Learn how anti-money laundering laws, efforts and policies prevent criminals from turning money obtained illegally into clean money.
Anti-money laundering (AML) efforts consist of the laws, regulations and procedures, which are designed to prevent criminals from exchanging money obtained through illegal activities—i.e. “dirty money”—into legitimate income, or “clean money.” The term “dirty money” originates from the days of Al Capone, who “laundered” the money he earned from his illegal activities through a chain of cash-based coin laundromats.
There are three stages of money laundering: placement, layering and integration.
- Placement is the act of injecting dirty money into a financial system, such as a bank account or a business. Some examples of placement methods, including blending funds with legitimate income (e.g. cash business), paying debt with dirty money, gambling, real estate investments, and foreign currency smuggling and exchanges.
- Layering hides the source of the money through various obscure and hard-to-trace bookkeeping maneuvers. Layering often involves international transfers, especially to countries with laws that favor the privacy of the account holders. The money is usually split and moved multiple times until it is virtually impossible to trace back to the source.
- Integration is when the now-clean money is withdrawn and placed into a “clean” bank account. The money then can be used for any purpose.
Anti-money laundering laws cover a limited range of money laundering activities and criminal activity, but the implications are far-reaching. For example, AML regulations require financial institutions, including banks, that issue credit or accept customer deposits to monitor customer behavior to ensure that they are not aiding money laundering activities. If banks do not comply to these laws and regulations, they can have costly effects, resulting in heavy fines and other enforcement actions.
IBM Cloud Pak for Data
Financial Crimes Insight
The Anti-Money Laundering Act is a collection of several acts and policies that work together to prevent and prosecute money-laundering crimes in the U.S. The fight against money launderers also involves the collaboration between several domestic and international government organizations, as this crime often takes place in various countries. The following are overviews of some of the most noteworthy U.S. acts that protect against money laundering.
These acts and organizations include:
Bank Secrecy Act (BSA): The BSA, also known as the Currency and Foreign Transaction Reporting Act, came into being in 1970, and it was the first legislation, which sought to prevent and prosecute the act of money laundering through banks and other financial institutions. The Bank Secrecy Act required banks to cooperate with government investigations to combat the funding of illegal activities by tracking the movement of money. For example, it requires banks to fill out a currency transaction report (CTR) for any cash transaction exceeding $10,000.
Money Laundering Control Act: This act was created in 1986, and it made money laundering a federal crime. Its primary focus is to reign in money laundering by drug cartels. It allows the government to seize assets without charging anyone with a crime. The act also extended the CTR to include any transaction over 10,000, not just cash.
Annunzio-Wylie Anti-Money Laundering Act: This act from 1992 primarily focuses on banks. It requires them to implement anti-money laundering prevention practices and it penalizes them for allowing criminals to use their institutions for money laundering purposes. It introduced the Suspicious Activity Reports (SARs) which banks need to complete if a client or transaction is suspected of money laundering flags.
Patriot Act: This was implemented after the terrorist attacks in New York on September 11th, 2001, and it aims to track and combat the financing of terrorism (CFT) and terrorist activities through money laundering. It strengthened the collaboration between banks and anti-terrorism units within the government, and it increased fines and sentences for money laundering. An essential point of the Patriot Act is the Customer Identification Programs (CIPs), also known as know your customer (KYC), which forces banks to vet their clients.
FinCEN: The Financial Crimes Enforcement Network (FinCEN) added to the BSA and Patriot Act regulations, and it implemented strict rules for customer due diligence that financial institutions need to comply with.
Several domestic and international government organizations, institutions and law enforcement fight money laundering around the world.
- U.S. organizations: Law enforcement and regulatory agencies include FinCen, Securities and Exchange Commission (SEC), Federal Bureau of Investigation (FBI), Central Intelligence Agency (CIA) and the United States Postal Service (USPS).
- International organizations: Organizations include Financial Action Task Force (FATF), UN Office on Drugs and Crime (UNODC), World Bank Financial Integrity Unit, and the International Monetary Fund (IMF).
An anti-money laundering compliance program is what a company does to adhere to AML policies and regulations. An AML compliance program is also designed to expose and react to money laundering, terrorist financing, and fraud-related risks.
Businesses have to follow a set of requirements to do so. There are five pillars of anti-money laundering that help an organization to reach AML compliance. They are:
- Designate an AML compliance officer.
- Create internal policies and procedures.
- Ensure continuous AML program training.
- Provide independent review by a third party.
- Do customer due diligence (know your customer and client suitability).
The easiest way to stop money laundering is to implement “know your customer” rules at financial institutions. If money is associated with one person or organization and each transaction is traceable, then it becomes nearly impossible to launder money. As you can see from the various AML acts passed in the past 50 years, the rules about customer due diligence have become increasingly stricter.
The Banking Secrecy Act asks financial institutions to report any activities that could be used to launder money. Here are the four most important reporting requirements to comply with the Banking Secrecy Act that are often triggered when a financial institution comes across a money laundering crime:
- Suspicious Activity Report (SAR): Financial institutions are required to complete this report within 30 days of detection of any suspicious transactions.
- Foreign Bank Account Report (FBAR): This form needs to be filled out when an individual has accounts or investment vehicles in countries outside of the United States.
- Currency Transaction Report (CTR): This report is required when a client deposits or withdraws an amount that is greater than USD 10,000.
- International Transportation of Currency or Monetary Instruments Report (CMIR): This report is similar to the CRT, but instead of a deposit or wire, a monetary amount of more than USD 10,000 is physically moved, shipped or transported from one client to another.
While money laundering is an international crime, many rules are local, and they can sometimes conflict with federal policies, making it very difficult for financial institutions to remain compliant with rules and regulations. Some banks have even decided to suspend services in countries that make it hard to stay compliant or have a reputation for facilitating money laundering.
AI tools and software have improved the overall process to detect criminal behavior. For example, AI and robotic process automation (RPA) can be used to run statistical analysis on unstructured data, finding high-risk cases and eliminating false flags due to redundant data. AI also uses natural language processing (NLP) to detect changes in user behavior, and it combines that data with contextual information, improving banking institutions ability to “know your customer.”
While AI tools have improved money laundering detection, they’re not perfect; these programs can still flag accounts and financial transactions in error. As their adoption rate increases, financial institutions will see reductions in error rates, allowing them to remain compliant with anti-money laundering laws and regulations more efficiently.
Anti-money laundering jobs can be found in various departments of an organization, from IT to finance, research, compliance, law, and of course, investigation and law enforcement.
In the private sector, certified anti-money laundering specialists and financial experts help organizations remain compliant, and they can aid in discovering potential anti-money laundering schemes. In the public sector, there are three main AML career paths: policy writing, legal, and law enforcement.
Aside from a degree and work experience, anti-money laundering certifications are often required to get a job in this area. Three well-recognized anti-money laundering certifications, associations and training include:
- Limra AML training and certification
- Certified Anti-Money Laundering Specialist certification (CAMS)
- Association of Certified Anti-Money Laundering Specialists (ACAMS)
BM’s Financial Crimes Insight is an AI solution that helps organizations implement anti-money laundering programs in a cost-efficient way. Institutions can improve customer onboarding and optimize fraud management with this portfolio of AI-infused analytical solutions offered on IBM Cloud Pak for Data
Additionally, using IBM’s Cloud Pak for Data, this tool can support compliance checks and help with customer management, payment safety, claims fraud, alert triage sanctions, entity research and geographic risk assessment.
To learn more about how to improve your anti-money laundering compliance , sign up for a free IBM Cloud Account today.
Take a holistic, risk-based and cost-effective approach to financial crimes compliance and fraud with AI-infused solutions supported on IBM Cloud Pak for Data and Red Hat®.
IBM Cloud Pak for Data is an open, extensible data platform that provides a data fabric to make all data available for AI and analytics, on any cloud.
Manage risk and improve compliance with IBM RegTech.