Money Laundering is regarded as a severe criminal offense. Law enforcement agencies are increasingly facing the challenge of detecting sophisticated schemes before they lead to damaging consequences. Without making the illegal source of money untraceable, criminals cannot spend the “dirty” cash and are under threat from regulatory bodies. Therefore, the need to make the money trail undetectable arises. For this, the dirty cash goes through numerous sophisticated transactions that make it appear as legitimate income.
Furthermore, Anti-money Laundering (AML) compliance measures have been devised by global authorities to enable financial institutions to get a hold of illegally obtained funds along with the culprit. In this blog, we will be looking at the process of money laundering, along with the significance of AML verification.
The Money Laundering Process
Although laundered use unique techniques to launder dirty cash, three stages are common to every money laundering process:
In this step, criminals introduce their illegally obtained funds into the financial system, usually through a bank. Examples of illegal sources of income include but are not confined to human trafficking, drug abuse, sale of illegal weapons, etc.
In the second stage, criminals attempt to hide the origin of their illegal cash by “layering” it through numerous bank transactions from different banks in various jurisdictions. This way, small amounts of money are passed through different channels, making it untraceable.
In the final stage, criminals reintroduce the dirty cash into the economy. This can be done by investing in real estate, lavish vehicles such as boats, or by buying luxurious art pieces.
Which Industries are Prime Targets for Money Laundering?
Now that you have understood how money laundering is performed, let’s take a look at some industrial examples of where it generally occurs.
A shell company is an organization that exists without active business activities or significant assets. Such companies are not necessarily illegal, but they are at times used for illegitimate purposes, such as to hide business ownership or launder dirty cash. The bank statement of a shell company is often labeled as legitimate profits, that are then cleansed of their illegal nature.
Because of increasing institutional interest in digital currency, the cryptocurrency industry is gaining prominence worldwide. This opens new opportunities for money laundering schemes, as the industry is still quite unregulated. As blockchain technology provides the advantage of anonymity, criminals have been using it to their advantage. Once the money is layered through online cryptocurrency exchange platforms, the trail of the funds becomes undetectable.
The Art Industry
The art industry is not new to the world of money laundering. Since the money trail has to be concealed, launderers invest huge amounts of illegal cash into high-end art products during the integration stage. This way, even if suspicion arises on the original source of money, it is cleaned through the purchase process.
Meeting Anti-money Laundering Compliance Standards
Global regulatory bodies such as the Financial Action Task Force (FATF) have mandated numerous industries to comply with AML regulations. Non-compliance to these regulations can result in hefty fines and penalties on top of reputational damage.
Under this law, registered firms are required to implement Know Your Customer (KYC) and AML verification procedures, to weed out fraudsters during the initial stage of onboarding. Additionally, financial institutions are also required to perform enhanced due diligence on suspicious or high-risk customers.
One solution for meeting regulatory compliance along with ensuring an enhanced customer experience is to opt for third-party AML providers. These providers offer services such as anti-money laundering screening and ongoing monitoring of transactions – all of which are necessary for identifying money laundering schemes and the associated culprits.
The strength of artificial intelligence-backed AML solutions lies in their ability to offer remote services through online platforms. Because of highly accurate verification results and compliance features, institutions generally adopt AML services in the form of:
- Screening the customers against criminal watch-lists, Politically Exposed Persons (PEP) lists, and global sanctions
- Transaction monitoring of high-risk business entities
- Automated ongoing AML screening