Understanding AML in Banking & How it Works;

AML in banking is notoriously costly and challenging.

This article aims to support your understanding of how it works and how to do it right at your financial institution, neobank or challenger bank.

Why Is AML in Banking Important?

The scale of money laundering is hard to gauge. But according to the United Nations Office on Drugs and Crime (UNODC), that figure reaches between 2-5% of the world’s entire GDP each year. 

This puts the figure around $800 billion and $2 trillion per year.

But why is it a problem for your bank or neobank? Well, failing to control that flow of dirty money into your system could:

  • Incur hefty compliance fines: Failing to meet AML regulations will be extremely costly for your financial institution. 
  • Damage your business reputation: You may face a PR disaster if your bank or neobank is found to be helping terrorists or criminals.
  • Incentivize crime: An indirect consequence of helping laundering money? Giving criminals permission to continue with their illegal activities.
  • Help finance terrorism: A key goal of AML is to reduce terrorist financing. Terrorist organizations rely on money to sustain themselves but accessing that money can be challenging, especially for large, cross-border amounts. Money coming from both legitimate and criminal sources funds terrorism worldwide.

Below is a chart looking at the amount of AML fines paid by banks in 2019 alone in each of a set of prominent economies.

AML banking fines 2019

While AML fines are nothing short of controversial in the banking world, they are nevertheless a harsh reality.

Banks and neobanks who wish to remain competitive must do their best to ensure these compliance costs do not balloon to the point where they damage their bottom line.

How Does Banking Money Laundering Work? 

Suppose you are a criminal and want to buy a house. You can’t just pay for it in cash. Your illegal money needs to enter the banking system and be layered (laundered) so you are not caught.

There are three key stages to that process.

Money Laundering Cycle process
  1. Placement: This is when dirty money enters the financial system. Typically, this is someone’s bank account – personal or business. For example, placement can come from cash-based businesses, payment for invoices with the wrong item quantities or quality, or smurfing (when criminals place small amounts of money in multiple money mule accounts to avoid triggering AML verification).
  2. Layering: This stage essentially moves the money about. It’s often transferred to offshore companies or bounced from one shell company to another. The end goal is to hide its origin.
  3. Integration: This is the final stage when the money is used to purchase assets. Most common assets purchased with previously dirty money include property, fine art, and commercial investments. Lately, NFTs have also been known to help launder money. You can read more about metaverse fraud here.

Note that not all money is laundered through the banking system. You can read more about other types of money laundering in our upcoming AML guides and articles.

A Brief History of AML in Banking

The US Bank Secrecy Act (BSA), enacted in 1970, is widely considered to be the earliest effort to curb money laundering. After numerous edits and amendments, a special team was designated to administer it: the Financial Crimes Enforcement Network. 

In 1989, the Financial Action Task Force, or FATF, was launched to prevent money laundering in multiple countries. After the 9/11 attacks, it added terrorist financing to the list of crimes it attempts to prevent. 

The 1989 UN Vienna Convention article 3.1 defines money laundering as follows:

“The conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions.”

Today, AML is regulated by a large number of organizations worldwide, along with the FATF. That includes:

  • AMLD (Anti-Money Laundering Directive) in Europe
  • The Financial Conduct Authority (FCA) in the UK
  • FINTRAC, or Financial Transactions and Reports Analysis Centre of Canada
  • CBIRC, the China Banking and Insurance Regulatory Commission
  • FSA, or the Financial Services Agency in Japan
  • FIU, the Financial Intelligence Unity in India
  • And more…
AML regulators around the world

How to Remain Compliant with Banking AML

Because there are so many AML regulators, it may be hard to keep track of all the rules. This is particularly true for banks and neobanks that operate in multiple jurisdictions. However, general compliance entails the following:

  • Customer due diligence: You must perform the most basic form of KYC: Know Your Customer checks. That includes learning a person’s name, address, date of birth, and confirming it with an ID document.
  • PEP checks: A PEP, or Politically Exposed Person, is someone entrusted with a prominent public function. They are considered a higher risk due to their potential involvement in corruption and bribery, which is why AML rules require that you keep track of these individuals’ banking habits.
  • Sanctions list checks: A sanction screening aims to discover if a company or individual has been issued a penalty by law. While it does not mean they have been penalized for money laundering, it is illegal to do business with a sanctioned company.
  • Record keeping: Your bank or neobank should keep a record of all your customer due diligence, risk assessments, policies, transaction data, and even training records.
  • Policy statement: This is a document that acts as a clear framework for your anti-money laundering policy, including the controls you have in place to prevent financial crime.
  • Transaction monitoring: Any inbound or outbound transaction reaching a certain threshold must be checked by banks. The threshold varies from one country to another. In the US, it covers transactions above $3,000. In the UK, it is £10,000. 

What Is an AML Suspicious Activity Report (SAR)? 

A Suspicious Activity Report, or SAR, is a written document that must be submitted to the relevant authorities if you suspect you are dealing with criminal activity. It is mandated on the list of the FATF’s 40 recommendations.

In the banking AML world, this will cover a customer or business who you may suspect is laundering money using your services. 

SARs are a key part of law enforcement, but also for governments to perform risk assessments by identifying emerging trends in financial crime in order to develop new legislation or adapt existing laws. 

You can read more about SARs in our transaction monitoring guide.

when to file a sar report

AML Banking Software and Tools

AML regulations are constantly evolving but so are the tools designed for compliance. Banks and neobanks now have access to a growing number of technologies designed to meet AML requirements. They include:

  • Real-time ID verification: ID verification serves the double purpose of meeting KYC and AML requirements. Video selfie verification is quickly becoming the norm for banking institutions. You can read about its pros and cons, along with other ID verification software here.
  • Real-time transaction monitoring: It’s a straightforward technique, in practice, but you should ensure that your system can deal with large volumes of data. It should also be flexible and easy to customize enough to meet ever-changing AML requirements.
  • Machine learning: Artificial intelligence algorithms have been at the forefront of AML detection for quite some time now. Machine learning engines learn from previous cases where money laundering was identified and suggest relevant rules to ensure it doesn’t happen again.  

Click here to compare the 14 best AML software.

How to Augment Your Banking AML with SEON

SEON is a fraud prevention tool designed to give you complete flexibility with your transaction monitoring and identity verification.

In addition to real-time alerts with customizable thresholds, we also offer user verification based on alternative digital data to augment your ID checks. It’s the frictionless way to learn more about someone, without putting them through lengthy KYC and AML checks.

Best of all? Our transparent, pay-per-API call pricing makes it the ideal solution to augment your current AML systems – whether you need to pre-filter obvious fraudsters or gain more information as part of your manual AML reviews.

Sources

  • UNODC: Money Laundering
  • FATF: The FATF Recommendations

FAQs for AML in Banking

What is the AML process in banking?

AML in banking involves verifying the identity of your banking customer, checking that they do not appear on PEP or sanctions lists, and monitoring transactions over a certain threshold.

What are AML policies?

AML policies are what your bank or neobank must clearly state regarding anti-money-laundering checks. You must write and publish an AML policy statement on your website.

What tools can help with banking AML?

Banking AML checks can be performed with identity verification tools, transaction monitoring tools, and machine-learning tools. The latter helps suggest rules that reduce the risk of dealing with money laundering customers. 

Share article

See a live demo of our product

Click here

Author avatar
Florian
Communication Specialist

Florian helps tech startups and global leaders organise their thoughts, find their voices, and connect with customers worldwide.


Get our latest newsletter

Join over 6000 companies in getting the latest fraud-fighting tips