Fraud 😈 vs Anti-Money Laundering 👼

Money laundering costs the world nearly 5% of its GDP. The losses are estimated to be over $2 trillion per year.

For starters, money laundering is not some harmless misdemeanor. It’s a serious financial crime with significant economic and social consequences. As 90% of money laundered is off the radar, criminals and terrorist financiers find it very easy to fund and monetize illegal activities.

What is money laundering?

Money laundering is an unlawful practice that disguises the source of ill-gotten gains and makes them look legitimate.

Here’s an illustration =>
I may have been compensated for organized illegal operations including drug trafficking, corruption, embezzlement, or gambling. Now, in order to spend the profits without bringing attention, I employ shell firms, high-cash enterprises, and other foolish financial entities to unlawfully clean the filthy money and release it into the market.

The practice of money laundering now affects more than one type of business. Its dismal impact extends beyond sectors and countries.

How does money laundering happen?

Money launderers traverse three stages to stealthily release illicit funds into the financial ecosystem.

3 stages of money laundering

1. Placement

This is the stage where the dirty money is first introduced into the financial system. Here, money from criminal organisations is moved to be deposited and presented as coming from a trustworthy source.

This can be done by depositing it into bank accounts, gambling at casino, False invoices, the transfer of funds to organisations with high cash flow, foreign bank accounts, offshore entities, buying assets, or investing it in businesses.

2. Layering

It is the process of dividing a large sum of money into smaller transactions in order to conceal money laundering and to mix the dirty money with legitimate money in order to obscure its origins.

This is achieved by conducting a series of complex financial transactions, such as wire transfers, international transactions, currency exchanges, shell company purchases and movement of funds between various forms, accounts and jurisdictions.

The purpose is to make it challenging for authorities to trace the money back to its illegal source. Finally, the laundered money circulates around the world and is exchanged in foreign markets.

3. Integration

It is also known as the ‘extraction phase,’ is the final stage of money laundering. Here, the laundered funds are re-introduced into the legitimate economy, appearing as if they were generated through legal means.

The laundered funds are returned to the criminals and integrated into their regular financial flow. Criminals can now legally recover their laundered money and use it for any purpose.

Here are some examples of money laundering:

1. A drug trafficker might deposit drug profits into a bank account in the name of a shell company.
2. A corrupt politician might use a front company to buy real estate with money from bribes.
3. A terrorist organization might use a money mule to wire money to a bank account in a foreign country.

If you suspect that someone is engaging in money laundering, you should report it to the authorities.

Here are some tips for preventing money laundering:

1. Be aware of the signs of money laundering. These signs may include large cash deposits, complex financial transactions, and shell company purchases.
2. Report any suspicious activity to the authorities.
3. Follow anti-money laundering regulations. Businesses that are subject to anti-money laundering regulations must implement procedures to prevent money laundering.

By being aware of the signs of money laundering and reporting suspicious activity, you can help to stop this crime.

How money laundring impacts Economy ?

The consequences of money laundering are serious. Not only does it affect fiscal health, income distribution and tax revenues, but it also increases crime and slows economic growth.
Institutions that specialize in the movement of funds, such as banks, NBFCs, and other financial institutions, are more likely to be affected by money laundering. Therefore, they must be very vigilant.

1. Skewed economic indicators
   Money laundering bloats financial transactions and creates an inaccurate picture of economic activity. This can distort economic indicators such as GDP, investment levels and trade balances, making it difficult for policymakers and analysts to make informed decisions.
2. Impairs fair competition
   Illegal funds flowing into the legitimate economy can give criminals an economic advantage over law-abiding corporations. This unfair competition can hinder market dynamics, stifle entrepreneurship and undermine legitimate business growth.
3. Prevention of criminal activity:
   Money laundering allows criminals to profit from illegal activities such as drug trafficking, corruption, fraud and organized crime. By interfering with the money laundering process, law enforcement can stop criminal businesses and stop individuals from doing illegal things.
4. Promote corruption:
   Money laundering facilitates the movement of illicitly obtained funds and perpetuates corruption in both the public and private sectors. Corruption undermines trust, increases the cost of doing business, and hinders economic development by diverting resources from productive investments.
5. Disrupting Financial Institutions:
   Money laundering poses risks to the stability and reputation of financial institutions. Illegal funds flowing through the banking system can expose banks to legal, operational and reputational risks. These risks can lead to loss of public confidence, increased compliance costs and potential financial crisis.
6. Prohibition of Foreign Investment:
   Money laundering can prevent foreign investors from getting involved in the country’s economy. Investors want a transparent and well-regulated financial system that protects against money laundering. If a country’s anti-money laundering framework is perceived to be weak, it can undermine investor confidence and lead to a decline in foreign direct investment.
7. Income inequality widens:
   Money laundering perpetuates income inequalities by allowing criminals to enjoy the proceeds of their illegal activities while avoiding taxes and other obligations. This inequality further widens the gap between rich and poor within societies, adversely affecting social cohesion and economic stability.
8. Undermines fiscal policy:
   Money laundering drains government revenues because it allows individuals to hide their taxable income and evade taxes. This increases the burden on honest taxpayers and reduces funds available for public services, infrastructure development and welfare programs.
9. Fighting Terrorist Financing:
   Money laundering is often associated with terrorist financing because illegal funds can be used to finance terrorist activities. By combating money laundering, governments and financial institutions can cut off the flow of funds to terrorist organizations, thereby undermining their ability to commit violent acts and protect national security.

The 9/11 attacks, commonly known as the 9/11 terrorist attacks, had a significant impact on money laundering regulations, which were primarily focused on the banking sector. Financial institutions have been mandated to expand anti-money laundering (AML) programs and strengthen due diligence on foreign bank accounts.

Strengthened banking regulation by improving communication between law enforcement and financial institutions. This led the United States to adopt her stricter AML regime, and other countries followed suit.

In India, the RBI imposes strict anti-money laundering regulations. Banks must follow a strict customer identification process for account opening and transaction monitoring. Any suspicion must be reported immediately to the competent authorities.

What is Anti-Money Laundering?

Anti-money laundering (AML) regulations include laws that make money laundering and other fraudulent activities illegal.
Protect banks and other financial institutions against terrorist financing, drug trafficking, and other forms of organized crime. Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CTF) regulations enable financial institutions to comply with legal requirements and report suspicious financial activity.
Prevent fraud while improving the customer experience with artificial intelligence (AI) and machine learning (ML) innovations.

4 Pillars of AML

For efficient anti-money laundering, businesses need to get the following pillars strong.

1. Know Your Customer

Know Your Customer (KYC) is an important process for financial institutions. It is a legal requirement of AML law to establish and verify identities, assess risk factors, and monitor suspicious activity.

KYC helps banks and financial institutions better understand their customers and their financial transactions, serve them better, and manage risk better.

In India, the Reserve Bank of India (RBI) issued his KYC guidelines in response to his AML recommendations of the Financial Action Task Force (FATF). Financial institutions must collect his KYC information at all times, not just when opening a new account. Receive additional data periodically based on account behavior or in regular update cycles based on risk classification.

2. Customer Due Diligence

Customer Due Diligence (CDD) is the administrative process by which all relevant customer information related to potential terrorist financing risks is recorded and processed.

CDD helps new clients identify risks and provide risk assessments (via online databases), politically exposed persons (PEPs), government filings, watchlists and sanctions checks.

CDD is a key step in her KYC that requires continuous monitoring of each customer’s money laundering risk.
With this risk-based approach, a more thorough due diligence process is performed on customers at high risk of non-compliance by identifying customers who have been added to sanctions or other her AML lists.
Customer due diligence identifies money laundering techniques such as tiering and structuring. Smurfing is the practice of dividing large amounts of money into smaller transactions to evade reporting limits and avoid perusal.

3. Customer and Transaction Screening

Banks and other financial institutions dominate the financial industry with diverse customer portfolios. You need to monitor and control the money transfers that are made.
An average-sized bank has thousands of transfers every day, with several other banks and companies involved in the transaction. Therefore, even minor violations can have serious consequences, including major administrative bankruptcies, hefty fines, and loss of credibility.
Therefore, all customer deposits and other transactions must be carefully reviewed.

4. Suspicious Activity Reporting

Law enforcement investigating money laundering often checks bank records for strange or fraudulent activity. The current regulatory framework keeps detailed records of all financial transactions to help law enforcement identify criminals. Banks must maintain an immutable audit trail that regulators can rely on. However, it is also important for financial institution compliance professionals to investigate and resolve issues in a timely manner.

How do you respond to money laundering suspicions?

Simple. Ask the client for more information. Then you can quickly determine if there is any chance of money laundering or not.

And remember to tick off this checklist to avoid the risk of money laundering.

Tick off the AML checklist :

1. Thoroughly screen all new customers. Check the purpose of the business partnership and try to understand why they chose your company. Customer Due Diligence (CDD) supports customer identification, risk assessment and risk mitigation.
2. Observe all unusual transactions that occur on the customer side.
3. Another important precaution to consider is unusual funding sources. In certain circumstances, requesting documentary evidence can help detect signs of money laundering, such as: B. Bank statements, recently filed business accounts, or documents confirming the origin of funds.
4. Consider the reasons for receiving funds from outside. It looks like a standard feature, but in some cases it acts as an illegal property. Therefore, it is best to investigate the source of third party funds.
5. Ask for a rationale if instructions are changed without the customer’s prior consent.
6. The most common method used by money launderers to abuse trusts, company formation, customer account management, etc. To mitigate these risks, you should apply for the required CDD and enhanced due diligence checks under the legal sector anti-money laundering guidelines before providing these services.
7. Be very careful with cash transactions, adhere to the company’s cash policy, and do not accept cash payments in excess of established limits.

Challenges in implementing AML

AML compliance is indispensable. But effective implementation is the key challenge for banks and financial institutions. Increased governance, lack of skilled resources, requisite tools, technology, and in-depth knowledge are a few bottlenecks that impact AML deployments.

Let’s take a brief look at some of the challenges below.

1. Enhanced governance:

These banks and financial institutions struggle to meet cross-border, multi-jurisdictional requirements for AML compliance and customer due diligence. Their main challenge is to find beneficiaries and take corrective action to close the current anti-money laundering gaps revealed by regulatory reviews.

2. Shortage of skilled workers:

Finding experts with deep knowledge of anti-money laundering can be difficult. Fluctuations and lengthy onboarding processes are also an issue. Businesses must invest significant time and energy to keep up with changing regulatory requirements.

3. Complex processes and technologies:

To comply with AML regulations, banks must implement numerous procedures and technological advances to consolidate KYC data and systems into a single repository. Additionally, to enable centralized analysis of fraud and financial crime, we need to build the necessary infrastructure to detect suspicious activity across channels, improve data quality, and standardize data. . The level of risk assigned during onboarding depends on the trade the client is executing. To avoid false positives, banks must dynamically assess each customer’s risk and adjust risk levels. This requires continuous monitoring of customer transactions, which is a difficult task.

In conclusion

If you are a business looking to combat money laundering, you must invest in a robust AML platform focusing on the four critical aspects.

1. Research and Technology

Using cutting-edge technology, such as artificial intelligence, we can identify false positives and conduct in-depth investigations to eradicate fraudulent activity.

2. Ongoing Communication

All affected parties, including law enforcement, governments and regulators, need to communicate regularly. To combat money launderers, communications keep everyone involved informed, analyze allegations, and help uncover potential networks.

3. Leverage data analytics

Analytics provide information and insights that help identify and pinpoint patterns related to money laundering.

4. System standardization

Good standardization facilitates data processing and communication and hinders fraud detection.

Reference :-

https://www.unodc.org/unodc/en/money-laundering/overview.html