Read about:
- The driving forces behind the evolution of AML regulations.
- The impact of AML regulations on the world and financial institutions in particular.
- The 5 benefits brought on by international collaboration and information sharing.
According to the United Nations Department of Economic and Social Affairs, money laundering presents governments and organisations with unique challenges in this post-pandemic, crypto-centric world. AML and KYC regulations are the tools needed to tackle these challenges. As with all regulations in our rapidly changing world, both AML and KYC are undergoing some serious changes. So, let us look at some of the most recent introductions.
What does AML stand for?
AML stands for “anti-money laundering”. It references a set of tools, regulations, and practices designed to detect and prevent the illegal conversion of ill-gotten gains/illicit funds into legitimate assets within the financial system.
AML laws are used across a range of industries (including a few surprising ones) and they are constantly changing, as noted in our previous guide to AML and KYC changes in Europe.
How has AML regulation evolved?
The war in Ukraine, and the subsequent sanctions, have placed more emphasis on the need for strong anti-money laundering laws. The push toward cryptocurrencies has also turned the spotlight on them as governments aim to stop billions of dollars from being illegally laundered every year.
AML laws are governed by a number of regional and national agencies, including:
- Financial Industry Regulatory Authority (FINRA) – USA
- U.S. Securities and Exchange Commission (SEC) – USA
- Financial Crimes Enforcement Network (FinCEN) – USA
- The Financial Action Task Force (FATF) – Europe
- Financial Conduct Authority (FCA) – UK
What is the driving force behind recent AML regulations?
National Illicit Finance Strategy—Introduced in 2022, this strategy provides a roadmap for tackling AML and focuses on improving asset recovery and targeting cybercrime.
3-Year Action Plan—A plan that runs until 2024 and focuses on increasing training, strengthening regulations, and readying financial systems to combat money laundering.
6AMLD—The 6th Anti-Money Laundering Directive is the latest directive from the EU. It introduces new offences relating to cybercrime and focuses on providing greater monitoring and security.
Technological Advancements and Implementation Challenges
Many of the latest AML changes utilise advancements in artificial intelligence (AI), including:
- Transaction monitoring: Vast amounts of data are processed to look for illicit behaviours.
- eKYC: Advancements in verification have helped to drive KYC and AML regulation evolution. These methods include eKYC (electronic Know Your Customer), whereby automatic verification tools are used to instantly confirm an individual’s identity.
- Sanctions screening: One of the biggest recent changes in KYC and AML laws concerns sanctions screening. This method automatically screens entities against active sanctions lists that are updated in real-time. It is used by financial institutions and other companies subject to sanctions—see here for more info.
These technologies are not all positive, though. Fraudsters and money launderers also have access to better tools, including cryptocurrencies and Faster Payment systems. These technologies are very new, and this can present challenges for regulators and companies that abide by their rules.
For instance, there are concerns that some monitoring methods may breach user privacy or cause complications with regard to new software implementation.
How have AML regulations impacted the world?
AML regulations have exerted a profound and far-reaching impact on the world by significantly altering the financial landscape. They have boosted the integrity of financial institutions, encouraged international cooperation, increased corporate accountability, and made it more difficult for criminals to exploit the financial system.
The general public is also more aware than ever of the dangers of money laundering. This achievement has been instrumental in advancing AML infrastructure, as the end consumer is ultimately the one who has to undergo more checks and further scrutiny.
The European Union has made some significant AML changes in recent years and these have had a positive effect on the union’s financial security. Finland is a prime example, as this EU member has some of the lowest money laundering offences in the world.
Customer due diligence laws have been key to Finland’s success in this area. Businesses are required to establish a user’s identity and verify all of the following:
- Name
- Address
- Date of birth
- Tax number
Enhanced due diligence checks are used for high-risk customers. Transaction monitoring and sanctions list checks are also utilised. Despite AML updates and improvements, money laundering is on the rise in the EU. It is thought that up to €1.87 trillion is laundered every year. But this has more to do with external factors (including the rise of cryptocurrencies) than any kind of ineffectiveness on behalf of the union’s AML laws.
How do AML regulation updates impact financial institutions?
One of the biggest effects of AML laws concerns what happens when they are not followed. These ever-changing and increasingly complex laws are not always followed to the letter, and when that happens, fines are usually in close attendance.
Overall, AML fines increased by 52% in 2022 while US companies met with a 151% increase from 2021. These fines have hit financial institutions hard, forcing them to rethink their approach and adopt new technologies.
Organisations that fail to meet these terms also risk damage to their reputation, as clients/companies may refuse to do business with a company associated with corrupt individuals or lax practices.
Why is international collaboration and information sharing important?
information across borders can provide a number of benefits:
- Information sharing helps to flag the activities of international criminals
- Criminals are prevented from moving to another country once regulations become too strict
- Technological advancements in one country can be used to assist authorities in another
- It closes loopholes exploited by criminals
- Countries can gain insights into new and evolving patterns
For much the same reasons, information and technology must be shared across financial institutions and industries. Red flags and behavioural patterns discovered in the banking sector could benefit the online gambling sector and vice versa.
Future Trends
AML laws are making a difference. However, we are living in the age of decentralized finance (DeFi) and global connectivity, so the problem will stubbornly persist and even expand regardless of the methods used to stop it. The key takeaway is that these laws could be the only thing stopping a Wild West scenario where anything goes and the outlaws are in control.
In the near future, regulators will likely devote more efforts to combating money laundering within the DeFi sector, and must also incorporate more cross-border harmonisation, ensuring that the future of AML is not spoken about in terms of the US, UK, and EU but the world on the whole.
To make sure you stay compliant with these ever-changing laws, contact A Data Pro. We provide a range of services to support your business, including due diligence reports and adverse media screening.
