Anti-Money Laundering - Definition, Origins

 

Anti-Money Laundering(AML)

Anti-money laundering (AML) is a set of rules, principles, legislations, laws, regulations, processes, and tools specific to the financial sector, whose goal is to tackle actions of laundering illicitly obtained funds by criminal or terrorist organizations. This involves the monitoring and reporting of suspected customers and transactions. Financial institutions and other businesses in many countries have a legal obligation to follow directives for doing this. For example, financial and insurance institutions are obliged to check their customers according to "Know Your Customer" (KYC). This involves legitimation and identity verification.

It is implemented within government systems and large financial institutions to monitor potentially fraudulent activity.

Money Laundering and AML

Money laundering refers to the process of taking illegally obtained money and making it appear to have come from a legitimate source. It involves putting the money through a series of commercial transactions in order to “clean” the money.

For example, money may be placed in a business and disguised as sales revenue in order to camouflage its origin. Money laundering is illegal in itself.

Predicate offenses in money laundering refers to a crime component of a complex or larger  crime. In a financial context, the predicate offense would be any crime that generates monetary proceeds. The larger crime would be money laundering or financing of terrorism. A predicate offence is a crime that is a component of a more serious crime. For example, producing unlawful funds is the primary offense, and money laundering is the predicate offense.

Organized criminal groups launder the proceeds of drug trafficking and commodity smuggling while terrorist groups use money-laundering channels to obtain cash to buy arms and finance their activities. The social consequences of money laundering are far reaching and potentially highly destabilizing for a state. The ability to prevent, detect and combat money laundering permits to identify criminals and the predicate offences from which money is derived.

Money Laundering Examples

 

Sell cocaine and get a million dollars

Take the million in cash to the some Islands. Buy a legitimate company, complete with a board of directors. Open a bank account in the company’s name and deposit the rest of the money. Enjoy the islands, get some sun, then go home. When you get home, borrow $200,000 from the Company account and have it delivered via wire transfer.

 

Open a restaurant.

Deposit proceeds from ongoing drug business along with proceeds from the restaurant every month into a legitimate bank account. Don’t add too much illegal money, just enough to make it look as though your restaurant is doing a good, healthy business. Pay all of your taxes on the restaurant deposits, so the tax authorities don’t start an investigation.

 

Briefly described, "money laundering" is the process by which proceeds from a criminal activity are disguised to conceal their illicit origin. More precisely, according to the Vienna Convention and the Palermo Convention provisions on money laundering, it may encompass three distinct, alternative actus reas: (i) the conversion or transfer, knowing that such property is the proceeds of crime (ii) the concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime; and (iii) the acquisition, posession or use of property, knowing, at the time of the receipt, that such property is the proceeds of crime.

 

Money laundering uses fraud to legalize illegal funds. Rules and regulations for laundering money must be avoided, so criminals use money laundering techniques to hide dirty money. The act of money laundering corrupts financial systems by damaging the integrity of financial institutions. When money launderers transfer money through illegitimate businesses, they compete with real business owners.

 

When money launderers invest dirty money in hard-to-detect markets to wash down, they inflate those markets the wrong way. In addition, money laundering makes it harder for law enforcement to track down criminals, stop dangerous and illegal behavior, and seize counterfeit funds. Today's financial criminals are equipped with the latest well-funded technology. This makes it more difficult than ever for financial institutions, law enforcement, and regulators to stay one step ahead. 

 

Financial criminals use modern financial tools to trick systems into accepting dirty money. Accessing programming systems enables criminals to use new tactics to disguise their identities and spread illegal transactions. In this case, it can be quite difficult for financial institutions to protect themselves. In this case, it can be quite challenging for financial institutions to protect themselves.

Money laundering, is the execution of transactions to eventually convert illegally obtained money into legal money. Although you as a company stick to the rules, this does not mean that your partners and business associates adhere to the same AML compliance laws as you.

Particularly in international business, you run the risk that the companies or individuals with whom you do business are not in compliance with the anti money laundering regulations set by the government. Conducting a Due Diligence Investigation  on your partners, suppliers but also customers is therefore essential.

Origin of AML Regulations

The Financial Action Task Force (FATF), also known by its French name, Groupe d'action financière (GAFI), is an intergovernmental policy making body founded in 1989 on the initiative of the G7. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF is therefore a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. 

The series of complaints against the Bank of Credit and Commerce International, Luxemberg, a global bank from Asia that grew faster in the western banking circles, probably,  provided the energy to the initiative. The efforts of national law enforcement bodies on their own were deemed to be insufficient to deal with the wide geographical spread of the production and distribution activities of illegal narcotics and the ability to move drug money across borders. The problem required a multinational response. In response to mounting concern over money laundering, the Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit that was held in Paris in 1989. Recognising the threat posed to the banking system and to financial institutions, the G-7 Heads of State or Government and President of the European Commission convened the Task Force from the G-7 member States, the European Commission and eight other countries. (G-7 is a forum created by France in 1975, for the government of seven major economies namely Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. In 1997, the group added Russia, thus becoming the G8.)

The FATF was founded with the aim of studying and developing measures to counter money laundering and to promote the implementation of international standards for AML. Prior to this, institutions such as banks held limited responsibility for money laundering cases. However, following the September 11 terrorist attacks in 2001, the FATF expanded its mission to combat terrorist financing, leading to a significant enhancement of existing regulations and an increase in the responsibilities of institutions subject to these regulations.

The Financial Action Task Force (FATF), a body of 40 member nations(July 2024),  is the global money laundering and terrorist financing watchdog. It sets international standards that aim to prevent these illegal activities and the harm they cause to society.

In 2001, the development of standards in the fight against terrorist financing was added to the mission of the FATF.  In October 2001 the FATF issued the Eight Special Recommendations to deal with the issue of terrorist financing.  The continued evolution of money laundering techniques led the FATF to revise the FATF standards comprehensively in June 2003.  In October 2004 the FATF published a Ninth Special Recommendations, further strengthening the agreed international standards for combating money laundering and terrorist financing - the 40+9 Recommendations.

In February 2012, the FATF completed a thorough review of its standards and published the revised FATF Recommendations. This revision is intended to strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime. They have been expanded to deal with new threats such as the financing of proliferation of weapons of mass destruction, and to be clearer on transparency and tougher on corruption.  The 9 Special Recommendations on terrorist financing have been fully integrated with the measures against money laundering. This has resulted in a stronger and clearer set of standards.

Recommendation 6 of the FATF 40+9 Recommendations and Paragraph 7 of the Methodology for Assessing Compliance with the FATF 40+9 Recommendations, are particularly relevant to anti-corruption efforts.

 

The Financial Action Task Force (FATF) Secretariat draft  paper outlining the links between corruption and money laundering that may facilitate the implementation of international AML/CFT standards.

Those involved in the fight against money laundering or the financing of terrorism rely on the most current information on typologies. FATF members provide one another and the Financial Action Task Force (FATF) Secretariat annually with observations based on recent cases or studies of particular subject areas. FATF collects this information and attempts to describe the trends in order to be in a position to adapt recommendations to specifically address money laundering and terrorist financing risks. FATF also informs the public at large by publishing annual typology reports on its webpage.

Initially the focus of CTF efforts was on non-profit organizations, unregistered money services businesses (MSBs) (including so called underground banking or ‘Hawalas’) and the criminalisation of the act itself.

In June 2011, FATF published a Guidance paper which provided support to countries and their financial institutions in designing AML/CFT measures that meet the national goal of financial inclusion, without compromising the measures that exist for the purpose of combating crime. Following the revision of its Recommendations in February 2012, FATF adopted an updated version of its Guidance on financial inclusion in February 2013. This project was conducted in partnership with the World Bank and the , and in consultation with the financial industry.

The Guidance paper focuses on ensuring that AML/CFT controls do not inhibit access to well regulated financial services for financially excluded and underserved groups, including low income, rural sector and undocumented groups. The document provides clarity and guidance on the FATF Recommendations that are relevant when promoting financial inclusion and shows how the Recommendations can be read and interpreted to support financial access.

The revised Guidance seeks to reflect the changes brought to the FATF Recommendations in 2012. It focuses in particular on the reinforcement of the risk-based approach (RBA), as a general and underlying principle of all AML/CFT systems. FATF believes that the development of risk-sensitive AML/CFT frameworks will be a key step for countries that wish to build a more inclusive formal financial system, and give access to appropriate financial services to a larger proportion of the population, including the most vulnerable and unserved groups.

In February 2012, the FATF completed a thorough review of its standards and published the revised FATF Recommendations. This revision is intended to strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime. They have been expanded to deal with new threats such as the financing of proliferation of weapons of mass destruction, and to be clearer on transparency and tougher on corruption. The 9 Special Recommendations on terrorist financing have been fully integrated with the measures against money laundering. This has resulted in a stronger and clearer set of standards

The FATF Recommendations set out the essential measures that countries should have in place to:

·         Identify the risks, and develop policies and domestic coordination;

·         Pursue money laundering, terrorist financing and the financing of proliferation;

·         Apply preventive measures for the financial sector and other designated sectors;

·     Establish powers and responsibilities for the competent authorities (e.g., investigative, law enforcement and supervisory authorities) and other institutional measures;

·     Enhance the transparency and availability of beneficial ownership information of legal persons and arrangements; and

·         Facilitate international cooperation.

Since 2019, the FATF has had an open-ended mandate, after originally operating under fixed-terms.

In October 2021, the FATF updated its 2019 Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (VASPs). This updated guidance forms part of the FATF's ongoing monitoring of the virtual assets and VASP sector.

The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. Countries have diverse legal, administrative and operational frameworks and different financial systems, and so cannot all take identical measures to counter these threats.

The FATF Recommendations, therefore, set an international standard, which countries should implement through measures adapted to their particular circumstances. The FATF Standards comprise the Recommendations themselves and their Interpretive Notes, together with the applicable definitions in the Glossary therein.     

FATF Mandate :

• Establish, revise and clarify global standards and measures for combating ML/TF;
• Promote global implementation of the standards;
• Identify and respond to new money laundering and terrorist financing threats;
• Engage with stakeholders and partners throughout the world.

FATF Standards: The Forty+ Nine Recommendations

Forty Recommendations - Complete set of counter-measures against money laundering

 

Nine Special Recommendations - Terrorist Financing

 

FATF Style Regional Bodies

The 9 FATF-Style Regional Bodies help construct and support AML/CFT compliance policies and updates in every major region in the world. FSRBs disseminate the FATF’s global standards in order to help the 200+ countries under their jurisdictions understand and comply with FATF’s AML/CFT expectations.

The FATF Process

Internal Review Mechanisms: Self-assessment exercise based on a standard questionnaire designed by FATF and used by its members to report on their anti-money laundering system on an annual basis and

Mutual Evaluation Process : Each country is evaluated by a team of experts drawn from other member countries to give ratings with respect to each recommendation of FATF

The FATF Black List & Grey List

The FATF collaborates with its member states and regional organizations to develop a legal, regulatory, and operational framework for combating these threats

The Financial Action Task Force (FATF) publishes two public documents three times a year that identify jurisdictions with weak measures to combat money laundering and terrorist financing (AML/CFT).

As part of its efforts, the FATF maintains a black list, officially known as High-Risk Jurisdictions subject to a Call for Action, and a grey list. The grey list includes countries that have committed to addressing strategic deficiencies in their anti-money laundering and counter-terrorist financing (AML/CTF) regimes. Given the potential regulatory risk associated with countries that do not maintain international compliance standards, financial institutions should be aware of FATF black list and grey list countries and what that designation entails. 

The FATF blacklist was the common shorthand description for the Financial Action Task Force list of "Non-Cooperative Countries or Territories" (NCCTs); i.e., countries which it perceived to be non-cooperative in the global fight against money laundering and terrorist financing. Although non-appearance on the blacklist was perceived to be a mark of approbation for Offshore Financial Centres (or "tax havens") who are sufficiently well regulated to meet all of the FATF's criteria, in practice the list included countries that did not operate as offshore financial centres. The FATF updates the blacklist regularly, designating countries to be added or deleted.

The term "non-cooperative" was sometimes criticized as misleading, as a number of the countries which appeared on the list simply lacked the infrastructure or resources to cope with relatively sophisticated financial criminals who try to operate there. Since 2008 the FATF has begun, at the behest of G20 leaders, a different and more analytical process of identifying countries and jurisdictions displaying strategic deficiencies in their anti-money laundering and anti-terrorist financing regimes

The Financial Action Task Force on Money Laundering (FATF) has made recommendations to members relating to CTF. It has created a Blacklist and Greylist of countries that have not taken adequate CTF action. As of 24 October 2019, the FATF blacklist (Call for action nations) only listed two countries for terrorism financing: North Korea and Iran; while the FATF greylist (Other monitored jurisdictions) had 12 countries: Pakistan (see Pakistan and state-sponsoredterrorism), Bahamas, Botswana, Cambodia, Ghana, Iceland, Mongolia, Panama, Syria, Trinidad and Tobago, Yemen, and Zimbabwe. In general, the supply of funds to designated terrorist organisations is outlawed, though the enforcement varies.

FATF Recommendations: Subjects Covered

 

Criminalization: To criminalize money laundering and terrorist financing. The definition of money laundering offenses has now expanded to include all serious offenses

Provisional Measures and Confiscation: To put in place measures to identify, trace, freeze, or seize and finally to confiscate the illegal proceeds.

Customer due diligence: To impose duties on financial institutions to know their customers and to abolish the use of anonymous accounts.

Record keeping: Financial institutions to keep records on all the transactions that they conduct.

Suspicious transactions reporting: Financial institutions to report all transactions that raise their suspicion, without alerting the clients.

Internal controls: Financial institutions adopt internal mechanisms that allow them to comply with the regulatory requirements.

Implementation: To create regulatory and supervisory agencies that are capable of implementing the international standards set by the Recommendations.

International cooperation: To put in place a system that allows it to cooperate with other countries on all aspects of law enforcement including exchange of information, preservation and confiscation of assets and extradition.

The FATF works in close cooperation with other key international organizations, including the IMF, the World Bank, the United Nations, and FATF-style regional bodies.

IMF and AML/CFT

Another important player in the fight against money laundering is the International Monetary Fund (IMF), which regulates and pressures its 189 member states to comply with international standards to prevent terrorist financing.

 AML/CFT policies and measures are designed to prevent and combat these crimes and are essential to protect the integrity and stability of financial markets and the global financial system. Over the past 20 years, the Fund has helped shape AML/CFT policies globally, and within its members’ national frameworks.

 

Both corruption and money laundering are of great concern for the IMF and they are now an integral part of its work because of the numerous disruptive consequences that each has on national and regional economies.

Anti-corruption and anti-money laundering work are linked in numerous ways, and especially in recommendations that promote, in general, transparency, integrity and accountability. Recommendation 6 of the FATF 40+9 Recommendations and Paragraph 7 of the Methodology for Assessing Compliance with the FATF 40+9 Recommendations, are particularly relevant to anti-corruption efforts

Anti-corruption and anti-money laundering work are linked in numerous ways, and especially in recommendations that promote, in general, transparency, integrity and accountability.

The essential connections are:

·         Money laundering (ML) schemes make it possible to conceal the unlawful origin of assets. Corruption is a source of ML as it generates large amounts of proceeds to be laundered. Corruption may also enable the commission of a ML offense and hinder its detection, since it can obstruct the effective implementation of a country's judicial, law enforcement and legislative frameworks.

·         When countries establish corruption as a predicate offense to a money laundering charge, money laundering arising as a corrupt activity can be more effectively addressed. When authorities are empowered to investigate and prosocute corruption-related money laundering they can trace, seize and confiscate property that is the proceeds of corruption and engage in related international cooperation.

·         When corruption is a predicate offense for money laundering, AML preventive measures can also be more effectively leveraged to combat corruption.

United Nations(UN)

The United Nations is an intergovernmental organization whose stated purposes are to maintain international peace and security, develop friendly relations among nations, achieve international cooperation, and be a centre for harmonizing the actions of nations

The United Nations included AML provisions in its 1998 Vienna Convention addressing drug trafficking, the 2001 Palermo Convention against international organized crime and the 2005 Merida Convention against corruption.

Money laundering has been addressed in the UN Vienna 1988 Convention Article 3.1 describing Money Laundering as:

“the conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions”.

The responsibility on member countries 

Criminalization of the laundering of proceeds of crime in article 6 of the Organized Crime Convention (Palermo Convention 2000)

1. Each State Party shall adopt, in accordance with fundamental principles of its domestic law, such legislative and other measures as may be necessary to establish as criminal offences, when committed intentionally:

(a)

(i) The conversion or transfer of property, knowing that such property is the proceeds of crime, for the purpose of concealing or disguising the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action;

(ii) The concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime;

(b) Subject to the basic concepts of its legal system:

(i) The acquisition, possession or use of property, knowing, at the time of receipt, that such property is the proceeds of crime;

(ii) Participation in, association with or conspiracy to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the offences established in accordance with this article.

The CFT Programme Mandate

 

The UN Security Council has addressed countering the financing of terrorism on various occasion. These include, among others, Resolution 2133 (2014) on kidnapping and hostage-taking by terrorists and Resolution 2178 (2014) on suppressing the flow of Foreign Terrorist Fighters (FTFs), financing and other support to terrorist groups in Iraq and Syria, Resolution 2195 (2014) on preventing terrorists from benefiting from transnational organized crime, Resolution 2199 (2015) aiming to prevent terrorist groups in Iraq and Syria from benefiting from trade in oil, antiquities and hostages, and from receiving donations.  

In UN Security Council Resolution 2253 (2015), the Council expanded and strengthened its Al-Qaida sanctions framework to include a focus on ISIL, and outlined efforts to dismantle its funding and support channels. The evolution of the threat posed by ISIL is additionally reflected in Resolution 2331 (2016) which aims to disrupt terrorist funding derived from acts of sexual and gender-based violence, including when associated to trafficking in persons, Resolution 2347 (2017) on preventing and countering the illicit trade and trafficking in cultural property originating from a context of armed conflict, notably from terrorist groups, including by prohibiting cross-border trade in such illicit items. 

Lastly, in the landmark resolution 2462 (2019), Member States were called on the urgency to suppress TerrorismFinancing. The resolution constituted a vital step forward in the international community’s efforts against Terrorism Financing by consolidating existing obligations in a single document, expanding the focus to include key emerging issues, addressing critical concerns over the potentially negative impact of counterterrorism measures on impartial and much needed humanitarian programming, and emphasizing the importance of strengthening international cooperation to ensure the exchange of relevant financial intelligence.

The importance of countering terrorism financing is also emphasised in the United Nations Global Counter-Terrorism Strategy and in its biennial review resolutions, which encourages UN entities to continue to assist Member States upon their request, to fully implement their respective international obligations to combat the financing of terrorism.

United Nations Security Council Resolution(UNSCR)

 UNSCR resolutions are used in anti-money laundering and combating the financing of terrorism (AML/CFT) to protect the global financial system and financial markets. UNSCR resolutions can include sanctions lists that require countries to freeze funds, financial assets, or economic resources of individuals and entities. 

For example, the UNSCR 1267 Sanctions List requires countries to freeze funds for individuals and entities designated by the UNSC. 

The UNSCR 1373 Sanctions List designates individuals and entities related to terrorism and terrorist financing at the national level. from time to time, UNSCRs are issued against states/entities/individuals for having indulged in Money Laundering/Funding Terrorism/Proliferation Financing 

The United Nations Office on Drugs and Crime (UNODC)

The United Nations Office on Drugs and Crime (UNODC) is a global leader in the fight against illicit drugs and international crime, in addition to being responsible for implementing the United Nations lead programme on terrorism. Established in 1997, UNODC has approximately 500 staff members worldwide. Its headquarters are in Vienna and it operates 20 field offices, as well as liaison offices in New York and Brussels.

UNODC works to educate people throughout the world about the dangers of drug abuse and to strengthen international action against illicit drug production and trafficking and drug-related crime. To achieve those aims, UNODC has launched a range of initiatives, including alternatives in the area of illicit drug crop cultivation, monitoring of illicit crops and the implementation of projects against money laundering.

Major Countries/Regions that initiated AML/CFT controls & regulations 

Major Countries/Regions that initiated AML/CFT controls & regulations in the early days include European Union, USA, UK, etc..

The European Parliament had passed multiple resolutions that asked for “the establishment of a global community program to combat drug trafficking, including provisions on the prevention of money laundering,” mirroring concerns across member states’ governments and legislatures.

The scale of the problem – and the need for action – were also recognized at a global level, too; the UN had agreed its ‘Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (‘the Vienna Convention’) in December 1988, and in July 1989, the G7 group of leading industrialized nations, joined by the President of the Commission, had created the Financial Action Task Force (FATF) as an international standard-setter on AML.

In the European Union, the first Anti-Money Laundering Directive   was introduced in 1990, with the objective of preventing the financial system from being misused for money laundering purposes. Since then, the EU's AML directives have undergone continuous revision to mitigate the risks associated with money laundering and terrorist financing. 

The sixth Anti-Money Laundering Regulation is currently[June 2021] applicable,  with member states of the EU preparing to comply with this regulation.

In the United States, the Financial Crimes enforcement Network (FinCEN) has the mandate to protect the country from the misuse of financial crimes, including money laundering and other illegal activities. FinCEN acts as the designated administrator of the Bank Secrecy Act (BSA), which was established in 1970 and remains one of the most important tools in the fight against money laundering. The BSA authorizes the Department of the Treasury to impose reporting and other requirements on financial institutions and other businesses to help detect and prevent money laundering. 

 Over time, the US has developed and modified the BSA to provide various regulatory agencies with effective tools for anti-money laundering. After technological advancements and big data revolution, AML software solutions became more crucial for companies. In-house AML software or third-party providers are inevitable to conduct a comprehensive AML program. In particular, the regulatory principles of the BSA helped international AML authorities lay the foundations of the Financial Action Task Force (FATF) in 1989. Today, FATF defines the global AML/CFT standards while it works to combat emerging ML methodologies and help developing nations enhance their compliance standards.

 

In the UK, activity is governed by several acts, primarily the Proceeds of Crime act 2002.

All major countries including India have enacted regulations with varying degree of sophistication, for prevention of ML/FT activities 

Happy Reading,