AML Monitoring – The Key Procedure for Identifying Money Launderers

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Any attempts made by companies and governments to minimize the risk of money laundering are known as Anti-money Laundering procedures. These steps, policies, and technologies go hand-in-hand with the Know Your Customer (KYC) process, as implemented by financial institutions. By combining both of these robust IDV and AML monitoring processes, a fool-proof strategy for fraud prevention is formulated. 

What is Money Laundering?

The money laundering process refers to the fraudulent act by criminals during which they make their money untraceable. By hiding the original source of the illegally-obtain funds, money launderers succeed in their attempts to dodge regulators and security checks. 

To make the dirty cash undetectable, money launderers pass it through the financial system in such a way, that the transactions are “cleaned” off their illegal source. For instance, a criminal may place the dirty cash in a business, making it appear as sales revenue in the financial statements. Thus, its origin is easily camouflaged. 

How Does it Work?

Money laundering is completed through a three-stage process. 

  1. Placement
  • Cash businesses – the cash from an illegal source is added into the business to make it appear legitimate. Usually, the money is introduced into car wash stores, strip clubs, salons, or casinos.
  • False invoicing – false invoices are made with illegal funds to match the dirty cash lodged 
  • Smurfing – this technique involves placing small amounts of cash in banks just below the AML monitoring and reporting threshold and then using them to settle expenses, etc.
  • Trusts and offshore companies – the illegal funds are sent to an offshore account and returned by an intermediary, making it appear as an investment
  1. Layering

This stage is where most money launderers get caught. During the layering process, small amounts of cash are admitted into banks, spread across different regions, using several branches. Next, the money is extracted and reintroduced to other banks in small amounts again. As a result, the transactions are deeply layered, making it impossible for regulators to find the money trail. 

  1. Integration

The last stage in the process is known as the integration stage. To draw attention away from the illegally-obtained funds, money launderers partake in clean acts such as paying payrolls and taxes, making investments, etc. to complete the “washing” stage. At times, this can lead to a 50% shrinkage in the funds. However, since the amount laundered is generally so high, it does not impact criminals as such. 

What Is Transaction Monitoring In AML Checks?

As money laundering has serious consequences, regulators came up with anti-money laundering procedures for early detection. AML monitoring is the process of keeping a check on customer transactions, including their transaction history, current information about the business, and the interactions carried out by the customer. The aim behind this thorough approach is to get a whole picture of the activity by customers. 

During the AML monitoring process, transactions that are monitored include deposits, withdrawals, transfers, loans, etc. Generally, financial institutions utilize artificially intelligent software to conduct AML checks.  

In a traditional set up, AML monitoring is conducted by skilled employees through a manual AML screening process. However, interrogating each transaction made by every customer of a bank is not only inconvenient, but also highly error-prone. To make a better use of time and resources, companies use automated AML monitoring systems to keep a check on transactions. 

The Role of Automated AML Systems

Automated AML Monitoring systems offer numerous benefits for not just businesses but customers as well. Some of them are listed below: 

  • Because of continuous alertness and ongoing monitoring protocols, AML systems detect suspicious behaviors in real-time 
  • Customer’s money transactions can be monitored with the highest level of security, keeping the data safe and enabling a bank to stay vigilant 
  • AML systems automatically form a fraudulent activity report through ongoing analysis
  • AML monitoring systems are crucial for staying compliant to KYC and AML regulations, allowing businesses to avoid hefty fines, penalties, and lawsuits
  • They allow businesses to weed out fraudsters by scanning every customer against criminal watch-lists, Politically Exposed Person (PEP) lists, global sanctions, and adverse media stories
  • Unlike manual monitoring systems, they are efficient in terms of time, resources, and money