Key Guidelines to AML Compliance - BenchMatrix

Key Guidelines to AML Compliance

Key Guidelines to AML Compliance

Anti-Money Laundering (AML) and Counter Finance Terrorism (CFT)
Money Laundering Explained

Any illegal business such as drug trafficking or selling illegal firearms is bound to generate a lot of cash which needs to be disguised into legitimate earnings without raising suspicions of Banks, Law Enforcement Agencies or the Government. Money laundering is the process of disguising this illegally earned money through various channels so that the origin of how the money was actually earned cannot be traced back. The three steps involved in the process of money laundering are:

  • Placement: Involves infusing of criminal proceeds into financial system for example by changing currency, structuring deposits into smaller amounts.
  • Layering: Involves carrying out complex financial transactions to camouflage the illegal origin of these proceeds for example by repeated transfers into different onshore / offshore bank accounts.
  • Integration: Involves getting money legitimately back out of the financial system for example by receipt of proceeds as loan repayment or proceeds, financial investments etc.
Terrorism Financing Explained

After 9/11, the emphasis towards counter finance terrorism shifted drastically since any terrorist activity requires financial assistance to either the individual terrorists or any such organizations. Counter Finance terrorism involves combating financing of terrorist organizations by taking measures to ensure finances are not easily accessible to individuals / organizations involved in crimes against humanity. Many countries have implemented counter finance terrorism as part of their anti-money laundering law. Thus, the goal of AML and CFT Compliance is to ensure prevention, identification, reporting and investigation of Money Laundering and terrorist financing activities and taking measures to alleviate the risks of Money Laundering (ML) and Terrorist Financing (TF).

Methods of ML and TF


Criminals all over the world use different techniques / methods to launder money. According to a study performed by United Nations Office on Drugs and Crimes (UNODC) in 2009, criminal proceeds amounted to 3.6% of global GDP, with 2.7% (USD 1.6 trillion) being laundered (refer FATF FAQs). So, to formulate effective AML / CFT policies and procedures, it is important to understand some of the commonly used methods to launder money. The evolution of technology has added a set of modern methods to already existing traditional money laundering techniques such as:

  • Structuring: Also known as “smurfing”, it is a method of money laundering wherein a large amount of criminally earned money is broken into smaller deposits into banks to avoid suspicion of money laundering. Another technique of smurfing involves purchase of financial instruments of smaller amounts and later deposit these instruments in banks accounts.
  • Bulk Cash Smuggling: One of the oldest methods to launder money, bulk cash smuggling involves physically smuggling bulks of hard cash to another country with much relaxed AML laws and depositing the smuggled cash into financial institutions.
  • Cash Intensive Business: This method of money laundering works by setting up businesses which typically receive a large proportion of its revenue as cash such as restaurants, bars, salons and depositing illegally derived cash into the business account as income in small proportions.
  • Transaction laundering: Previously known as “undisclosed aggregation” or “factoring”, transaction laundering occurs when a merchant processes unknown transactions on behalf of another business. The other business is often involved in prohibited activities and the merchant is either secretly involved or is being exploited to carry out such transactions.
  • Shell Companies: These are business entities without any actual premise, employees or operational assets. These are just legal entities but do not have any active business operation. Bank accounts of these companies are used by criminals to store dirty money. Such companies are often created by registered agents to conceal ownership information from other businesses. The 2016 Panama Papers exposed many shell companies laundering dirty money from foreign accounts.
  • Trade-based money laundering: This is one of the newest and complex methods of money laundering and involves trade-based transactions such as under / over valuing invoices to disguise the movement of money and is achieved through misrepresentation of the price, quantity or quality of imports or exports.
  • Cyber Laundering: The digital age and information technology has opened doors for new money laundering techniques such as digital currencies, online games, crowdfunding etc. which allows criminals to launder money more conveniently and at a rapid pace.
History of AML and CFT

The history of money laundering dates back to around 2000 years B.C where according to Sterling Seagrave’s book “Lords of the Rim”, the Chinese traders would hide their wealth from rulers and invest it in businesses in remote provinces or even outside China. The term “money laundering” originated because of Italian mafia members in United States such as Al Capone whose accountant used laundromats to disguise the earnings from illegal activities such as prostitution, gambling and bootlegging liquor sales. In the G-7 summit held in Paris in 1989, a Financial Action Task Force was established to examine money laundering techniques and setting out the measures needed to be taken to combat money laundering. Within a year of its creation, FATF issued a report containing forty recommendations intended to provide a comprehensive set of rules in the fight against money laundering.  The events of 9/11 in 2001 and the finances involved in masterminding such an act of terrorism prompted an action against terrorist financing due to which the fight against terrorist financing was added to the mission of FATF.

AML and CFT Compliance

What is AML and CFT Compliance?

Developing countries, as apparent in the last decade, have been targeted for crimes such as money laundering and terrorism financing the result of which is not just limited to destabilization of economy but also political instability of such countries as well. AML Compliance is therefore, significant in providing guidance to such vulnerable financial systems in their fight against money laundering. AML Compliance process includes background screening and ongoing monitoring of customers in order to identify and eliminate the risks of money laundering. Industries such as banks, stock exchanges, real estate, precious metal dealers etc. are now mandatorily required to include AML screening as a part of KYC regulations and screen the customers against global watch lists, sanctions and PEPs. FATF and World Bank are collaborating national authorities and state banks of different countries to implement stringent AML laws and regulations. The role of financial institutions such as banks and finance sector is pivotal in this global effort. Banks all over the world are legally obliged to implement AML laws to detect suspicious transactions and stop the illegal movement of money from one jurisdiction to another.

Importance of AML and CFT Compliance

AML Compliance in banks and other financial institutions is a primary source of risk prevention and has several benefits for the business rather than just being a regulatory burden. Financial institutions are at the fore front of maintaining the financial integrity of the economy as a whole, therefore, AML Compliance plays an important role in avoiding the reputational as well as financial losses to the businesses and economies associated with ML / TF.

Ever increasing frauds

With financial infrastructure in a constant technological shift and rise of online payments at a continuous rate, frauds are increasing day by day. Every loophole in the AML Compliance of banks and businesses stands at the risk of being exploited by the fraudsters, therefore, AML regulations are helpful in detection and prevention of such frauds without which they will be bombarded with chargebacks and other such claims. Few global stats related to fraud and money laundering are stated below;

Losses related to non-compliance

Non-compliance of AML regulations can be subject to heavy fines and penalties which are direct losses to any business. These are not just financial losses but also result in loss of credit ratings, temporary or permanent closure of businesses, etc. To avoid these losses, financial institutions are now more inclined towards adopting the AML Compliance measures. Here are some statistics related to non-compliance of AML regulations:

Customer value

Customers are likely to be more inclined towards banks taking necessary measures to secure them from fraud, therefore, AML Compliance is necessary for banks to avoid loss of both its customer and market value. For banks to grow their businesses, it is vitally important that there is a sense of confidence in its customer base and this can be achieved by complying to AML regulations in order to avoid losses due to frauds. The Swedbank in its recent money laundering scandal lost 7 billion of its market value along with a decrease in credit rating. Here are some facts related to customer frauds:

  • Worldwide financial institutions paid fines amounting to USD 24.26 billion last year due to payment fraud
  • In 2019, almost 165 million records containing personal data were exposed through fraud-related data breach.

Furthermore, an AML compliant business stands most likely to alleviate the risks associated with ML / TF. Adopting measures for identification and verification of customers on continuous basis is not only helpful in identifying PEPs and close associates of PEPs but also high risk customers such as those whose business profile does not match with the requested quantum of business. AML Compliance also allows FIs in setting transactions limits for higher risk customers, determining transactions that require higher management approval and determining circumstances under which FIs may refuse to take a customer on board.

Moreover, measures such as KYC, CDD and EDD allows for developing a customer and business profile at a very early stage of establishing a relationship which can result in reporting of suspicious transactions to help in early detection of ML activities. AML Compliance, therefore, is a significant step towards mitigating risks related to banking businesses and needs to be seriously considered as an important tool to combat the crimes of ML and CFT.

Key Guidelines to achieve AML and CFT Compliance

Financial institutions are required to adopt a Risk Based Approach to identify, assess and understand the risks with respect to ML / TF. Risk factors to be considered include:

  • Customer risk factors – such as non-resident customers, companies with complex ownership structures, cash intensive businesses, PEPs, shell companies etc.
  • Country or geographic risk factors – such as countries identified as not having adequate AML/ CFT System, countries subject to sanctions by UN, countries identified as supporting terrorist organizations etc.
  • Product, Service, Transaction, or Delivery Channel risk factors – anonymous transactions, non-face–to-face transactions, payments received from unknown third parties etc.

AML Compliance also requires financial institutions to adopt Customer Due Diligence measures while establishing business relations with a customer which includes identifying customers, obtaining information on the nature of customer’s business, monitoring transactions on an ongoing basis etc. Such measures help in enabling the financial institutions in early identification and reporting of suspicious transactions.

Financial institutions are also required to perform a continuous monitoring of their AML / CFT systems to control and assess their effectiveness and identify areas for further improvement. Establishing an effective system to combat the risk of ML / TF includes setting up Compliance and internal audit functions with necessary skills and experience to effectively implement the AML /CFT measures and training them to adapt to the ever-changing global scenarios related to AML / CFT.

Following is the checklist to efficiently achieve AML Compliance:

  • Risk Based AML Measures
  • Identity Verification including customer’s personal information such as name, address and date of birth.
  • Identifying the PEP (politically exposed person) status of its customers.
  • Real-time, batch based and manual sanctions screening against OFAC and UNSC lists.
  • Effective measures for transaction monitoring to identify high risk transactions or transactions with unusual patterns.
  • Suspicious Activity reporting to the financial regulators and authorities.
  • Regular AML training for bank employees to keep them up to date on the AML regulations.
  • Record keeping for continuous monitoring of customers, transactions, etc.

How can BenchMatrix’s RiskNucleus® AML Solution help your business with AML Compliance?

RiskNucleus® AML offers comprehensive functionalities covering automated watch list screening, transaction monitoring, customer due diligence and risk assessment, case management and reporting. It is one of the most complete, practical, and rapidly deployable solutions in the market. Some key features are listed below:

Transaction Monitoring: Rules-based transaction monitoring generates alerts if entities-of-interest (customers, merchants, employees, brokers, vendors, etc.) perform suspicious transactions. For extreme flexibility, the number and type of usable attributes are only restricted by availability, and data streams can be configured for multiple sources including delimited files, views in Oracle DB or MS SQL Server, IBM MQ, etc.

Risk Assessment: Our dynamic risk engine rapidly evaluates fraud risk scores for each entity based on several attributes, including inherent attributes like industry and occupation; geographical attributes like residence, origin, destination, etc.; and transactional attributes like cash usage in the current month. Models are built specifically for your organization’s business model without any restrictions on the number or type of risk factors.

Watchlist Screening: Apply several phonetic and fuzzy matching approaches to screen a variety of customer, employee, and transaction attributes against public watch lists like OFAC, UK, EU, UN, and a configurable private watch list. Screening alerts can further be processed through customizable review cycles to ensure adequate oversight.

Case Manager & Workflows: The system comes pre-built with a complete case management module with integrated workflows for alert routing and review as well as emails and notifications. Furthermore, all necessary information is available within the Case Manager so users don’t need to refer to source systems. Attachments and comments are also recorded within so a complete auditable track of activities is maintained at all times.

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