What is AML and why is it Important?

Anti-money laundering (AML) is a blanket-term used to describe the constantly evolving laws and regulations put in place to prevent money laundering and other related financial crimes. However, in order to fully understand AML activities, it’s important first that we get to grips with what money laundering means and the true extent of this crime.

In short, money laundering is a type of financial crime; more specifically, it’s the process of taking illegally obtained funds (dirty money) and making them appear legitimate (i.e., clean or ‘laundered’).

Criminals involved in money laundering activities want to make it as difficult as possible for the authorities to trace the source of any ill-gotten money, so the more complex the ‘laundering’ process is, the less likely they are to be found out. This means that money is often moved around overseas, for example, or invested in companies, art, and offshore accounts.

It is estimated that money laundering activities in the UK equate to approximately 2-5% of GDP. This means that between £36-90 billion of criminal finances are laundered through the UK economy annually, and that’s a low estimate!

Criminal finances can be generated through organised crime, individual criminal activities, and high-end money laundering schemes – but all of these impact businesses, individuals, and communities in a negative way.

These activities also put national security at risk by financing terrorist activities, armaments, and nuclear weapons.

Anti-money laundering (AML)

AML consists of a series of laws, regulations, and policies designed to prevent money laundering from taking place.

In the UK, anti-money laundering legislation is dictated by the Proceeds of Crime Act 2002 (POCA), the Terrorism Act 2000 (TA 2000), and the The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLR 2019). Additionally, the UK is a member of the Financial Action Task Force (FATF) which means the UK’s anti-money laundering legislation meets FATF’s global standards.

It’s also worth noting that, whilst the UK left the EU on January 31, 2020 – and so did not transpose the EU’s sixth anti-money laundering directive (6AMLD) into its domestic AML framework – the government has stated that the UK’s anti-money laundering systems are already compliant with many of 6AMLD’s rules and, in fact, the government believes that ‘the UK already goes much further’ in many respects.

Know your customer standards

Know Your Customer (KYC) standards are designed to protect financial institutions against fraud, corruption, money laundering, and terrorist financing. Indeed, for many organisations, KYC is the first and most crucial step of their AML compliance program and consists of the process used to verify a client’s identity, construct their risk-profile, and continuously monitor their account.

It’s important for organisations to carefully verify any customer’s identity, assess their risk, and understand their general financial habits as this makes it much more likely that any abnormalities and red flags will be identified. In turn, this allows organisations to act quickly and investigate any signs of money laundering (or other crimes) before the situation escalates.

The 3 Components of KYC

KYC may seem like a simple concept, but the processes of customer identity verification and customer due diligence are critical to a successful AML program.

There are three stages to KYC compliance:

1. Customer identification

This involves verifying a customer’s identity (i.e., that they are who they say they are) and usually calls for customers to share credentials such as name, date of birth, and address. In The UK, this commonly involves checking that the individual is on the electoral register and asking them to provide a current passport, full driving license, or birth certificate, as well as a utility bill, council tax bill, or mortgage statement.

2. Customer due diligence

Due diligence aims to uncover any potential risk to the organisation should the company agree to do business with a specific individual. For this reason, organisations will use the above information to check that the customer in question is not on any sanction lists, such as the one published by The International Criminal Police Organisation (Interpol).

They will also want to check that the prospective customer is not Politically Exposed, as it is deemed at international level that a PEP (Politically Exposed Person) is more susceptible to corruption (meaning this customer would be considered as high risk and subject to more rigorous and specific mitigation measures).

3. Continuous monitoring

Under AML directives, it’s not enough to perform identity checks and customer due diligence just once. Rather, in order to gain a full understanding of how customers typically use their accounts – and to catch any irregularities and mitigate risks as they arise – financial institutions must complete continuous monitoring and checks across their clients’ accounts.

AML Authorities in the UK

  • The Financial Conduct Authority

The Financial Conduct Authority is the UK’s primary financial services regulator, overseeing banks, building societies, credit unions, and other financial institutions. The Financial Conduct Authority (FCA) was established in 2012 under the Financial Services Act to replace the Financial Services Authority (FSA) and to ensure the safety of the UK’s financial system and financial institutions.

The FCA is in charge of ensuring that AML requirements are followed in the UK, and it has the authority to investigate money laundering and terrorism funding offences in collaboration with other law enforcement agencies and authorities, such as the Crown Prosecution Service (CPS). The FCA requires all banks and financial institutions in the United Kingdom to be registered.

  • HMRC

Her Majesty’s Revenue and Customs (HMRC) shares the responsibility to investigate money laundering offenses with the FCA. It also publishes guidance on anti-money laundering in the UK, including what due diligence and transaction monitoring financial organisations are required to carry out in order to be compliant with UK law.

  • National Crime Agency (NCA)

In addition to the FCA and HMRC, the National Crime Agency (NCA) and the Serious Fraud Office (SFO) also have the power to enforce money laundering regulations in the UK. Both these institutions have the power of arrest and may seek warrants and court orders.

UK anti-money laundering and counter financing of terrorism authorities (AML/CFT) also have the power to freeze and confiscate any assets they suspect are involved in money laundering, terrorism financing, and other criminal activities.

AML and non-compliance

Depending on the form and severity of the infraction, noncompliance with the UK’s AML/CFT legislation can result in monetary penalties or up to 14 years in prison. As above, the FCA has the power to close down or restrict the activities of companies proven to be guilty of wrongdoing, as well as to reclaim funds and assets implicated in money laundering violations through court or civil processes.

Additionally, non-compliance with AML/CFT directives in the UK is likely to result in considerable reputational damage for the companies concerned.

The importance of AML

We know that money laundering often funds criminal activities such as smuggling, illegal arms sales, embezzlement, insider trading, bribery, and cyber fraud schemes. It also has links with organised crime, such as human trafficking, drug trafficking, and prostitution rings.

As well as funding unlawful enterprises, money laundering diverts resources away from economically and socially productive uses. This negatively affects a country’s financial system by undermining its stability and erodes public trust. It’s also closely linked with terrorism, since money laundering is used to raise funds to sustain and camouflage terrorist activities.

AML in practice

It’s important for all types of organisations to offer AML awareness training to their employees – not just financial institutions (although these types of organisations will require more in-depth education on the subject).

The significance of effective internal controls and risk mitigation cannot be stressed enough since the effects of money laundering – and, indeed, its increasing regulation – affects all industries.

At its core, AML awareness training is about empowering your employees and equipping them with the right skills to handle the requirements of AML regulation as these affect their daily work tasks. In doing so, the training helps members of staff to flourish and be productive at work because it helps clarify their responsibilities and the boundaries surrounding these.

As well as reducing liability and risks for everyone in the company, then, AML training is a gateway allowing employees to get on with work unsupervised which, in turn, builds trust and drives productivity.

Some good AML controls include:

  • Nominated compliance risk owners within a business that employees can report to, creating a clarity in the whole process of reporting and responding
  • Providing employees with regular information and refresher training on the risks and red flags of money laundering. This means that employees are aware of their responsibilities and importance of AML activities.
  • Regularly updating AML policies, controls and procedures in line with new regulations, as well as completing a policy statement and sticking to it.

Final word

In an ever-changing regulatory landscape, getting your employees up to speed on the latest AML regulations and how to spot money laundering is one of the most effective ways to protect your company and its assets from illegal activity. We hope this article has helped our readers understand what AML means and why it is important for your business. However, if there’s anything we can help you with, please do get in touch via email or on 01509 611019. We’re a friendly bunch and would be more than happy to help!

NEW RELEASE: Global Anti-Money Laundering eLearning Course

A record number of anti-money laundering (AML) fines were issued worldwide in 2019. US regulators and authorities took the lead, handing out fines totalling over £6.2bn – twice as many fines as UK regulators.

This shows that the global impact of money laundering is showing no signs of abating. Regulators are continuing to crack down against illegally obtained wealth, including businesses that fail to prevent money laundering. For global businesses, preventing money laundering makes good sense and is vital for securing the future of a business. Non-compliance with anti-money laundering (AML) laws can result in heavy financial penalties and loss of reputation – two factors which can threaten the stability of global businesses.

While enhanced customer due diligence and internal procedures and monitoring are important, it is equally important to raise awareness on the pitfalls of money laundering within your workforce. Providing relevant AML training to employees is your first line of defence and ensures your staff are well prepared to spot and deal with any money laundering threats that come their way.

Our new eLearning course focuses on raising awareness on anti-money laundering (AML) legislation and its impact on organisations and their employees. The course is designed keeping global businesses in mind, covering general legal requirements for anti-money laundering on a global level, with a focus on the key roles and responsibilities that help organisations to comply.

Delivered in an immersive and engaging format, this online training course is divided into five modules covering legislation, responsibility, and policy, the definition of money laundering, signs of unusual activity and how to report unusual activity. The course can be taken all at once for a holistic, detailed introduction to AML, or learners can take and revisit separate modules to suit their schedule and preferred learning style.

Find out more about our new course HERE.

The Global Anti-Money Laundering eLearning course joins our suite of Anti-Money Laundering (AML) Training.

What is the Fifth Money Laundering Directive?

What is the Fifth Money Laundering Directive?

Anti-money laundering (AML) laws and regulations are designed to detect and prevent proceeds of crime from financing all sorts of illegal activity globally. Laundered money is often used to fund a range of crimes, including terrorist attacks.

Following the release of the Panama Papers and a range of terror attacks in Europe, European leaders are aspiring to align with the Financial Action Task Force (FATF) AML recommendations for strengthening the 4th Anti-Money Laundering Directive (4AMLD).

In April 2018, the European Parliament announced its intention to adopt the 5th Anti-Money Laundering Directive (5AMLD) which will come into effect from 10th January 2020.

Key Changes

The main purpose of the Fifth Directive is to make amendments and enhancements to the structure of the Fourth Directive which came into force on 26th June 2017 and ensure that AML regulations are effective and up to date. These include additional provisions not originally included in the text of 4AMLD and a focus on enhanced due diligence, improved access to information and increased transparency.

Some of the key changes are summarised below:

Beneficial Ownership

The beneficial ownership registers for legal entities, such as companies and trusts, will need to be public. This will enable member states to maintain interconnected Ultimate Beneficiary Ownership (UBO) registries. UBO registers of company ownership will be publicly accessible.

The wider access to beneficial ownership information is aimed at increasing transparency and preventing financial criminals from misusing complex, corporate structures for money laundering and terrorist financing purposes.

Cryptocurrency Exchanges

The Fifth Directive includes a legal definition of cryptocurrency and assets, defined as “a digital representation of value that can be digitally transferred, stored or traded and is accepted as a medium of exchange.” Cryptocurrency exchanges and wallets will, therefore, be classed as an obliged entity and these will have to perform the same checks as any obliged entity in the Fourth Money Laundering Directive, including customer due diligence, monitoring ongoing behaviour and reporting suspicious activity.

The main aim of regulating virtual currencies is to prevent cryptocurrencies such as Bitcoin from funding crimes and terrorist activity.

Prepaid Cards

Electronic money and prepaid cards will be subject to enhanced due diligence checks. The Fifth Directive lowers the threshold requirement on prepaid card transactions from €250 to €150. The threshold for online transactions with a prepaid card is €50. Anonymous prepaid cards issued outside the EU will only be accepted if their issuance meets requirements equivalent to the EU AML regime.

The enhanced checks are aimed at reducing the risks of anonymous prepaid instruments, such as gift cards and travel cards, from being misused for money laundering and terrorist financing.

Politically Exposed Persons

5AMLD widens the definition of a Politically Exposed Person (PEP) on a national level to include people who hold “prominent public functions,” for example a politician, and their immediate family members and close associates. Member State will have to issue a list setting out which functions qualify as “prominent public functions”.

The lists will enable smaller organisations to manage ongoing risks, by identifying, monitoring, and screening PEPs and individuals with jobs and roles that may make them vulnerable to corruption.

High-Risk Countries

The Fifth Directive will require enhanced due diligence (EDD) checks and improving safeguards on financial transactions to and from high-risk countries. The countries are deemed high risk due to a lack of AML regulation and due diligence requirements within these nations. As of February 2019, the EU has produced a list of high-risk countries which includes Afghanistan, American Samoa, The Bahamas, Botswana, Democratic People’s Republic of Korea, Ethiopia, Ghana, Guam, Iran, Iraq, Libya, Nigeria, Pakistan, Panama, Puerto Rico, Samoa, Saudi Arabia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, US Virgin Islands, and Yemen.

Provisions under Brexit

The draft withdrawal agreement between the UK and the EU commission contains provisions that would oblige the UK to continue to apply EU laws during a transition period, with a jointly agreed (non-binding) political declaration, paragraph 84 which makes clear that the EU and the UK would continue to work together on AML compliance after Brexit.

Are Your Employees Aware?

With key amendments due in 2020, it’s a good time to evaluate if your current approach to financial crime risk management is adequate and for staff to refresh their knowledge of anti-money laundering laws and regulations. Our Anti-Money Laundering (AML) training courses focus on raising awareness around key legislation and laws to ensure compliance. Find out how DeltaNet International can support your business through our AML eLearning courses.

Complying with Anti-Money Laundering Regulation in Fintech

Revolut, the digital banking service with over four million registered users across Europe, announced last week that their CFO Peter O’Higgins was leaving the business after three years. The start-up had been battling a damning report by the Daily Telegraph which revealed lapses in compliance between July and September 2018. The digital banking service switched off an anti-money laundering (AML) system designed to flag suspicious transactions, potentially allowing thousands of illegal transactions to pass across the banking platform.

In a blog posted recently, Revolut CEO, Nik Storonsky, has denied allegations of non-compliance and provided an explanation on the AML breach that never was. This however brings back into focus the compliance challenges fintechs face as they continue to grow and its impact on their workforce.

Disruptive Technology and AML regulation

From making faster digital payments to depositing a check to your account using a banking app on your mobile phone (without setting foot in a bank!), customers today are spoilt for choice when it comes to choosing a financial service for managing their finances and day-to-day transactions. Fintech is transforming the way traditional financial institutions operate and the way customers are consuming financial services. Outdated manual processes and operations are now replaced by state-of-the-art apps and software, making the finance sector more user friendly than ever. Even the big financial institutions are moving on from their conservative approach to new technologies and investing in the workforce to develop innovative solutions to compete with fintech unicorns such as Revolut and Monzo.

With transactions taking place online through apps or websites, regulatory bodies, like the FCA, are wary of how new technology could be used for money laundering and other illicit activity by criminals. Most fintech businesses are subject to AML regulation just like any other financial institution or business. In some countries, including the UK, failure to disclose suspicious transactions is considered a criminal offence that could result in a prison term – in addition to fines. This is detrimental to fintech businesses as it will affect their market share and uptake, and lead to poor reputation. After all customers are more likely to have faith in regulated industries than unregulated ones.

Role of the Workforce in Compliance

Fintech businesses must look at the impact on their workforce and how they can ensure compliance with regulations while adapting to digital transformation. The FCA requires financial services firms to maintain robust AML systems and controls, since they are at risk from those seeking to launder the proceeds of crime or to finance terrorism. Knowledge and understanding of compliance are therefore essential to ensure that fintech businesses don’t get caught out by criminals looking to outsmart the system. There is a need for businesses to enforce compliance with a proactive approach, developing controls and processes with security and regulation in mind.

Businesses must also ensure that staff are aware of necessary actions to take when they spot irregularities. As part of AML regulation, the FCA requires financial businesses to file suspicious activity reports when the company knows, suspects or has reason to suspect that a transaction may involve money laundering or other unlawful activity.

In the long term, fintechs are expected to work closely with regulatory and legal bodies to develop a common regulatory framework in order to make compliance more seamless and efficient.

With the UK leading global fintech regulation, the best solution for fintech businesses is to adopt compliance as part of their culture and conduct as they continue to innovate with technology.

Compliance and FCA training from VinciWorks

Find out how VinciWorks can support your business with a wide range of corporate eLearning solutions dedicated to compliance and FCA led regulations. Our eLearning can be delivered as off-the-shelf packages, or we can customise the content to suit your organisation. Visit our website for more information.

Money Laundering, Cryptocurrencies and EU Legislation

Money Laundering, Cryptocurrencies and EU Legislation

While new EU rules aimed at tackling money laundering came into effect in early July, critics are already suggesting that the new regulations are obsolete. Commentators are suggesting that the EU needs to rapidly introduce legislation that empowers national regulators to tackle financial crimes and money laundering involving cryptocurrencies such as Bitcoin.

The fifth review of the EU Anti-Money Laundering legislation was kick-started by revelations of money laundering revealed by the Panama Papers expose. The new rules are focused on creating centralised bank account registers to simplify the work of security forces. But national financial intelligence units are poorly organised and they rarely cooperate: thieves can easily obscure their proceeds by moving them between countries.

However, critics are suggesting that the rise of cryptocurrencies means that additional protections are required and the EU needs additional powers to combat the changing face of financial crime. There is currently no single EU force that can coordinate the tracking, recording and prosecution of financial crimes that cross borders.

EU lawmaker Sven Giegold commented: “The Commission cannot hesitate any longer in bringing forward a legislative proposal for a European anti-money laundering authority.”

Before the EU releases further updates to the statute, they will need to allow time for member states to comply with the current release. Many member states are still struggling to implement the previous update, which was issued in 2015. This suggests that many countries are not well placed to defend against the tandem rise in cyber crimes and cryptocurrencies. In this environment, people will continue to have easy access to the tools they need to launder the proceeds of their crimes.

Malta may find itself on the frontline of the battle between regulators and money launderers, as Europe’s smallest country has successfully promoted itself as a digital currency hub, attracting significant investment from major players in the crypto industry.

Here in the UK, new legislation has been proposed to include the penalty of jail time for people who use the UK property market to launder money. This would reduce the attraction for criminals and corrupt officials to stash their funds in British property – a tactic that has inflated the UK property market, making it difficult for many people to buy a home. Campaign group Transparency International estimates that £4.2billion of London real estate is bought with suspicious assets.

Lord Duncan, the UK government minister for Scotland commented: “For too long criminals have been able to use the property industry as a front for investing dodgy funds, hiding dirty money and evading the law. This stops now.”

Anti-Money Laundering Courses from VinciWorks

Keeping up-to-date with money laundering regulations is a constant challenge. Our eLearning solutions are designed to help your teams remain aware of regulations and prepared to take action against crime.

Panama Papers leak reveals extent of wealth hidden offshore by rich and powerful

Methods used by the rich, powerful and corrupt to hide wealth have been exposed after over 11 million documents were leaked from Panama law firm Mossack Fonseca.

The documents reveal more than 200,000 offshore entities set up to conceal clients’ money. Although not technically illegal, the lack of transparency required for these shell companies make it easy for their beneficial owners to remain hidden – ideal for criminals seeking to launder money, as well as those looking to cheat the public out of tax.

Someone could, for example, loan public money to an offshore company, have it transferred through numerous others until its origins are untraceable, and eventually enjoy the benefits of the money without having to account for its origins. Meanwhile, the initial loan is defaulted on, and the public loses out.

That’s the essence of the $2bn money laundering ring that’s been linked to Vladimir Putin’s inner circle in the wake of this scandal. But it’s evidence closer to home that has people calling on the government to take action against widespread money laundering and tax evasion going on in the UK.

In fact, the NCA estimates that hundreds of billions of pounds in criminal proceeds is laundered through the UK each year. So, how do businesses in the UK currently combat money laundering?

Combating money laundering

Due diligence is at the heart of anti-money laundering. It requires businesses to find out everything they can about individuals involved, including company directors and beneficial owners, before transacting with anyone.

In high risk countries, such as Panama or the British Virgin Islands, identities should also be verified through certified copies of photographic identification. Once these identities are known, there are a number of risk factors that can indicate potential money laundering activity:

  • Individuals with criminal convictions
  • Individuals you never meet in person
  • Individuals who are Politically Exposed Persons, or connected to PEPs
  • Individuals in high risk areas according to the Transparency International Corruption Perceptions Index
  • Individuals using intermediaries based in high risk jurisdictions
  • Client companies with complex ownership structures
  • Corporate clients whose capital is in the form of bearer shares
  • Clients with a high level of cash income

Failure to carry out due diligence and establish exactly who stands to benefit from transactions is not only irresponsible; it can lead to money laundering charges, as well as being accused of turning a blind eye to criminal activity.

The Panama Papers scandal shows there is a lot of work to be done, but with pressure on governments to address tax havens now at an all-time high, perhaps it will turn out to be a small step in the right direction.

About VinciWorks

VinciWorks help businesses operating in regulated sectors train employees in anti-money laundering by offering our Combating Money Laundering and Terrorist Financing eLearning course. Course licence includes access through our Astute eLearning Platform, providing powerful tools for enhancing engagement and proving compliance.