AML Verification: Processes for AML Compliance

Last Updated: August 21, 2024 by Tamas Kadar

Introduced in 2020, the 6th Anti Money-Laundering Directive (6AMLD) identifies 22 crimes, including those related to digital assets and taxes, under its scope. Although penned by the European Union, this directive sets the pace for money laundering law worldwide, making it mandatory for financial institutions and certain companies to implement technological safeguards against such crimes.

These safeguards, consisting of layers of software security, must be subjected to Anti-Money Laundering (AML) verification or checks to ensure compliance. Understanding the practicalities of these measures is crucial to navigating the current AML environment.

What Is AML Verification?

An AML verification is a data collection and analysis protocol that financial institutions must have in place in order to legally conduct transactions. In practicality, it is a background vetting process that is conducted during customer onboarding, as well as along their customer journey to the satisfaction of “existing expectations for SAR reporting”.

The process is designed to keep companies within legal compliance for anti-terrorist legislation like the Banking Secrecy Act in the US and European 6AMLD regulation, and other mandates that help keep the international economy safe.

AML checks often overlap with KYC verification but typically involve more detailed information. While KYC is required for financial entities, AML verification expands on this by using additional data-based strategies to specifically target money laundering concerns.

How Does AML Verification Work?

To comply with international mandates, financial institutions must validate the name, date of birth, and address of account holders. These data points are deemed sufficient by legislation to establish a customer’s profile for potential liability. Institutions then verify this personal information against sanctions lists, blacklists, and Politically Exposed Persons (PEP) lists to ensure compliance and reduce risk.

For accounts owned by companies rather than individuals, identifying the true beneficial owner can be more complex. Money launderers often hide the actual ownership of commercial accounts to use them for laundering money. In some cases, high-level individuals within a company may knowingly allow criminal activity to occur, relying on plausible deniability to avoid responsibility. To counter this, Article 7 of 6AMLD explicitly assigns criminal liability when a “lack of supervision or control” enables a crime, ensuring accountability rests with a responsible party, if not the beneficial owner.

Infographic illustrating the AML regulators around the world

Why Is 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.

The AML Verification Process

The AML (Anti-Money Laundering) verification process involves verifying customer identity, assessing risk, monitoring transactions, screening for sanctions, reporting suspicious activity, and keeping records for regulatory compliance. This process includes in the following aspects:

Customer identification: By collecting and verifying personal information such as name, date of birth, address, and identification documents (e.g., passport, driver’s license).
Know Your Customer (KYC) Verification: Conducting background checks to verify the customer’s identity and ensure they are not on any sanctions or watchlists (e.g., PEP, blacklist).
Risk assessment: Assessing the risk level of the customer based on factors such as geographic location, transaction history, and nature of the business.
Transaction monitoring: Continuously monitor financial transactions for suspicious activities, including large or unusual transactions that deviate from normal behavior.
Sanctions screening: Cross-check customers and transactions against sanctions lists and other relevant databases (e.g., OFAC, EU Sanctions List).
Adverse media screening:
Suspicious activity reports: Reporting any suspicious activity or transactions to the relevant authorities (e.g., Financial Intelligence Unit, regulatory bodies).

Who Needs to Comply with AML Regulations?

Current AML regulations protect the economy from terrorism, corruption, and other crimes, applying to entities involved in financing these activities. While AML compliance is required primarily in banking, it also extends to industries like iGaming, fintech, real estate, and high-value dealers.

AML mandates cover firms dealing with property, high-value items like art, managerial services for client assets, gambling companies, and those managing funds or trusts. Compliance also applies to domestic and foreign financial institutions with US connections, foreign banks interacting with US banks, and UK businesses like high-value dealers, trust providers, accountancy services, real estate, and iGaming companies, all of which must follow strict AML regulations.

How Can SEON Help?

SEON plays a crucial role in helping businesses stay compliant with AML regulations. International mandates require an AML platform that ensures the validity of new customers, and over 80% of SEON’s clients operate under these regulations. SEON helps them achieve both compliance and ROI by offering flexible risk mitigation solutions tailored to meet these standards.

SEON’s AML risk assessment checks names against PEPs, RCAs, watchlists, sanctions lists, and more. The AML API works alone or within SEON’s fraud prevention platform, using real-time data and machine learning to flag potential bad actors while minimizing friction for legitimate customers.

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.

Frequently Asked Questions

What is beneficial ownership?

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.

What is a SAR (Suspicious Activity Report)?

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