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Anti-Money Laundering – A Recapitulation

Anti-Money Laundering Software is as straightforward as it sounds – It works against Money Laundering.
But, in efforts to understand Anti-Money Laundering, we need to understand money laundering first.

So, what is money laundering?

The term ‘Money Laundering’ originates from the innovative methods used by the Italian Mafia to channel the large amounts of money they acquired from illegal occupations, into financial institutions without raising a concern or being subjected to taxation.
For a brief explanation, ‘money laundering’ encapsulates the numerous ways in which people convert illegally obtained funds into legal money.

To prevent this from happening, many laws got put into place in the late 1900s to ensure that financial institutions (FIs) were safeguarded against illicit activities including, but not limited to, money laundering. The Financial Action Task Force (FATF) also makes sure that financial institutions also do not indulge in malpractices by implementing many protocols that FIs needed to follow.

With the addition of these security protocols and compliances, the paperwork that FIs generated suddenly grew manifold. Keeping up with all the new rules and laws was also proving difficult for bank officials. This is why Anti-Money Laundering software came into existence.

Anti-Money Laundering (AML) Software helps banks and other legal/ financial organizations collate, sort and manage customer data and transaction history to identify problematic clients and simultaneously helps them oblige to regulatory compliances.

To gain a deeper understanding of AML software, let’s look into the 4 basic types of AML software –

1) Transaction Monitoring systems – They help monitor and identify suspicious transactions based on transaction patterns and long-term user behaviour. These transactions would include abnormal behaviour, large sum transactions, and multiple consecutive transactions. These systems also put together Suspicious Activity Reports (SARs) or Suspicious Transaction Reports (STRs) that help identify long-term customer behaviour.

2) Currency Transaction Reporting systems – These specifically deal with keeping a record of large cash transactions. The sum varies from region to region. Some systems also have real-time tracking and allow FIs to verify customer identity before allowing large cash transactions.

3) Customer Identity Management systems – Customer Identity Management is an important part of KYC (Know Your Customer). It helps financial institutions identify potentially dangerous customers by checking various databases for fraudulent activity, identity theft, blacklisted persons, and other suspicious behavior. Most countries maintain an elaborate list of suspicious identities as well as PEPs (Politically Exposed Persons). These candidates are generally flagged by the customer identity management system through its name screening capabilities.

4) Compliance Management systems – As stated before, to ensure the security of FIs, many regulatory compliances have been put into place. Keeping up with these and making sure that a FI is truly compliant can be taken care of with compliance management systems. They create audit trails, keep records of proof of compliance, track employee records and training, and help handle non-compliance situations.

Some modern AML Tools utilize Artificial Intelligence (AI) to streamline the above-mentioned processes. These tools function on static and dynamic sets of rules, are capable of integrating with third-party security tools and databases, accumulating and organizing data, and can automatically screen customer profiles for potential risks.

Anti-Money Laundering (AML) challenges | Intelligent Automation, AI and Machine Learning

Intelligent Automation, Artificial Intelligence (AI), and Machine Learning (ML) are increasingly being incorporated into AML Technologies:

Financial outlook is experiencing a revolutionary transformation, tech-savvy customers expect banks to deliver smoother and swifter experiences. As a result, financial enterprises are embracing new technology innovations and integrating intelligent automation with AI and ML into their AML compliance solutions which is the future banking. Intelligent automation, AI and ML are crucial as it empowers banks to manage large volume data-sets, combat and prevent frauds quickly thereby optimizing operational efficiencies, by reducing costs and maximizing profits.

AI and ML identify patterns and supports the systems in acquiring configuration rules based on the patterns and information detected. Furthermore, ML aids in detecting suspicious financial transactions and money-laundering activities thereby flagging suspicious activities and helps in reducing false positives. Hence, it is crucial for banks to adapt to intelligent automation, AI, and ML and incorporate them into AML solutions.

AML Key Drivers_Intelligent Automation, AI and Machine Learning

The AML software, when coupled with intelligent automation, Al and ML can offer a lot of benefits like reduction in compliance costs, enhanced transaction monitoring process thereby providing an enhanced and effective solution.

The Convergence of CyberSecurity, Fraud, and AML

In recent times, many financial organizations are integrating many technologies to manage compliance and anti-money laundering frauds. With increasing demands in risk management, many businesses face new challenges. For instance, there is a lot of new software and technologies in the market to combat such risks; hence it’s difficult for banks to scrutinize them and consider their specific requirements. This is where AML, cybersecurity, and anti-fraud systems are converged together to streamline detection management from suspicious transactions.

Battling financial crime is challenging, hence fraud and anti-money laundering functions need to be integrated for a holistic approach to the solutions and users. For instance, if a customer opens an account with a bank, the bank can check for fraudulent activities, cybersecurity, and money laundering activities simultaneously and not separately. If there is any suspicious activity, the customer will end up receiving three different calls from the AML team, cybersecurity team, and fraud team, hence convergence of all three is a must.

Typically, any financial institution has a fraud and compliance segment. The fraud team is responsible for fraudulent activities and losses whereas the compliance team is responsible for the legal processes, government regulations, and tax evasions. If there is any suspect or any financial crime detection both the departments may have captured similar information and will have to take the right action. But in most such cases, both these departments do not share such information which doesn’t provide full proof information and a picture of the customer, leaving investigations incomplete. This means multiple systems are maintained in the same company, but the information is not transferable. Imagine such scenarios can be frustrating for customers as they will get calls from different departments asking for the same information repetitively when the pool of information is available with the Bank. To streamline investigations, they’ll need to converge their cybersecurity, AML, and anti-fraud solutions.

Challenges in CyberSecurity, Fraud, and AML

The road to convergence is quite challenging and tough, depending on the nature, size, and complexities of the organizations. Many factors must be focused such as which areas can be integrated now or in the future; some areas could be kept separate and combined at a later stage, some segments can be quickly converged, some segments can be added at a later stage. Another challenge is one solution will not be suitable for all organizations, it must be tailored for organization-specific needs like demographics, nature, and type of company, client type, legal rules, etc.

Increasing demands of customers, expecting payments, and other requests grow swiftly, hence converging has become a necessity. As to perform this, banks will have to detect behavioral patterns and assess them quickly, so converging is crucial as it will lead to faster payment processing and quick services.

Cryptocurrency and Money Laundering

Cryptocurrency and Money Laundering

We all have been hearing since last year about cryptocurrency and the lucrative profits it offers which is attracting all the money-launders, terrorism financing, and other financial fraudulent activities. A lot of news of crypto scandals is floating in the market. Due to emerging trends of cryptocurrency and the fraud activities involvement, the government authorities and regulators have increased their focus on all the institutions dealing with cryptocurrency in making them compliant and ensuring them to follow the regulations.

How fraudsters use Crypto to launder illegal money?

Fraudsters and criminal use crypto money laundering to conceal all their illicit funds in a lot of ways. The most dignified form of money laundering is bitcoin money laundering. There are three main stages in money laundering, and these same stages are applied to crypto money laundering as well.

Let’s understand what is Money Laundering first –

Money laundering is a process where a large amount of proceeds is generated by criminal activities and terrorist funding such as drug trafficking, arms trafficking, gambling, tax evasion etc.

Three stages of Crypto Money Laundering or Money Laundering

1. Placement – The first stage is introducing illegal proceeds into purchasing cryptocurrency, creating a digital wallet to do financial transactions just like a bank account. Cryptocurrencies or can be acquired with cash or other types of crypto, online cryptocurrency trading exchanges, or through licensed exchangers which may or may not require customer identification. Legal transactions follow the regulatory process for identity verification and are AML compliant.

2. Layering – The second stage is where the illicit money is separated from its source and where the funds are concealed through various ways such as transferring funds to different wallets or shifting services to hide the fund source.

3. Integration – The final stage is the funds that were laundered money goes back to the owner who uses the money to make purchases or invest in new business. Cryptocurrencies could be switched to fiat currencies through the exchange process. This exchange process mostly follows a stringent identification process and supports popular coins such as Bitcoins etc. Offshore fiat currency bank account sometimes can be used to launder dirty money through an online company that is accepting bitcoin payments and can be created to allow income and switch dirty cryptocurrency into white/legal bitcoins. Cryptocurrency can be used to purchase goods also digital wallets can be stored on phones, online devices making it possible to sell crypto coins for physical cash/money.