Huge amounts of fines and penalties are imposed on banks and other financial institutions for paving the way for criminals to use their systems to launder money. This reinforces the value of employing robust AML (Anti-money Laundering) automated solutions. Based on a study by PwC, a total amount of USD 1 trillion to 2 trillion was laundered globally in 2020, which accounts for approximately 5% of the total GDP. Automated AML solutions and specific AML programs have the ability to safeguard an institution from crimes such as money laundering and the financing of terrorist organizations.
In this article, we will be discussing how anti-money laundering solutions work to eliminate money laundering and related financial crimes from financial institutions.
Laundering of Dirty Cash
Money laundering occurs when an individual or criminal organization converts illegal or “dirty” cash to legitimate funds by passing them through numerous transactions and reintroducing them into the system. In other words, illicitly obtained funds go through a 3-step process to make the money become untraceable by regulatory authorities.
1. Stages of Money Laundering
Money is laundered in three stages, each of which has a unique purpose. Let’s take a detailed look into them:
2. Placement
In this stage, illegally obtained money is introduced into the financial system through banks, casinos, or even retail stores. In the placement stage, money launderers enter the financial ecosystem by posing as a customer, an investor, or a vendor. This can be done through several methods, a few of which include:
- An accomplice bank
- Asset purchases
- Smuggling currency across a border
- Blending dirty cash with clean cash
3. Layering
The aim of this stage is to conceal the illegal source of funds. Some methods used for layering money include:
4. Transforming illegal funds into financial instruments
Money orders and bank drafts are typically used for this
5. Buy and sell
In this technique, money launderers purchase luxury assets with illegally obtained money and then sell it, either to a local or an international buyer. Once this buy-sell cycle is completed, the illegal funds become untraceable.
6. Integration
The final step in the money laundering process is known as the integration stage, during which the money is introduced back into the financial system, usually through a bank. However, other techniques for integrating the money into the economy include:
- Property dealing
- Opening shell companies
- Obtaining fake loans from shell companies
- False invoices from foreign investors
Anti-Money Laundering Solutions
Machine learning (ML) and artificial intelligence (AI) have positively disrupted numerous business operations in the financial services industry. Tasks such as data analysis, filtering of false documents, and identification of sophisticated criminal transactions are being automated with the help of advanced artificial intelligence models. To prevent money laundering, financial institutions are increasingly employing AI-powered AML solutions to accurately detect and report suspicious customers and activities.
– What Do AML Automated Solutions Do?
AML automated solutions are deemed critical for performing continuous AML monitoring and screening while saving the company’s time, resources, and manual efforts, all of which can be better utilized for other essential tasks.
To assist financial institutions in complying with ever-increasing regulations, AML automated solutions enable enhanced due diligence, criminal watch lists and sanction screening, ongoing transaction monitoring, and automated regulatory reporting of suspicious activities.
Apart from reporting suspicious activities by customers, these solutions also proactively detect high-risk business entities and screen every transaction being made in real-time. This discourages the occurrence of illicit activities in institutions that are armed with automated AML solutions, without compromising on customer experience or any regulatory requirement.
Benefits of AML Systems for Financial Institutions
Listed below are 4 ways in which automated AML solutions have revolutionized customer screening.
– Enhanced Due Diligence
AI-powered AML solutions automate the enhanced due diligence process. The process begins by taking necessary steps for verifying the identity of an individual customer or a business entity, critically analyzing and monitoring the transactions they make, and assigning a rating to them based on the level of risk associated with them.
– Examining Odd Patterns
Money launderers generally use numerous accounts from various locations to transfer small transactions that can easily be left undetected. While it is almost impossible for bank employees to identify such transactions through traditional methods of verification, automated AML solutions can effortlessly detect patterns of activities related to money laundering or financing of terrorist activities.
– Identifying Politically Exposed Persons (PEPs)
For any organization to sustain itself in a highly competitive market, it is necessary to comply with international regulatory standards while providing the safest services. According to the Financial Action Task Force (FATF), financial institutions are required to screen potential and existing customers against PEP lists, criminal watch lists, and global sanctions. Additionally, any institution that has a business relationship with high-risk entities is strictly advised to observe enhanced due diligence and monitor the transactions on a continuous basis. AML automated solutions enable companies to stay in compliance with such regulations, reducing the likelihood of being charged with heavy fines and lawsuits.
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