounts and then recombine them. 

Cryptocurrency money laundering

Regulatory framework in the UK

There are multiple laws, regulatory frameworks and government agencies that are responsible for anti-money laundering in the UK. 

Proceeds of Crimes Act 2002 (POCA) 

Money laundering is defined under the Proceeds of Crimes Act and includes handling or possessing criminal property, including money, money’s worth, securities and property. Money laundering can take place in any country in the world and can range from a single act committed by one person to a complex set-up involving multiple transactions and individuals. POCA criminalises money laundering and establishes a legal framework for confiscating assets connected to criminal activities.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 

Also known as the Money Laundering Regulations (MLR), these regulations outline the legal requirements for anti-money laundering and counter-terrorist financing in the UK. The MLR requires businesses to assess and mitigate the risk of money laundering and terrorist financing and to perform their due diligence. This includes: 

  • Verifying the identification of customers, beneficial owners and politically exposed persons (PEPs)./li>
  • Maintaining records of customer due diligence and transactions for a specified period.
  • Reporting any suspicious activity to the National Crime Agency (NCA).
  • All relevant businesses must register with a supervisory authority.
  • Establishing and maintaining internal policies, procedures and controls to prevent money laundering and terrorist financing. These policies and procedures should be tailored to the specific risks of the business.
  • Providing training to employees surrounding money laundering and terrorist financing.

The Financial Conduct Authority (FCA) 

The Financial Conduct Authority is the regulatory body responsible for overseeing and regulating financial bodies, institutions and businesses in the UK. The FCA plays a crucial role in enforcing AML regulations within the financial sector and sets out specific requirements for financial institutions, conducts regular inspections and has the authority to impose penalties for non-compliance.

National Crime Agency (NCA) 

The National Crime Agency is the UK’s leading agency for tackling serious and organised crime, including money laundering. It works collaboratively with other law enforcement agencies and has the power to investigate and disrupt criminal activities. The NCA plays an important role in more complex cases of money laundering. They also help to coordinate anti-money laundering efforts on a national level.

Joint Money Laundering Intelligence Taskforce (JMLIT) 

The JMLIT was established by the National Economic Crime Centre (NECC) and is a joint partnership between law enforcement agencies, the government and the financial sector. It was set up to facilitate the sharing and analysis of intelligence and information to improve the detection and prevention of money laundering. Because money laundering schemes are often complex, a joint task force allows different agencies to share information and can help to identify cases of money laundering and recognise any vulnerabilities. 

HM Treasury 

HM Treasury is the economic and finance ministry of the UK government. It plays a key role in shaping the UK’s anti-money laundering strategy and works closely with other agencies to combat money laundering. HM Treasury is involved in the development of legislation, regulations and policies related to anti-money laundering.

Office for Professional Body Anti-Money Laundering Supervision (OPBAS) 

OPBAS was created by the UK government in an effort to strengthen the anti-money laundering supervisor regime. It is made up of 25 professional body supervisors from the legal sector and accountancy sector. OPBAS ensures that these professional bodies effectively supervise their members and comply with anti-money laundering regulations. 

money laundering in financial institution

Responsibilities of financial institutions

Financial institutions, including banks, building societies, insurance companies and other institutions that deal with financial transactions such as investing, loans and monetary deposits, have a responsibility to take appropriate measures to protect their business, employees, customers and the economy from money laundering and other financial crimes. 

The role of financial institutions in detecting and reporting money laundering should not be understated. Below, are some key responsibilities all financial institutions should follow:

Know Your Customer (KYC) and Customer Due Diligence (CDD) 

Financial institutions must do their customer due diligence, meaning you must take appropriate steps to identify your customers and perform checks to ensure they are who they say they are. To do this you must obtain their name, date of birth, residential address and a photograph on an official document to confirm their identity. Some ways you can confirm your customers’ identities include:

  • Passport.
  • Driving licence.
  • Utility bills.
  • Bank statements.
  • Credit reference agencies, such as Experian or Equifax.
  • The electoral register.

In some cases, it may be necessary to confirm multiple identities, for example if your customer is acting on behalf of someone else or if you need to confirm the ownership structure of a company. Due diligence also includes checking your customer is not using a fake ID. Conducting a risk assessment on a customer to determine the level of due diligence required may also be necessary. Higher-risk customers, such as politically exposed persons (PEPs) or those from high-risk jurisdictions, may require enhanced due diligence and more thorough checks. As part of due diligence, financial institutions are required to continuously monitor customer transactions to detect any unusual or suspicious activity. 

Monitor transactions 

Many financial institutions use automated transaction monitoring systems to flag potentially suspicious transactions. These systems analyse transaction patterns and amounts and other variables to identify any anomalies that may suggest money laundering is taking place. In addition to automatic systems, employing compliance professionals to manually review any flagged or suspicious transactions and assess their legitimacy is also recommended.

Keeping accurate records 

Financial institutions are required to maintain comprehensive records of customer information, transactions and due diligence efforts. These records serve as evidence of compliance and can be crucial during regulatory audits or investigations. Records should be kept for a minimum of five years from the date a business relationship ends or the date a transaction is completed.

Training and awareness 

Providing ongoing employee training can ensure your employees have a strong understanding of money laundering risks, the vulnerabilities of financial institutions to money laundering, the serious criminal activity often connected to dirty money, the laws, regulatory frameworks and regulating bodies in the UK and how to prevent or detect money laundering. Anti-money laundering training can ensure employees know how to identify and report any suspicious activity.

Reporting suspicious activity

Being aware of how to identify and report suspicious transactions and activity is key for financial institutions and helps to reduce the likelihood that money laundering will occur. 

As well as the important steps listed above, including monitoring transactions and performing customer due diligence, below are some other important ways that financial institutions can identify and report suspicious activity.

Employee vigilance 

Even if automated systems are in place to identify suspicious financial transactions, it is likely that some suspicious activity will not be automatically identified. Employee vigilance is an effective way of identifying money laundering. Regular training on identifying signs of money laundering and reporting procedures is crucial. Employees should be aware of who to report their suspicions to, for example their line manager, HR or a designated individual. Financial institutions should encourage a culture of compliance and make employees aware of the importance of reporting suspicions.

Be aware of money laundering red flags

There are multiple red flags that could indicate money laundering, including:

  • Large financial transactions.
  • Transactions that are inconsistent with a customer’s usual financial behaviour.
  • Rapid movement of money between accounts.
  • Frequent deposits or withdrawals that are just below the reporting threshold (£5,000).
  • Transactions involving shell companies or companies with no clear business purposes.
  • Transactions involving third parties with no obvious connection to the customer.
  • Businesses or entities with complicated ownership structures or business structures.
  • Customers from high-risk jurisdictions (those known for money laundering activities).
  • Engaging in high-risk business and transactions without proper due diligence.
  • Sudden and unexplained increases in account balances.
  • Assets or funds that are disproportionate to the customer’s known income.
  • Uncooperative or suspicious behaviour regarding their account or transactions.

Implement internal reporting procedures 

Internal reporting procedures should be in place that allow employees to report any suspicious activity to the designated compliance officer. The officer can then investigate further and gather more information before deciding on the next step. The process of reporting money laundering suspicions should be handled confidentially and employees should be aware that there will be no legal or professional repercussions and that the suspected money launderers will not be aware of who made the initial report.

Report any suspicious activity 

If any suspicious activity is detected or suspected, financial institutions must report this activity immediately to the appropriate regulatory authority. In the UK, Suspicious Activity Reports (SARs) are made by financial institutions to the National Crime Agency. SARs give information and intelligence that may not otherwise have been accessible to law enforcement. They can help to prevent money laundering from taking place and can prevent criminal behaviour connected to dirty money, such as terrorist activities, drug trafficking and human trafficking. 

the role of financial institution in reporting money laundering

Challenges and technology solutions

The rise in the use of online banking and the increased popularity of cryptocurrency has made it easier for criminals laundering money to make transfers and withdrawals without detection. By leveraging technological solutions, financial institutions can enhance their anti-money laundering capabilities, improve efficiency and stay ahead of evolving money laundering techniques. 

To combat the increased risk of money laundering, technological advancements can help to aid in the detection of laundering activities, for example:

Artificial Intelligence (AI) 

AI, specifically machine learning algorithms, can be used to analyse large datasets and detect patterns that could indicate money laundering. This can improve the accuracy and efficiency of money laundering detection. AI systems can assess customer behaviour over time to identify any anomalies and deviations from normal patterns.

Advanced data analytics 

Analysing large amounts of data in real time helps financial institutions identify unusual patterns and behaviours and create alerts for further investigation. Advanced analytics can improve the detection of suspicious activities. Financial institutions can also utilise predictive analytics, which helps to predict and anticipate potential risks, allowing them to proactively address threats before they occur. 

Regulatory Technology solutions

Also known as RegTech solutions, this uses technology to streamline the compliance processes and provides institutions with automated tools to help them comply with Know Your Customer requirements, streamline identity verification, accurately detect money laundering and provide monitoring capabilities to ensure compliance with the regulations.

Data sharing platforms 

Platforms that facilitate secure data sharing among financial institutions and regulatory bodies can enhance collaboration and improve the effectiveness of anti-money laundering efforts. 

Biometric technology 

Enhanced customer verification through biometric authentication adds an additional layer of security, reducing the risk of identity theft and fraudulent transactions. Biometric technology can include fingerprint mapping, facial recognition and retina scans. 

Machine-readable regulations 

Technology can be used to automate the interpretation and implementation of complex regulatory changes, helping financial institutions stay compliant in real time. Delays in implementing changes can offer criminals a key window to launder money without getting caught. Implementing automated processes can help to close this window. 

However, although the strategies listed above can be hugely advantageous in helping to prevent money laundering, it is necessary to balance the benefits of technology with the ongoing need for human oversight. Financial institutions should also consider ethical concerns, particularly regarding data privacy.

Future trends 

It is important to be aware of future trends that are likely to shape the anti-money laundering industry.

Enhanced cryptocurrency regulations 

With the lax regulations surrounding cryptocurrency and the anonymity offered on cryptocurrency platforms, enhanced regulations will not only offer increased trust in the sector but will also help to reduce the amount of money laundering through cryptocurrency platforms. Governments around the world are considering ways to regulate cryptocurrency, which could help to reduce laundering through cryptocurrency. As well as improved cryptocurrency regulations, blockchain technology can be utilised to uncover illegal activity. 

Increased collaboration

Although this has been a huge focus in recent years, the success of collaboration between different agencies, such as the JMLIT, means that this is expected to continue. Increased collaboration among financial institutions, regulatory bodies and law enforcement agencies will improve information-sharing capabilities and strengthen the overall fight against money laundering.

Focus on cybersecurity 

As financial transactions increasingly move to digital platforms, there will be an increased focus on strengthening cybersecurity measures to prevent data breaches, unauthorised access and illegal transactions, which can be exploited for money laundering.

Enhanced due diligence 

Financial institutions will likely be expected to increase their due diligence, particularly in relation to high-net-worth clients, high-risk clients and cross-border accounts and transactions. Additionally, future trends could see the value of deposits that are flagged by financial institutions changing to a lower amount, to reduce the incidence of smurfing. 

Detecting and reporting money laundering

Conclusions

To identify, detect and prevent money laundering, financial institutions must remain adaptable to evolving money laundering techniques and regulatory changes. Regular updates to technology, training and policies are essential. Collaboration, both domestically and internationally, is also essential for tackling the global nature of money laundering. 

Information-sharing and coordinated actions with other agencies can help to build a more accurate picture of financial behaviour and help to identify criminal activity. For financial institutions, training and educating employees on the latest money laundering trends and techniques will help them to be able to identify and report suspicious activity.

Preventing money laundering is an ongoing and ever-changing challenge. As criminal behaviour and money laundering become more sophisticated, evolving anti-money laundering strategies and advanced technology are required. Vigilance, collaboration and the adoption of new technology are essential components of an effective anti-money laundering framework.

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About the author

Nicole Murphy

Nicole Murphy

Nicole graduated with a First-Class Honours degree in Psychology in 2013. She works as a writer and editor and tries to combine all her passions - writing, education, and psychology. Outside of work, Nicole loves to travel, go to the beach, and drink a lot of coffee! She is currently training to climb Machu Picchu in Peru.



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