What is AML? Why is it Important?
AML stands for Anti-Money Laundering. You all must have heard the term money laundering in passing, but what is anti-money laundering? To clearly understand anti-money laundering and its regulations, it is important to know what money laundering is. So, let us first talk about money laundering.
What is Money Laundering?
Money laundering is a major financial crime. It involves legalizing money that has been illegally obtained. Money laundering can also be used to conceal the source, nature, and act of an offense or create a legal image. There are many money laundering methods. These methods evolve with technology. The International Monetary Fund (IMF) estimates that the money laundering rate ranges between 2-5% of the global GDP. This is a huge amount of the world’s total currency. Global and local regulators have issued new directives to stop money laundering. These regulations are known as Anti-Money Laundering or AML.
What is AML?
AML or Anti-Money Laundering refers to a set of policies, laws, and regulations designed to stop financial crimes and prevent criminals from disguising illegally obtained funds as legitimate income.
The first time that anti-money laundering initiatives were made famous was in July 1989 when a group of countries from all over the globe formed the Financial Action Task Force (FATF) in Paris. The FATF, which initially studied and developed anti-money laundering strategies, set international standards for preventing money laundering and encouraged their implementation.
The FATF’s mission was expanded to include terrorist financing in October 2001 after the September 11 terrorist attacks. The International Monetary Fund (IMF) is another important institution that is involved in the fight against money laundering. The IMF, like the FATF, regulates and compels its 189 members to adhere to international standards to prevent terrorist funding.
Anti-Money Laundering Regulations
Anti-Money Laundering or AML regulations and laws are designed to stop money laundering. Along with stopping money laundering, AML regulations are put in place to stop criminal activities, including trade in illegal goods, market manipulation, corruption of public funds, and tax evasion.
Know Your Customer or KYC is one of these regulations. The regulators of AML regulations make it mandatory for companies to know more about their customers. Companies can determine if there has been a suspicious transaction based on customer information. A customer who wants to transfer money may be listed on the terrorist list. This customer can be a terrorist and a threat to national security. If the company doesn’t know about this customer, it may result in a serious financial crime. That’s why KYC is important.
Another regulation in place is the AML holding period. It requires deposits to remain in an account for a minimum of five trading days. The purpose of this holding period is to help in anti-money laundering and risk management. Additionally, AML regulations require banks and other financial institutions to follow rules that ensure they are not aiding money laundering.
Why are AML Laws and Regulations Important?
Financial criminals throughout the world are concealing their money through money laundering. 2-5 percent of GDP is money that has been laundered through financial institutions. This is a large amount. The number of financial crimes will increase if financial institutions don’t comply with AML regulations. That is why companies need to comply with AML regulations. With AML regulations, money laundering may not stop completely, but it can be reduced through constant vigilance. Companies that don’t comply with regulations are subject to various penalties.
In 2018, the AML penalties totaled $ 4.27 trillion in 2018. The penalties reached $ 8 billion at the end of 2019, an increase of approximately twofold compared to 2018. AML penalties for 2021 are expected to be higher than those in 2020. These penalties are most often received by banks. If there were no penalties and no regulations, financial crimes would increase drastically. Hence, to keep these crimes under control, AML laws and regulations are important.
What Can Companies Do to Ensure AML Compliance?
Compliance with AML regulations can be difficult for businesses. Regulations are constantly updated from time to time. Companies need to pay more attention to complying with regulations due to increased penalties and audits. Any company’s AML compliance officer is responsible for ensuring compliance. Compliance officers follow regulations and oversee companies that violate them. The compliance officer also protects his company against financial crime.
Make sure your company’s compliance office is complying with AML’s laws and regulations. There are more than 200 countries on watch lists and sanctions. You don’t want anyone on these watchlists to be your customer. That’s why your compliance officer needs to check if your customers are on these lists or not.
The world without AML regulations and laws will see an increase in financial crimes. To ensure that money is not used for terror funding or other illegal activities, it is important to comply with AML’s regulations. The regulations may not put a full stop to financial crimes or money laundering, but they keep a check on such activities.
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