What is Money Laundering (AML) and How to Prevent It

Key takeaways

Money laundering is a global problem that affects economies and fuels organized crime.

AML regulations aim to prevent and detect money laundering through various measures.

The money laundering process typically involves three stages: placement, layering, and integration.

KYC and AML are distinct but closely linked processes in combating financial crimes.

Money laundering is the process by which criminals attempt to make illegally obtained money appear legitimate. Anti-Money Laundering (AML) policies aim to curb this practice that typically works to launder money from activities such as drug trafficking, corruption, or terrorism.

Money laundering is a global problem with significant consequences, as it affects the global economy, weakens the financial system, and fuels organized crime. In fact, the International Monetary Fund (IMF) estimates that between $2.17 and $3.61 trillion are laundered annually, equivalent to 5% of global GDP.

Faced with this problem, Anti-Money Laundering (AML) regulations seek to reduce and eliminate this illegal practice, giving greater responsibility to regulated entities to fight against these financial crimes.

What are AML Directives?

Anti-Money Laundering (AML) directives are a set of rules designed to protect and maintain a healthy financial system. These regulations require financial organizations to apply certain measures to prevent and detect money laundering. They also require suspicious transactions or activities to be reported to competent authorities.

What measures must institutions implement to combat money laundering?

Anti-money laundering directives design the regulatory framework, but it's up to organizations to apply Anti-Money Laundering (AML) regulations. The most common steps are:

• Identity verification: Through this process, organizations can ensure that the person on the other side is really who they claim to be. This is the first step in detecting and preventing money laundering.
• PEPs and sanctions screening: Once the user's identity is verified and validated, their data is cross-checked against different databases of PEPs (Politically Exposed Persons) or sanctions.
• Transaction monitoring: AML policies allow for the traceability of various transactions to detect suspicious activities.
• Employee training: Team education is key in any fight against money laundering. It's important that everyone in the organization is on the same page: from the management team to the lowest-level employees.

In addition to these measures, many companies also apply risk analysis or continuous internal audits as part of this process.

Who Sets the AML Standards?

The rules to combat money laundering and terrorist financing originate from the Financial Action Task Force (FATF), headquartered in Paris. This organization works under the umbrella of the Organization for Economic Cooperation and Development (OECD), and its guidelines have a global impact.

Currently, the FATF establishes 40 recommendations that countries must implement in their legal and regulatory frameworks in their fight against money laundering. These recommendations cover a wide range of topics, such as customer due diligence (CDD), suspicious transaction reports (STR), or international cooperation issues.

The standards of this body (FATF) are accepted as the international standard for combating money laundering. More than 180 countries and jurisdictions have committed to implementing its recommendations, which means these guidelines have a significant effect on how institutions, mainly financial ones, operate and manage their anti-money laundering policies.

At a more local level, each country has the responsibility to implement the recommendations in its own legislation. That's why not all countries have the same regulations regarding the prevention of money laundering, and AML regulatory frameworks can vary from one state to another.

Moreover, it's important to note that this regulatory framework against money laundering is a living regulation in continuous evolution. The Financial Action Task Force continuously reviews its recommendations to adapt to new global threats and trends. That's why financial institutions must stay up-to-date with AML (Anti-Money Laundering) regulations to ensure they are complying with their obligations and protecting themselves from potential financial crimes.

The Cases of Spain, the United States, and the UK with AML Policies

In Spain, the body responsible for establishing the guidelines and rules that entities must comply with is SEPBLAC (Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offenses). This institution is also in charge of supervising compliance with anti-money laundering regulations.

In the United States, FinCEN (Financial Crimes Enforcement Network) is the main agency responsible for combating money laundering and terrorist financing. This body is in charge of issuing regulations and guidelines for obligated entities, as well as supervising their compliance.

In the United Kingdom, the FCA (Financial Conduct Authority) is responsible for overseeing compliance with money laundering prevention regulations by financial entities. This body has the power to impose substantial sanctions on entities that do not comply with the regulation.

The Stages of Money Laundering

Typically, the process of money laundering consists of three phases: placement, layering, and integration. Here's what usually happens in each of them:

Stage 1: Placement

In the initial stage, the goal is to introduce the money into the financial system. This placement of capital is usually carried out in businesses that move large amounts of cash, real estate transactions, and gambling.

Another method can be paying debts with cash or exchanging currencies to convert part of the money to another currency. To introduce this illegal money, others decide to transport the money to other countries with less financial control.

Stage 2: Layering

Layering is the process of creating a documentary record that conceals the illegal origin of the funds and protects the identity of criminals. Transfers through multiple accounts or continuous currency conversions are usually some of the warning signs for regulatory bodies and organizations.

That's why financial entities such as banks or neobanks are obligated to perform due diligence to detect these types of illicit activities.

Stage 3: Integration

Once the capital is laundered, it is reincorporated into the legitimate financial circuit and returns to the hands of criminals. The previous layering process makes it very difficult to distinguish between legally and illegally obtained funds.

For example, if criminals acquired assets (such as real estate, jewelry, or vehicles), they could resell them to recover that capital, now legal tender. Another common technique is issuing false invoices to shell companies to receive payments for services or goods that don't actually exist.

The Difference Between AML and KYC

Although they go hand in hand, identity verification (KYC, Know Your Customer) and AML (Anti-Money Laundering) processes are not the same, although they are closely linked. While the former focuses on knowing and identifying the person, the latter deals with all the regulations linked to capital, its origin, and traceability. It could be said, therefore, that identity verification is the first phase in the fight against money laundering.

That's why having solid identity verification or KYC software allows organizations to build the foundation to stay away from fraud.

How to Prevent Money Laundering: Didit's KYC and AML

Having a solid KYC system is the first step in the fight against money laundering. That's why at Didit, we offer a free, unlimited, and forever identity verification service.
This solution includes:

• Document verification, through which we extract information from the documentation, also ensuring its legitimacy.
• Facial recognition, through which we verify that the person is who they really are, using liveness tests and advanced algorithms to avoid frauds like deepfakes.

How can we offer this service for free, regardless of the company size? In this blog post, we tell you everything.

In addition to free identity verification, at Didit we optionally offer an AML Screening solution, so we can compare verified identities against various international databases for companies to also comply with these regulations without compliance costs skyrocketing.

If you want to know more about our free KYC and optional AML solution, click on the banner. Our colleagues will answer any questions you may have!