How many steps are in anti-money laundering?

Anti-money laundering (AML) refers to the prevention and detection of money laundering efforts within certain industries. An anti-money laundering process consists of the steps, actions, protocols, and guidelines required by organizations and governing bodies to do just that. But why is detecting and preventing money laundering such a concern for financial businesses globally? The importance of anti-money laundering is difficult to overstate.

Successfully laundered funds can be detrimental in several ways. They can: 

• Jeopardize the operational health of financial institutions 
• Lead to fines and compliance issues
• Directly account for economic changes like inflation and increased interest rates
• Generate a cycle of illegal activity and illicit proceeds

To help prevent financial crimes like money laundering, terrorist financing, fraud, and more, governing bodies around the world have enacted anti-money laundering guidelines. These guidelines and anti-money laundering acts have some variation between countries or organizations, but they generally tend to look pretty similar and involve a common process. Let’s take a look at the different anti-money laundering stages within a typical AML process. 

What are the 3 steps in money laundering?

Before you can curtail money laundering, you have to know how it happens — particularly the three steps of placement, layering, and integration. 

1. 1. Placement: This step involves taking illegally obtained money, and placing it into legal financial systems for safe keeping. Keeping large cash sums on-hand and unprotected can be risky, so in an effort to protect themselves and their money, criminals have to place it somewhere safe. This typically includes methods like opening offshore accounts, laundering through cash-heavy businesses, and depositing small amounts into bank accounts. 
   2. Layering: This step transforms dirty money into several different forms and transactions. For example, exchanging cash for casino chips, casino chips for gold, and gold for real estate all offer a way to make the ill-gotten gains difficult to track. Cryptocurrency also provides another avenue for financial criminals to attempt to layer their funds. Layering can involve falsifying accounting books, moving money across several countries, and obscuring the audit trail as well. 
   3. Integration: This third step occurs when laundered money enters back into the economy. Itcan happen in many different ways. One example is using the money to buy goods and services like real estate, luxury assets, or even businesses. Other methods include paying fake employees, offering dividends to shareholders of criminal enterprises, or even giving out ‘loans’ with no expectation of them being repaid. 

What is the process of anti-money laundering?

The process of anti-money laundering — as mentioned earlier — differs from country to country. In general though, most governing bodies include several main pillars as part of their AML process. 

What are the 5 pillars of AML?

The five pillars of anti-money laundering are: 

• Appointing compliance leadership. When beginning an AML process, it’s important to work with someone who is familiar with AML guidelines and regulations. Hiring a compliance officer is a great way to dedicate responsibility and resources to the anti-money laundering process. In turn, the compliance officer will stay up to date on everything your organization needs to do. 
• Completing risk assessments. Since AML is about deterring criminal activity, all AML processes need to take a risk-based approach. This means that the higher risks to compliance should take priority when implementing or revising an AML strategy. Part of compliance leadership’s responsibility is to assess the current risk landscape for their organization and help put a plan in place to address the most pressing issues in a timely and effective manner. 
• Preparing AML policies and providing AML training. Having a process in place is important, but it’s equally important to train employees and staff on how to actually execute that process. That entails training them on AML software or other tools that assist anti-money laundering efforts. Since employees are often the first line of defense against money laundering, investing in recurring training is a big part of any AML plan. Additionally, AML training should occur from employee onboarding throughout their entire employment, as needed. Once you know what is required of your organization, you can develop policies, protocols, and actions to ensure you achieve AML compliance. This is a critical step in any AML process because it provides a roadmap for how you intend to implement your anti-money laundering efforts.  
• Monitoring suspicious activity and performing system updates. It is important to monitor and report suspicious activity. To this end, keeping detailed records and noting out-of-the-ordinary transactions can help you remain compliant and curtail criminal activity. With advances in technology, criminal activity is always evolving. So too are AML guidelines and efforts. Performing routine maintenance and required updates to your AML process help not only to keep you compliant, but also to prevent money laundering.
• Performing customer due diligence (CDD) using KYC best practices. What is KYC in the AML process? KYC stands for “know your customer.” It is a subsection of many AML guidelines worldwide. The objective of KYC is to ensure that the customer is who they claim to be. There are several factors that can help confirm the identity of a customer, including document verification, biometric verification, and data verification. Online tools like Onfido’s Real Identity Platform use the power of AI to help optimize the KYC process for organizations. However, knowing your customer involves more than just verifying their identity. To truly know your customer, you need to understand your customer, their behaviors, and specifically, their risk profile. This CDD process requires rating clients as high, medium, or low in terms of their risk level. This includes cross referencing customers with databases, government records, and watchlists.