Introduced in 2020, the 6th Anti-Money Laundering Directive (6AMLD) defines 22 crimes under its scope, including offenses related to digital assets and taxes. Although developed by the European Union, 6AMLD influences money laundering laws on a global scale. Financial institutions and certain other businesses are required to implement technological safeguards to comply with its mandates and avoid involvement in these crimes.
These safeguards, often consisting of multiple layers of software security, are scrutinized through processes like AML verification or AML checks. Let’s delve into the practicalities of the current AML environment.
What Is AML Verification?
An AML verification, or AML check, is a data collection and analysis protocol that financial institutions must have in place to legally conduct transactions. In practice, it is a background vetting process conducted during customer onboarding and throughout the customer journey to meet “existing expectations for SAR reporting.”
The process ensures compliance with anti-terrorist legislation like the Banking Secrecy Act in the US, the European 6AMLD regulation, and other mandates that help safeguard the global economy.
Notably, AML checks often overlap with the data gathered from the KYC verification process, though AML verification typically considers additional information. While KYC checks are required for financial and other entities, AML verification incorporates broader data-based strategies to specifically address money laundering risks.
How Does AML Verification Work?
To comply with international mandates, financial institutions must validate the name, date of birth, and address of the account holder. According to legislation, these data points are sufficient to establish confidence in a customer’s profile regarding potential liability. The institution assesses this personal information and ensures the individual or entity is not listed on sanctions, blacklists, or PEP lists.
However, determining the beneficial owner of a commercial entity can be more complex. Money launderers often obscure the true ownership of commercial accounts to use them as bank drops for laundering activities.
Another tactic used to conceal transactions with criminal origins is plausible deniability. In some cases, bad actors within a company may knowingly permit financially valuable, criminal activities to occur. When accountability is required, these companies hope to evade liability in the confusion of shifting blame.
To address this, Article 7 of 6AMLD assigns explicit criminal responsibility to situations where a “lack of supervision or control” enables a criminal act. Previously, vague liability definitions made legal action difficult, but the law now requires a responsible professional, if not the beneficial owner, to be held accountable.
Why Are AML Verification Important?
With the adoption of 6AMLD protocols, AML verification has become an even higher priority for financial bodies than it was. The most obvious benefit is being part of the greater effort to negate the financial power of criminal enterprises and terrorism worldwide – a reward in and of itself. But avoiding fines is also key for these companies.
For most companies, the looming threat of massive fines is a key motivator to maintain watertight compliance. For example, for companies in the EU subject to 6AMLD mandates, the punishments for noncompliance offenders were hardened significantly by comparison to 5AMLD, with the minimum fine now at €5/$4.8 million and four years imprisonment for the responsible party.
Entities found to be repeat or extreme lawbreakers can also be subject to:
- denial of governmental benefits like grants and public funds
- temporary or permanent disabling of all business activity
- judicial surveillance
- court-ordered closings of physical premises
What Documentation Is Required for an AML Verification?
To receive a valid AML verification, FinCEN also has a list of acceptable forms of identification that can be provided. These tend to overlap with KYC compliance checks and include:
- a government-issued photo ID that indicates full name and nationality, such as a passport or driver’s license
- a document that proves the individual’s address, such as a utility bill or correspondence from government organizations
- direct contact with the beneficial owner
- source of funds information, including financial records from other institutions
- regular updates to the above (subject to locally applicable legislation)
The validity of the above will be confirmed using identity verification software (IDV tools). At the financial entity’s discretion, photocopies of the above can be acceptable, as long as this is paired with a risk assessment during onboarding. The institution will also cross-reference the identity of the beneficiary against sanctions lists, PEP lists, and other applicable blacklists.
In the screenshot above, SEON is used to supervise potentially money laundering-related transactions.
Who Needs to Comply with AML Regulations?
AML regulations aim to protect the global economy from terrorism, corruption, cross-border crime, and other illicit activities. Any organization that could directly or indirectly facilitate such activities is required to adhere to these mandates. While AML compliance is a given in banking, its reach extends to industries like iGaming, fintech, and high-value trading, depending on the country.
Key Sectors Subject to AML Verification
Globally, financial institutions are the primary entities required to perform AML checks. However, AML regulations now apply to sectors where hidden funds are common, such as luxury real estate, art collection, and gambling. For instance, shell companies are often used to purchase high-value properties, making these transactions subject to AML scrutiny.
Industries typically required to comply with AML regulations include:
- Property or business brokers: Firms involved in buying or selling properties or businesses.
- High-value item dealers: Businesses trading art, antiques, and other high-value goods.
- Financial managers: Companies managing money, securities, or other assets on behalf of clients.
- Gambling and iGaming: Online and offline gambling enterprises.
- Banking services: Firms opening or managing bank accounts or handling client funds.
- Trust and fund management: Companies creating or managing trusts, funds, or foundations.
AML Compliance in the U.S.
In the U.S., AML regulations apply broadly to financial institutions, including:
- Domestic banks and financial companies.
- Foreign financial institutions operating in the U.S. or interacting with U.S. banks.
- Foreign banks using U.S.-based banking services or from sanctioned regions.
AML Compliance in the UK
In the UK, money laundering supervision extends to industries associated with potential laundering activities:
- High-value dealers like art and antique traders.
- Trust service providers acting on behalf of other entities.
- Accountancy firms and real estate agencies.
- Online casinos and iGaming companies registered under AML jurisdiction.
Notably, businesses outside regulated jurisdictions may still operate within regulated borders, but they must meet strict compliance standards to do so.
By understanding these requirements, organizations can ensure they stay on the right side of AML laws and protect themselves from legal and reputational risks.
How Can SEON Help?
Staying compliant with AML regulations is a huge part of what SEON can help achieve. International AML mandates all describe a compliant process as one that has an AML software security solution in place to give confidence in the validity of new customers.
Over 80% of SEON customers are under the jurisdiction of AML mandates, and we get them over the finish line of both compliance and ROI by providing flexible risk mitigation solutions.
We provide a way to do AML risk assessment, including checking whether names and their variations appear on any AML related lists – PEPs and RCAs, watchlists, fugitive lists, sanctions lists, and so on. SEON’s AML API can be used in isolation or as part of the fraud prevention platform.
Our comprehensive risk assessment is based on real-time data being fed through machine-learning algorithms, escalating potential bad actors to further scrutiny and approving obviously good customers with minimal friction.
During AML checks, SEON allows fraud teams to do all of the following:
- spot synthetic, falsified identities
- see who is an AML liability
- flag PEPs and their relatives and monitor them closely
- look for suspicious connections with other flagged accounts
- identify patterns in suspicious users
- conduct transaction monitoring
- verify identities without the cost and friction associated with MFA or other SCA
- explore the validity of provided location data based on other location signifiers like IP fraud score or the presence of privacy services like a VPN
- source data for SARs
- reference AML-specific datasets for red flags
In other words, implementing SEON makes keeping AML compliant at both digital onboarding and throughout the customer journey by constantly checking for signs of misdeeds.
The safest environment for a financial institution to do business in is certainly one that is free from money laundering, but cultivating that space requires work. With SEON, that work can be streamlined significantly, saving both time and operational costs while also boosting fraud prevention and mitigation.
Frequently Asked Questions
A beneficial owner is defined as a single entity that owns or controls an interest in a legal or commercial entity, such as a company, property, or security. Most commonly, though, knowing the beneficial owner answers the question “Whose money is this, really?” This designation of ownership is in place for the sake of legal responsibility when it comes to that entity’s conduct in the larger economy.
When transaction monitoring software flags suspicious data, the information is compiled in a report called a SAR – or Suspicious Activity Report. It is formatted in a specific way so that financial analysts and regulators may review it.
The easiest way to submit a SAR is via a free online system – via the BSA E-Filing System in the US or the NCA website in the UK, for example. Some transaction monitoring software will also include a feature to automatically file them for you.
In the screenshot above, SEON is used to pause the journey of customers from high-risk countries to be reviewed manually.
Sources
- GOV.UK: Who needs to register for money laundering supervision
- Willkie Compliance: Who is Subject to US AML Laws?
- FinCEN: Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions
