Money laundering: a brief introduction
Money laundering is the process of concealing the origins of money obtained illegally, by passing it through a sequence of transfers and/or transactions. The overall scheme of this process returns the money, "clean" to the launderer, to be used in the legal economy.
Money laundering is conducted in multiple ways, with skills and innovation of criminals increasing rapidly. However, at a basic level the process of laundering is described in the following steps by the FATF (Financial Action Task Force);
- In the initial - placement - stage of money laundering, the launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account.
- After the funds have entered the financial system, the second – layering – stage takes place. In this phase, the launderer engages in a series of conversions or movements of the funds to distance them from their source.
- Having successfully processed his criminal profits through the first two phases the launderer then moves them to the third stage – integration – in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.
Anti-money laundering (or AML) refers to the laws, regulations and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income. Though anti-money laundering laws cover a limited range of transactions and criminal behavior, their implications are far-reaching.
Manual labour: why digitization and automation is needed
With huge scandals, hefty fines, and a tighter grip on the issue from authorities, money laundering (and the prevention of it) has become a hot topic in recent years. But with increased attention and focus, comes an increased cost for industries and business obliged to follow the rules. As financial institutions all over the world try to accelerate their efforts in money laundering prevention, AML specialist teams grow rapidly, from an increase in required activities involving manual labour.
In fact, 50-75% of AML compliance costs in financial institutions, originates from manual labour. Therefore, digitization and automation of AML processes has become a necessity, in order to maintain cost efficiency and business growth.
Guide: How to digitize and automate your AML process
KYC
Performing a KYC report (know your customer) has become mandatory for a lot of businesses in an increasing number of industries. Digitizing and automating the process is a good place to start, as it is the foundation of your customer relationship. Requirements of the KYC process can vary slightly depending on your business and industry. However, you should in general be looking closely at your customer or potential customers company, closely related companies, representatives and relationships.
In practice this could include; PEP and Sanctions screenings, engagements and profiles of company representatives (such as board members or beneficial owners), financial information, corporate ownership structure etc.
There are tools available for both digitizing and automating the KYC process. Digitized (but not automated) solutions are usually platforms where you can search, collect and verify customer data, while automated solutions can be implemented through APIs for example, enabling a fully automated signup, registration, application or onboarding process.
Risk management and assessment
Assessing and handling risks of money laundering activities is surely at the core of your AML process. Having all the structure in place is very important. Well-documented protocols and routines for risk handling, as well as a framework for risk assessment is not only a legal requirement, but also a necessity to reduce risk over time. Once you've completed this initial work, setting the standards for your company, there are plenty of tools to assist in digitizing and automating the tasks related to money laundering prevention, however which one to choose is entirely up to your needs and wants.
Lately, the development of advanced risk management, detection and assessment solutions have been emerging, combining tons of data and sophisticated pattern recognition to provide more solid grounds for decision-making. So keep your eye on the market for coming releases of awesome risk-related services and products!
Monitoring
Customer data
When relevant changes occur in your customer or potential customers business - such as a new board member, a change in company signatory rights or a stakeholder being marked as PEP - you'd like to be first to know. This is why customer data monitoring is crucial, as it ensures you have the correct information at all times. Today, there are multiple services that can provide automated monitoring.
However, the most secure ones from a GDPR perspective, would be those that don't require you to share any customer information with a third party. Read more about Roarings monitoring solution if you are interested.
Transactions
Follow the money! Monitoring transactions in real-time, enables banks and other financial institutions to identify risk in their customers businesses, alerting or notifying you when suspicious activities takes place.
And by combining this information with analysis of customers’ historical information and account profile (including KYC report), todays software solutions for transaction monitoring can help provide financial institutions with a “whole picture” analysis of a customer’s profile, risk levels, and predicted future activity.
Summary
Surveys have shown that financial institutions spend huge amounts of means on money laundering prevention. Increasing AML compliance requirements are putting pressure on everything obliged to comply with regulations, resulting in negative effects in customer onboarding performance, employee satisfaction and productivity.
By automating and digitizing the AML process, reducing the need for manual labour and assessment, your organization can ensure regulatory compliance, improve business performance and reduce risks, while saving time and money. Areas where digitization and automation can be implemented to great effect, includes KYC, Risk Management & Assessment, Customer data monitoring and Transaction monitoring.
