Anti Money Laundering, or AML, refers to a global push to stop the flow of currency generated by illegal activity such as that of organized crime and terrorist groups. AML practices require financial institutions to monitor and detect money-laundering through a series of regulations and procedures that track income flows and identity.
In essence, money laundering is the process of using illegitimate business means to transfer, deposit or invest money illegally. Some classic examples of money laundering include sudden increases in cash deposits from overseas or the failure to provide a financial institution with sufficient information about individual identities or business information. In most money laundering cases, suspicious organizations make it appear that their income was earned legitimately by hiding their illegal actions or true identities.
To protect themselves, financial services institutions that allow customers to open a variety of accounts must complete several procedures in order to guarantee that they are not participating in any money-laundering activities.
AML regulations got global attention when the members of the G-7 Summit created the Financial Action Task Force (FATF) on Money Laundering in 1989 to combat the dangers of money laundering. In 2001, the task force expanded its mandate to cover terrorist activities.
The FATF efforts helped established a framework to guide countries that had inefficient AML laws and controls. FATF’s main functions include monitoring the progress of implementing AML procedures, reviewing money-laundering trends and promoting the use of FATF standards on a global scale.
In addition, the USA Patriot Act, first passed by the US Congress in 2001, also includes AML compliance legislation aimed at regulating financial transaction and monitoring money-laundering activities. Under the Patriot Act, financial institutions are required to establish AML programs.
In general, AML programs have four main components: procedures designed to assure the compliance and implementation of regulations; an officer who oversees the program’s operations; an ongoing training program; and a third-party auditing system.
Many financial institutions have also established AML software systems to analyze customer data and track any unusual transactions. Any suspicious activity would be flagged and investigated for further inspection.