In this edition of Blanco’s Jargon Buster series, we focus on an important acronym that is closely related to customer due diligence (CDD): Anti-Money Laundering (AML).
How does money laundering work?
Criminals use illegal techniques to hide the income they earn from illegal activities, such as drug trafficking and sales. There are three stages to money laundering: placement, concealment and integration. Placement is the process of introducing the illicit money into the financial system. In the concealment phase, the source of the money is hidden through a series of transactions and accounting tricks. Finally, in the integration phase, the ‘cleaned’ money is introduced into the economy, after which it is virtually impossible to trace the origin of the funds. A common money laundering method is, for example, to channel illegally obtained money through a legitimate company owned by or linked to a criminal organisation. Illegally obtained money is disguised by depositing it in the company so that the criminal can withdraw it in a seemingly legitimate transaction.
What is AML legislation?
AML legislation consists of a set of laws, regulations and procedures that help prevent criminals from disguising their illegally obtained money as legitimate income. Criminals have been using money laundering techniques to hide their money and the crimes they have committed for decades. AML measures make it more difficult for criminals to hide their ill-gotten money.
Financial institutions are required to monitor customer transactions and report suspicious activity.
How are AML and CDD related?
Financial institutions use AML measures to keep their business safe. One of these AML measures is having a thorough CDD process. The CDD process ensures that financial institutions only do business with people and companies that have been found to be trustworthy. Another important AML measure is monitoring transactions to ensure that the institution is not part of a money laundering scheme.
Sixth Anti-Money Laundering Directive (AMLD6) gets tougher on money laundering
The AMLD6 is the most recent anti-money laundering directive. AMLD6 introduces:
- Longer prison sentences for offenders
- A defined list of criminal activities that constitute money laundering
- Stricter laws for people who assist with money laundering
- Making legal persons, such as companies, liable for criminal activities
- More information sharing between countries to help fight cross-border crime
Stay tuned for our next jargon busting article!