What is AML? How it works and its benefits

The AML is a set of measures and regulations designed to prevent and detect money laundering in the financial system

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Salvador Del Valle
February 16, 2024

What is AML?

AML, by the acronym ofanti-money laundering, translates as anti-money laundering and is also known by the term prevention of money laundering (AML).

The AML is a set of measures and regulations designed to prevent and detect money laundering in the financial system. This criminal action is the process of hiding or disguising illegally obtained funds by circulating them in the banking or financial system to transform them into legitimate money.

Over the years, there have been numerous money laundering cases that have highlighted the importance of AML regulations and the critical role of financial institutions in detecting and preventing these activities. One of the most notorious examples is the "Laundromat" case, a large-scale money laundering scheme that involved the creation of shell companies and the transfer of billions of dollars through bank accounts in Europe.

To stop this type of activities, AML practices were created, which must be applied by financial institutions to ensure that their services are not used for money laundering purposes.

The effectiveness of AML practices depends on the regulatory compliance or compliance. Regulatory compliance generally involves developing policies and procedures to prevent money laundering, which may include customer identification and verification, suspicious transaction reporting, and ongoing monitoring.

In summary, AML and compliance share the following characteristics:

  • Common goal: Both AML and compliance share the objective of ensuring that an organization complies with laws and regulations applicable to money laundering issues.
  • Prevention of money laundering: compliance refers to development of policies and procedures of organizations to prevent money laundering and comply with AML practices.
  • Integration– For greater effectiveness, AML practices are integrated into an organization's regulatory compliance framework.
  • Risk control: Both processes attempt to control risks. In the case of AML, the risk of the organization being used for money laundering is assessed. In compliance, he works on risks in areas such as cybersecurity, data privacy and business ethics.

The relationship between AML and compliance is close and complementary, since both focus on ensuring that an organization complies with legal and ethical regulations and standards. In this way, the action of the AML exceeds the financial and legal aspects, to go further and involve the ethical and corporate responsibility aspects in the control of financial activities.

AML Regulations

AML regulations arelegal regulations established by local governments and international authorities. These regulations vary from country to country, but have common elements in their approach to anti-money laundering.

At a global level, AML regulations are applicable in the following sectors:

  • Financial institutions: banks, stock exchanges, insurance companies, credit unions, fintech, etc.
  • Currency exchange and money transfer entities: exchange houses, money transfer companies and remittance service providers.
  • Real estate agencies and real estate agents: In some jurisdictions, real estate companies, especially those that handle high-value transactions, must comply with AML regulations.
  • Gambling and casinos: The gaming industry, including casinos and betting houses, is subject to AML proceedings.
  • International trading companies: companies involved in global trade, handling significant international transactions.
  • Professionals from the financial and legal sector: In some countries, professionals such as accountants and auditors, as well as lawyers, may be required to comply with AML regulations. For example, in Argentina, accountants must report on suspicious laundering operations, and in Mexico, there is a registry of obligated subjects based on article 17 of the LFPIORPI, among which are professionals who intervene in acts such as the purchase and sale of real estate, the management of bank accounts, etc.

The international body that sets standards and promotes global cooperation to combat money laundering is the FATF (Financial Action Task Force). The FATF recommendations and requirements are met in all its member countries, which also undergo periodic compliance evaluations.

However, each jurisdiction has its own anti-money laundering enforcement authorities. For example, in the United States the Financial Crimes Enforcement Network (FinCEN) operates; in the United Kingdom the Financial Conduct Authority (FCA), and in Canada the Financial Reporting and Transaction Analysis Center (FINTRAC).

Although AML regulations are replicated in organizations in each country for their specific activities, the directives of the European Union and the European Parliament They are a highly respected standard in anti-money laundering and compliance, and are taken as the source of almost all local regulations.

The European directives that are in force are:

  • Fourth AML Directive (AML 4): Directive (EU) 2015/849 came into force in June 2017 and established a series of measures to prevent money laundering and the financing of terrorism. AML 4 states:
  • Obligation of member states to maintain records of beneficial owners.
  • Stricter customer identification and verification (KYC), especially for politically exposed persons (PPE) and high-risk customers.
  • Greater cooperation between supervisory authorities and standardization of sanctions for non-compliance.
  • Fifth AML Directive (AML 5): (EU) 2018/843, was implemented in January 2020. This directive includes:
  • Expanding the definition of entities required to comply with AML regulations.
  • Creation of a centralized registry of bank accounts.
  • Greater emphasis on risk assessment and risk-based approach.
  • Greater transparency about the real owners of the companies.
  • Sixth AML Directive (AML 6): European Union directive 2018/1673 establishes:
  • Stricter definitions of crimes and penalties
  • Expands corporate responsibility in laundry.

The most relevant actions established with all the aforementioned regulations are:

  • Maintain transaction records.
  • Report suspicious activities to authorities.
  • KYC - identify and verify clients and background.
  • Verify the origin of the capital.
  • Transaction tracking and monitoring
  • Blocking suspicious activity
  • Risk identification and management
  • Employee training.

The relationship between AML and KYC

El AML y elKYC (English acronym for know your client, or know your customer) are two interconnected components in the fight against money laundering. While AML focuses on preventing and detecting money laundering, KYC focuses on the identification and verification of the identity of the clients.

When performing KYC, financial institutions collect information about their customers, such as names, addresses, identification documents, and the purpose of their relationship with the financial institution. This data is essential for AML, as it allows institutions evaluate the risk associated with each client and detect possible suspicious activities.

The relationship between AML and KYC is would complement, since KYC provides the basis for successfully carrying out AML measures.

Additionally, and as a measure that adds security, both processes use the audit process due diligence (due dilegence) to thoroughly investigate customers and assess the risk of their transactions. Without a clear understanding of who the customers are and how they relate to the financial institution, it would be difficult to prevent money laundering effectively.

Finally and of great importance today is the application of artificial intelligence to these processes. This technology is providing an additional security framework by having the ability to work with large amounts of data and providing increasingly precise systems for KYC.

Benefits of AML

Beyond the legal obligation that companies have, the benefits associated with a good AML policy and systems are:

  • Reducing money laundering: Imposing regulations and control measures makes it more difficult for criminals to introduce illicit money into the financial system, which in turn reduces the financing of illegal activities and corruption.
  • Protection against the financing of terrorism: AML regulations not only focus on money laundering, but also on the detection and prevention of terrorist financing. By following the money trail, activities that finance acts of terrorism around the world can be identified and stopped.
  • Protection of financial integrity:AML protects the integrity of the financial system by ensuring that institutions are not used for illicit purposes. This promotes system stability, which is crucial for the efficient functioning of the economy.
  • Greater transparency:The implementation of AML measures increases transparency in the financial system and builds confidence in investors and the general public. Transparency is essential for the optimal functioning of the economy and sustainable financial development.
  • Reputation protection:Complying with AML helps build trust in customers and the general public. This protects the reputation of the organization, a primary issue in a globalized, hyperconnected world with extremely high competition.
  • Reduction of risks for shareholders, clients and involved parties: reduction of legal and financial risks that could negatively affect the company and all actors that have business relationships with it.
  • Avoid sanctions:An effective AML policy and system helps avoid sanctions, which can have a significant financial impact and damage the organization's reputation. While there are international directives through FATF, sanctions are imposed through local laws that each jurisdiction must approve. Some examples of sanctions are removing or withdrawing permits to carry out economic activities, freezing assets or seizing bank accounts.
  • Reduction of expenses associated with non-compliance and fines:A well-designed AML policy and system helps reduce the expenses associated with non-compliance, such as fines and legal costs, allowing the company to use its resources more effectively. Fines are amounts of money determined in each country and based on local legislation.
  • Improvement and optimization of the user experience:Due diligence in customer identification and verification (KYC) can facilitate onboarding and transaction processes for customers.
  • Avoid inconveniences to clients due to non-voluntary participation in illicit schemes: protects the financial integrity of clients and maintains a relationship of trust between them and the organization.

Lastly, it is important consult the anti-laundering lists that contain information about individuals and entities suspected of being involved in illegal activities. Consulting these lists helps identify and avoid transactions with high-risk individuals or entities.

AML practices and regulations provide a regulatory framework to reduce money laundering through financial institutions and companies. However, it is key to know if those trying to make these transactions are real people, through an efficient process of identity verification.

This is why AML techniques rely heavily on the verification and authentication carried out in the KYC process, since it generates the security that you are dealing with legitimate people and organizations and money in good faith.

In conclusion, identity verification is a guarantee important in today's financial and digital world. As the methods used by criminals evolve, it is essential that AML regulations are kept up to date and effective, and that the technologies used for know your customer are safe and efficient.

At Zenpli we focus on guaranteeing compliance with AML regulations through user verification on the most important and extensive sanctions lists at the national and global level. In addition, we facilitate KYC processes in Mexico, since we have the necessary information to support any entity, regulated by Banxico, CNBV or a third party.

If you have a company, elevate your clients' identity verification processes with Zenpli. Make sure you stay up to date on compliance! Contact us, invest in security and gain business reputation thanks to our agile and versatile processes.