Everything You Need to Know About Money Laundering and Regulations
Money laundering is one of the most common financial crimes. It is a means of processing money made through criminal activity, and as such, governments have put increasingly strong controls on financial and other organisations.
But what exactly is money laundering? And what sorts of regulations can you expect to face when running a financial service provider? Why is it so difficult to sign up with banks, remittances companies and corporate FX firms? How did it change the money transfer history? be sure to understand the role of regulators in money transfers by reviewing our list of secure FCA regulated money transfer firms.
What is money laundering?
The crime of money laundering has been around as long as people have been using money. The U.S. Treasury Department defines money laundering as “the process of making illegally-gained proceeds (i.e. dirty money) appear legal (i.e. clean)”. The Financial Conduct Authority defines it similarly, and so does every other financial regulator across the globe.
Individuals or businesses that are making money through fraud or other crimes need a way to explain the influx of money. This usually takes 3 steps:
- Placement. The funds are furtively introduced into the financial system.
- Layering. The money is moved around through numerous accounts to create confusion.
- Integration. It is integrated into the financial system through additional transactions until the dirty money appears clean.
For example, a financial firm obtains a sum of money through fraudulent means that they cannot record in their books. Instead, they introduce it into their accounts bit by bit, under the guise of smaller, legitimate transactions that appear legal. They consequently layer and integrate it, to make it difficult for investigators to trace it back to its real source.
Anti-money laundering (AML) regulations have been developed to make it easier to detect fraudulent activity from the start. Financial institutions and other regulated entities are required to prevent, detect and report any potentially suspicious activity to government regulators.
Famous incidents relating to money laundering
The famous mob boss might have inadvertently originated the term “laundering”. He laundered an estimated $1bn through various businesses. He started out with a chain of laundromats which were cash operated.
The BCCI scandal
The Bank of Credit and Commerce International (BCCI) was the 7th largest private bank in the world. That is before it was taken down by the CIA in a bust revealing a mass of money laundering activity. Some of their most famous clients were revealed to be Saddam Hussein and other dictators and terrorist leaders.
(fines by regulators, famous people who have been accused of it, terror activities that were funded this way etc.)
HSBC inadvertently helps fund terrorists
In 2012, a Senate report revealed that HSBC’s lax anti-money laundering procedures had helped for Mexican drug money, Iranian terrorist money, and suspicious Russian money enter the U.S. HSBC was ordered to pay $1.9bn in fines. To the ire of many, no jail time was handed to anyone responsible for the oversights. However, HSBC are still facing knock-on effects of this report today, with families of victims of Mexican drug cartel activity suing the company. The 2016 Panama Papers scandal has also revealed more information on the HSBC’s illegal activities, days after monitors called their AML measures inadequate.
The Panama Papers scandal
In April 2016, 11.5 million files were leaked from the world’s 4th biggest offshore law firm, Mossack Fonseca. The documents contained information on world leaders, politicians, and even sports stars using offshore accounts. Some of this information shows inconsistencies with AML regulations, as well as criminal activity.
Current AML policies require the following:
- assessing the risk of your business being used by criminals to launder money
- checking the identity of your customers
- checking the identity of ‘beneficial owners’ of corporate bodies and partnerships
- monitoring your customers’ business activities and reporting anything suspicious to the National Crime Agency (NCA)
- making sure you have the necessary management control systems in place
- keeping all documents that relate to financial transactions, the identity of your customers, risk assessment and management procedures and processes
- making sure that your employees are aware of the regulations and have had the necessary training
Regulations are put in place by both local and international authorities. Thus, each country will, in addition to the FATF’s regulations, have its own specifications.
Procedures for banks and money transfer companies to approve a transaction
AML regulations are particularly significant for banks and money transfer companies needing to approve international transactions. They are required to verify the identity of all their clients. Documentation proving the client’s identity, as well as the legitimacy of the money, is required.
With money laundering still common and organisations still failing to comply with current regulations, governments are putting increasing accountability measures into place. As global terrorism continues to be a threat, with groups such as ISIS targeting European and American states, possible terrorist funding is being taken seriously.
Companies aim to develop quicker and more secure ways to comply with AML regulations, with improving technology allowing for greater data encryption. Thus, suspicious transactions will be more easily identified and reported.
Anti-money laundering regulations have been around in some form as long as money has existed. The 20th Century brought increased regulations in order to counter illegal activities, especially those involving drug cartels and terrorist organisations. Still, some banks and financial organisations have had major lapses, and even with AMLs, it is unlikely that money laundering will ever be entirely eradicated. Additionally – over-regulation can be put the markets in a halt and in many cases, doesn’t protect customers in the fashion they were supposed to.