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The Essential Guide to a Strong AML Program

The Essential Guide to a Strong AML Program

Learn how money laundering works, how it impacts the economy and how you can develop a strong and effective anti-money laundering program.

An Anti-Money Laundering (AML) Program is a set of policies and procedures that an organization maintains to detect, prevent and address money laundering. These programs can help prevent firms from incurring huge fines as a result of non-compliance with AML regulations.

What is Money Laundering?

Money laundering is the process of concealing the true origin of money that was obtained from criminal activity. Though the source of laundered money is often unclear, most illegal funds originate from activities such as drug trafficking, fraud, tax evasion and corruption. Once the funds are obtained, they must be “cleaned” to disconnect them from their illegal source.

The Money Laundering Process

According to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), there are generally three steps involved in the money laundering process:

  1. Placement: involves placing the proceeds of crime in the financial system;
  2. Layering: involves converting the proceeds of crime into another form and creating complex layers of financial transactions to disguise the audit trail and the source and ownership of funds (e.g., the buying and selling of stocks, commodities or property); and,
  3. Integration: involves placing the laundered proceeds back in the economy under a veil of legitimacy

Looking for a quick reference? Download our 5 Key Components of a Strong AML Program cheat sheet.

Why Implement an AML Program?

Money laundering poses a serious threat to the economy. The International Monetary Fund (IMF) notes that money laundering can discourage foreign investment, impact international capital flows and result in welfare losses. Given the interconnected nature of today’s financial systems, the effects of money laundering can be felt internationally.

Money laundering can distort our understanding of the economy, incorrectly shifting demand for goods, services or currencies, and impacting exchange rates. In some cases, criminals may be able to exercise a great deal of political power due to the large amounts of illegal funds they have amassed. This can negatively affect economic policy and international relations if corruption and criminal activity begin to influence government actions.

Overall, money laundering has consequences that impact every nation. Most people assume that money laundering only occurs in developing economies where regulations are rather loose, yet economies such as the United States and Canada are still susceptible to financial crimes despite their extensive AML legislation. In 2011, The Guardian reported that Wachovia, a large American bank, was fined for failing to apply adequate anti-money laundering policies to the transfer of $378.4bn that originated from drug trafficking. For this reason, a comprehensive AML program is essential to maintaining a strong global financial system.

Download our cheat sheet on How to Identify an Altered Check and protect yourself from financial crimes.

AML Compliance

In 1990, the Financial Action Task Force on Money Laundering (FATF) introduced a list of Forty Recommendations to help nations combat money laundering inside their borders. These recommendations are regularly updated and revised, most recently in 2012, to reflect changes in global systems.

Currently, the FATF has 37 members including the United States, Canada and the European Commission, who are responsible for ensuring that the Forty Recommendations are respected at applicable institutions, such as banks. Additionally, international organizations such as the IMF, the World Bank and the United Nations also adhere to these anti-money laundering recommendations. Though the FATF provides a framework to help nations address money laundering issues, many countries maintain their own unique regulations to ensure greater protection against financial crimes.

Awareness of regulations can ensure that your organization is not susceptible to financial crimes and avoids facing non-compliance fines. In fact, earlier this year, Deutsche Bank was fined over 500 million GBP by British and American government agencies for failing to uphold adequate anti-money laundering policies.

A weak or ineffective AML program lead to financial trouble and a damaged reputation. To ensure that your organization is adhering to AML regulations, consult local government legislation.

In the United States, several laws have been passed over the last 40 years to protect the economy from money laundering. The most prominent regulation in place, however, is the Bank Secrecy Act (BSA) which was introduced in 1970. The BSA ensures that businesses keep adequate records of monetary transactions to help law enforcement detect and confront the introduction of illegal funds into the financial system.

In 2001, under the USA PATRIOT Act, the BSA requirements were expanded to protect the United States against financial crimes used specifically to fund terrorism.

The Financial Crimes Enforcement Network (FinCEN) ensures that the following institution types adhere to the BSA regulations:

  • Banks
  • Money Services Businesses (check cashes and money transmitters)
  • Securities and commodities firms
  • Casinos and card clubs
  • Insurance companies
  • Precious metals dealers
  • Loan or finance companies and pawnbrokers

In Canada, the primary anti-money laundering legislation is the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) which was introduced in 2000. The PCMLTFA aims to protect the Canadian economy from the effects of money laundering by introducing record keeping and reporting requirements for specific organizations. This legislation outlines that certain transactions and suspicious activity must be reported to FINTRAC by:

  • Financial entities (including banks, credit unions, caisses populaires and loan companies)
  • Life insurance companies, brokers and guests
  • Securities dealers
  • Money services businesses
  • Agents of the Crown that sell money orders
  • Casinos
  • Dealers in precious metals and stones

And, when carrying out certain activities on behalf of their clients:

  • Real estate brokers and sales representatives
  • Accountants and accounting firms
  • Public notaries and notary corporations of British Columbia

Components of a Strong AML Program

Though most governments maintain their own standards regarding AML policies, a strong AML program is founded upon five basic components. These components should act as the framework for your AML program. Depending on the complexity of your business processes, you may need to expand upon this framework to better suit your needs.

System of Internal Controls
Internal controls include policies and procedures that ensure compliance with regulations. This includes reporting and record keeping requirements introduced by the government. Effective controls detect illegal activity before it causes too much damage.

Independent Audit
An independent audit, conducted by a qualified team, should take place regularly to identify any discrepancies in financial records that may indicate suspicious activity. The audit can also ensure that the system of controls is functioning effectively.

Compliance Officer
A compliance officer works to implement and review the AML program for an organization. Reporting to senior management, the compliance officer should be a well-trained and qualified individual with access to necessary resources.

Training Program
A comprehensive training program should be implemented to improve employee awareness of money laundering and other financial crimes. Training should inform employees about regulations, organizational requirements, and reporting procedures.

Risk Assessment
Risk assessment refers to the ongoing process by which an organization identifies the money laundering risks it faces, determines the extent of that risk and mitigates the risk by following the appropriate protocol. Every organization will have a unique risk assessment process based on its organizational structure, product offering, global presence, etc.

Support Your AML Program:
Build a Culture of Compliance

In addition to implementing policies and procedures to support your AML program, consider promoting a culture of compliance within your organization. Thomson Reuters suggests that there are six basic factors that contribute to a workplace culture that supports compliance.

The FATF and government agencies regularly update their policies to accurately reflect the current state of global financial systems, and firms should be aware of these changes to improve their own AML program and procedures.

When employees communicate openly with the appointed compliance officer and senior management, high levels of trust and transparency can be achieved. This reduces the risk of non-compliance among employees and facilitates constructive conversations if non-compliance occurs.

Regular training programs can keep employees informed on important reporting requirements and record keeping expectations, helping them understand their role within the organization’s AML program and the importance of compliance.

Effective Technology
Digital solutions can improve an AML program if they complement the organization’s systems and make it easier to follow procedures when compliance issues occur. Technology can also facilitate a quick response to these issues.

Organizations that reward employees for following the correct protocol when dealing with non-compliance will see a stronger culture of compliance than organizations who choose to ignore compliance issues when they arise.

Incident Reporting and Case Management
A system that helps keep track of incidents can make it easier to identify and address risks before they result in serious legal issues. When employees are aware that their organization values a case management system, they are more likely to report suspicious activity or misconduct. Case IQ's case management solution can help your organization detect and prevent internal non-compliance, thereby enhancing the AML program that is already in place.

Download our free eBook to learn more about how case management software can help you effectively manage ethics and compliance investigations.