What is Anti Money Laundering - AML
Anti-money-laundering refers to a set of procedures, laws and regulations designed to stop the practice of generating income through illegal actions. Though anti-money-laundering laws cover a relatively limited number of transactions and criminal behaviors, their implications are far-reaching. For example, AML regulations require institutions issuing credit or allowing customers to open accounts to complete due-diligence procedures to ensure they are not aiding in money-laundering activities. The onus to perform these procedures is on the institutions, not on the criminals or the government.
What's Anti-Money Laundering?
BREAKING DOWN Anti Money Laundering - AML
Anti-money-laundering laws and regulations target activities that include market manipulation, trade of illegal goods, corruption of public funds and tax evasion, and the activities that aim to conceal these deeds.
Criminals must clean money obtained illegally through actions such as drug trafficking. To do so, the money launder runs it through a series of steps to make it appear like the criminal earned it legally. Once there's a record to show how the criminal earned the money, he or she hopes it will not arouse suspicion.
One of the most common ways to launder money is to run it through a legitimate cash-based business owned by the criminal organization. Money launderers may also sneak cash into foreign countries for deposit, deposit it in smaller increments or buy other cash instruments. Launderers often want to invest, and brokers will occasionally break rules to earn larger commissions.
It's up to financial institutions that issue credit or allow customers to open accounts to investigate customers to ensure they are not taking part in a money-laundering scheme. They must verify where large sums of money originated, monitor suspicious activities and report cash transactions exceeding $10,000. Besides complying with AML laws, financial institutions must make sure clients know about these laws and guide people with them without prior active government orders.
AML rules and regulations rose to global recognition during the 1989 formation of the Financial Action Task Force, setting international standards for fighting money laundering. The aim of enforcement groups like the FATF is to maintain and promote the ethical and economic advantages of a legally credible and stable financial market.
Since money is a limited resource, money accumulated illegally and with no regulation prevents capital from flowing into socioeconomically productive industries. The imbalance in money flow also inevitably leads to further printing of money, harming the purchasing power of a country's currency. If not controlled, this inflation can cripple and erode an economy.
How Anti-Money-Laundering Action Helps Reduce Overall Crime
Money-laundering investigations center on parsing financial records for inconsistencies or suspicious activity, and these financial records often tie perpetrators to criminal activity. In today's regulatory environment, extensive records are kept on just about every significant financial transaction. Therefore, when trying to uncover the identity of a criminal, few methods are more effective than locating records of financial transactions he or she was involved in.
Terrorists, organized criminals and drug smugglers rely extensively on money laundering to maintain cash flow for their illegal activities. Taking away a criminal's ability to launder money hampers the criminal operation by shutting off cash flow. Therefore, fighting money laundering is a highly effective way to reduce overall crime.
In cases of robbery, embezzlement or larceny, the enforcing agency can frequently return the funds or property uncovered during money-laundering investigations to the victims of the crime. For example, an agency discovers money a criminal laundered to cover up embezzlement, the agency can usually trace it back to the source of the embezzlement. While this does not nullify the original crime, it can put the money in question back in the proper hands.
Anti-Money-Laundering Enforcement Groups
The Financial Action Task Force sets the international standard for combating money laundering. Formed in 1989 by leaders of countries and organizations around the world, the FATF is an international body of governments that sets standards for stopping money laundering and promotes the implementation of these standards. Because laundering money is one way in which terrorists finance their activities, money laundering and terrorism go hand in hand. The FATF is, therefore, also dedicated to the setting and implementation of standards for fighting terrorist financing and other threats to the international financial system.
The FATF developed a series of recommendations that were adopted in February 2012 to give its 35 member countries and two regional organizations a comprehensive set of measures to implement in the fight against money laundering, terrorist financing and financing of the proliferation of weapons of mass destruction. The FATF promotes the implementation of these measures, but the leaders of each member country carry out the measures on a national level. Each country must adapt the measures to make them appropriate for its own circumstances. To help members implement the recommended anti-money-laundering measures, the FATF provides them with guidance and best practices.
In 2000, the FATF began using a name-and-shame system that publicly announced countries that failed to produce and enforce comprehensive AML laws and had minimal to zero participation in the international crusade against illegal moneymaking activities.
Another international group that participates in combating money laundering is the International Monetary Fund. With 189 member countries, the IMF has been expanding its anti-money-laundering efforts since 2000.
The events of Sept. 11, 2001 led to an intensification of the IMF's work in this area and spurred the broadening of its goals to include fighting the financing of terrorism. Shortly thereafter, the IMF began assessing the compliance of its member countries with the international standard for combating terrorist financing.
The IMF pays special attention to the effects of money laundering and terrorist financing on the economies of its member countries. The IMF points out that people who launder money and finance terrorism target countries with weak legal and institutional structures, and use the weaknesses to their advantage to move funds. Ways in which the IMF helps its members stop money laundering and terrorist financing include serving as an international forum for the exchange of information and helping countries develop common solutions to these problems and effective policies to guard against them.
In addition, the IMF contributes to the evaluation of each country's compliance with anti-money-laundering measures and to identifying where each country needs improvement. The IMF focuses its work on assessing the strengths and weaknesses of each member's financial sector in complying with the FATF recommendations, providing members with the technical assistance needed to strengthen their legal and financial institutions, and offering advice to members in the process of developing policies directed toward compliance with FATF measures.