Understanding Anti-Money Laundering: What it is and Why it Matters?


What is anti-money laundering (AML)?

The network of laws, rules and processes known as “anti-money laundering” (AML) aims to expose attempts to pass off criminal payments as legitimate revenue. Money laundering seeks to cover offenses including minor drug sales and tax evasion, as well as public corruption and funding of terrorist organizations.

The introduction of AML law was a reaction to the expansion of the financial sector, the abolition of international capital restrictions, and the ease with which intricate webs of financial transactions could be carried out.

According to a high-level United Nations body, money laundering will account for $1.6 trillion in yearly flows in 2020, or 2.7% of the world’s GDP.

The 1970 Bank Secrecy Act mandated that banks report cash deposits of more than $10,000. Still, AML regulations in the US have grown to include a complex regulatory framework requiring financial institutions to perform due diligence on their clients and look for and report suspicious transactions.
The European Union and other governments have adopted similar measures.

Anti-Money Laundering

History of Anti-Money Laundering:

However, although efforts to regulate illegal funds date back centuries, the phrase “money laundering” has only been used for the last fifty years.

The United States approved its first anti-money-laundering law in 1970, intending to counter organized crime. The law mandated that financial institutions disclose cash deposits of $10,000 or more and identify persons making transactions and keep records of such activities. Amid the Watergate crisis of the same year that the U.S. Supreme Court affirmed the validity of the Bank Secrecy Act, the term “money laundering” gained everyday use.

Other laws were passed in the 1980s amid growing attempts to battle drug trafficking, in the 1990s to enhance financial surveillance, and in the 2000s to cut off financing for terrorist groups.

In 1989, a collection of nations and international organizations founded the Financial Action Task Force to combat money laundering (FATF). Its goal is to create and advocate for global AML standards. FATF’s mission grew to include countering terrorist funding after the September 11th attacks, which occurred in October 2001.

The International Monetary Fund (IMF) is another crucial group in the battle against money laundering (IMF). The IMF, like the FATF, has urged its member nations to adopt anti-terrorist funding policies consistent with international norms.

The United Nations’ 1998 Vienna Convention on narcotics trafficking, 2001 Palermo Convention on transnational organized crime, and 2005 Merida Convention on corruption contained anti-money-laundering rules.

In early 2021, Congress approved the Anti-Money Laundering Act of 2020, which was the most comprehensive revision of U.S. AML legislation since the Patriot Act of 2001. The Corporate Transparency Act, included in the 2021 legislation, made it more challenging to utilize shell corporations to circumvent anti-money laundering and economic penalties.

How Does Money Laundering Work?

Money launderers sometimes use cash-generating enterprises owned by accomplices or inflated invoices in shell company transactions to transfer illegal monies. Money transfers used in layering transactions are intended to hide the origin of illicit payments.

To get around reporting requirements and AML scrutiny, a big transfer is divided up into smaller ones, a practice is known as structuring or smurfing. Is it possible to stop money laundering? Given the projected yearly flows of close to 3% of the production of the global economy, more tough AML enforcement may, at most, strive to restrict rather than completely eradicate money laundering. Even though AML regulations make their life more difficult, money launderers never seem to run out of resources like money or allies.

Understanding AML, CDD, and KYC: Comparing Anti-Money Laundering Practices

The term “anti-money laundering” (AML) refers to a comprehensive set of regulations and protocols whose purpose is to prevent illegal financial transactions.
The purpose of “know your client” (KYC) regulations is to exercise customer due diligence by vetting and authenticating potential customers. On the contrary, “client due diligence” (CDD) refers to the vigilance that banks and other businesses must do to prevent, detect, and report illegal activity.

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