Financial crimes have existed in various forms across history.
Ever since taxes and sanctions were enforced to ensure the fair distribution of wealth, individuals and organisations with malicious intent have leveraged loopholes in regulations and other illegal means to conceal their financial transactions from authorities.
While this has been a noticeable issue throughout history, today, financial crimes—especially money laundering—have become a major threat to the stability of the global financial system.
These crimes have led to the diversion of funds from economically and socially productive initiatives that benefit people from all economical categories to disruptive ventures.
For example, money laundering has paved the way for terrorist financing, as most often than not, the funding received by terrorist organisations is generated through illegitimate ways and is concealed from regulators.
In addition to fueling terrorism, money laundering also drives many informal and illegal economic activities, including the trading of arms, narcotics, smuggling contraband and more.
Noticing this worrying trend, regulators across the world have enforced strict anti-money laundering and counter-terrorist financing (AML/CTF) regulations to prevent these types of financial activities and uphold the integrity and stability of the global financial system.
Here are some of the most prominent AML/CTF regulations from different regions of the world.
Financial Action Task Force (FATF) guidelines
The FATF was established in 1989 by G-7 countries to handle the increasing threats posed by money laundering and terrorist financing. Today, the agency consists of more than 39 member states and acts as a global AML/CTF regulator.
The FATF guidelines provide recommendations and a framework for countries to develop effective and efficient AML/CTF laws to combat illegitimate economic activities.
These recommendations span:
Applying a risk-based approach
Business organisations should evaluate money laundering and terrorist financing risks when establishing relationships with customers. If risks are identified, necessary measures, such as reporting to the authorities, should be taken to limit these activities.
Customer Due Diligence
Customer Due Diligence (CDD) measures should be a core part of evaluating the identity of each customer and the legitimacy of their financial posture. CDD measures should allow financial institutions to establish audit processes to evaluate customer risk levels.
Financial institutions are required to keep customer records—which constitute evidence of financial crimes—for a minimum of five years.
Politically Exposed Person (PEP) controls
PEP controls must be implemented to prevent corruption and bribery and politically exposed persons should be considered risk-bearing individuals for firms.
Reporting of suspicious transactions
If suspicious financial transactions are detected during audits, financial institutions must report this through suspicious transaction reports.
The Fifth Anti-Money Laundering Directives (5AMLD) in the EU
The EU has always been a leading proponent of anti-money laundering initiatives and the 5AMLD—which follows FATF guidelines—updates the existing 4AMLD framework to adopt a more risk-based and transparent approach to tackle more modern and sophisticated money laundering schemes.
Introduced in 2020, 5AMLD requires businesses to implement more stringent and thorough CDD measures to analyse the current company and useful property information before establishing business relationships with customers.
In addition to enforcing AML laws on regular financial transactions, 5AMLD also spans more niche and not well-regulated financial ventures like casinos and digital currency and wallet providers. The new directive limits the anonymity of these virtual financial services.
Moreover, the latest directive calls for increased cooperation and sharing of information among AML superiors and the ECB.
The Bank Secrecy Act (BSA)
The BSA is the United States’ primary anti-financial crime regulation and is governed by the Financial Crimes Enforcement Network (FinCEN).
BSA laws require financial institutions to maintain and submit several reports, including:
- Currency Transaction Report
- Suspicious Activity Report
- Foreign Bank Account Report
If financial institutions are found in violation of BSA laws, they are subject to severe penalties and sanctions. If any individual intentionally fails to comply with BSA laws, they can be sentenced to up to 5 years in prison or imposed a $250,000 fine.
AML/CTF regulations are key to ensuring a safe and stable economy
In recent years, countering money laundering and terrorist financing has become a significant challenge for financial regulators. In response, authorities have unveiled new regulations or updated existing financial crimes regulations to prevent these illegitimate transactions.
While keeping on top of all the changes in AML/CTF regulation is challenging, financial institutions can leverage RegTech solutions to power their compliance workflows.