Money Laundering Explained: How Banks Combat Financial Crime

Money laundering is a technique used by criminals to disguise illegally obtained money as legitimate. Criminals need to “clean” this “dirty money” to make it appear legal and usable for investments. In this guide, we will explore how money laundering works, the techniques criminals use, the signs to look out for, and how banks prevent money laundering through anti-money laundering (AML) measures.

Understanding Money Laundering Techniques

Money laundering involves three stages: placement, layering, and integration.

1. Placement This is the initial stage where illegally obtained funds are introduced into the financial system. Common methods include:

Making payments to cash-based businesses.
Paying false invoices.
Depositing small amounts below the AML threshold into bank accounts or credit cards.
Moving money into trusts and offshore companies.
Using foreign bank accounts.
Aborting transactions after lodging funds with a lawyer or accountant.

2. Layering In this stage, criminals separate the funds from their illegal source through complex financial transactions, making it difficult to trace the origin. Techniques include:

Using front businesses to mix dirty money with legitimate profits.
Structuring large sums into smaller amounts and spreading them across multiple accounts.
Currency exchanges to convert dirty money through foreign currency providers.
Using virtual currencies like cryptocurrencies, which are harder to trace.

3. Integration This final stage involves reintroducing the laundered money into the economy as legitimate business or personal transactions, often by purchasing real estate or luxury assets.

Detecting Money Laundering: Signs to Look Out For

Vigilance is key in detecting money laundering. Here are some red flags:

Unusual financial activity compared to usual transaction patterns.
Large cash deposits without a clear source.
Evasive or defensive behavior when asked for details.
Discrepancies in provided information.
Large investments by third parties without explanation.
Increasingly complicated financial transactions.

Anti-Money Laundering (AML): How Banks Prevent Money Laundering

What is Anti-Money Laundering (AML)? AML refers to the measures that financial institutions take to comply with legal requirements, monitor transactions, and report suspicious activities. The Financial Action Task Force (FATF), established in 1989, sets the global framework for AML policies.

Why is AML Important? Money laundering is linked to various criminal activities like smuggling, illegal arms sales, embezzlement, insider trading, bribery, and computer fraud. AML measures help:

Comply with regulations.
Protect brand reputation.
Avoid penalties.
Reduce costs related to fines, employment, IT, and risk exposure.

How Banks Implement AML Measures

1. Staff Training Frontline employees are trained to spot suspicious activity. AML compliance officers develop policies, review transactions, and report suspicious activities.

2. Customer Identification Programs (KYC) Banks verify customers’ identities to ensure they are legitimate. This includes:

Verifying names, dates of birth, and addresses.
Using biometric identification like facial recognition.

3. Large Transaction Reporting Banks file reports for transactions above certain thresholds made by a single customer during a business day.

4. Monitoring and Reporting Suspicious Activities Banks monitor for behavior that exceeds reporting thresholds and has no apparent business purpose. They report suspicious activities to authorities.

5. Sanctions Compliance Banks screen customers against lists of sanctioned individuals, companies, and countries.

6. Customer Due Diligence Banks continuously assess the risk posed by each client, monitoring high-risk clients more closely.

7. AML Holding Periods Deposits must remain in an account for a minimum of five trading days before transfer, slowing down the layering process.

8. AML Transaction Monitoring Software Large banks use software to monitor transactions in real-time, analyzing account history, risk levels, and transaction details. High-risk transactions are flagged for review.

Conclusion

By understanding money laundering techniques and implementing robust AML measures, banks can help prevent financial crime and protect the integrity of the financial system. For more information on AML requirements and compliance, consult the latest guidelines from regulatory bodies.

Disclaimer: This article is for informational purposes only and does not constitute any professional advice. Feel free to contact us to consult with our professional advisors team for personalized advice and guidance.

Sources: How to detect money laundering (veriff.com)