AML stands for Anti Money Laundering. It is a term that applies to a set of policies, procedures and technologies designed to prevent money laundering. They are implemented within government systems and financial institutions to monitor and prevent fraudulent activity. AML regulations require financial organizations to develop, implement and maintain sophisticated systems to detect suspicious transactions and to assess money laundering risks. Most governments have Anti Money Laundering laws, and they are on the whole similar to each other. International organizations such as The United Nations, The Financial Action Task Force and The International Monetary Fund all have guidelines for Anti Money Laundering controls and prosecutions.
But what is money laundering exactly? Simply put, it involves taking money made through criminal activities and making it seem legitimate, usually using unwitting lawful businesses to “clean” the money. In the brick-and-mortar world, a simple example of money laundering would be purchasing a very small cheap item with a large denomination note, and then getting change, for instance purchasing a $1.00 lipstick with a stolen or counterfeit $100.00 bill. The thief now has $99.00 of “clean” money.
The digital realm and eCommerce provides criminal elements with many creative ways of money laundering. Money laundering crimes can be committed by individuals, groups or syndicates, and can include anything from small or large-scale theft, tax evasion, public and private corruption, drug and human trafficking, and the financing of terrorist activities.
There are typically three stages of money laundering activities:
This involves putting the illicit funds into the legitimate financial ecosystem. If large sums are involved they are typically broken up into smaller transactions, especially in jurisdictions where transactions over a certain value are scrutinized. This could include buying high-value goods such as artworks, property or jewelry for resale, buying foreign currency, or making deposits into accounts disguised as valid transactions. It could also include fake website shops that take customers’ money with no intention of delivering any goods.
This stage involves moving the money around a bit more, to add more layers of legitimacy and make the source of the funds harder to detect. This is the most complex stage to detect. Some examples of layering include changing the currency multiple times, multiple interbank transfers, or transfers between multiple “shell companies”, whose only purpose is to facilitate the transactions with fake documentation.
In the final stage the criminals retrieve the now “clean” funds, which for all intents and purposes seem to be proceeds from legitimate business transactions.
So what measures do financial organizations take to help combat money laundering?
Firstly, all financial institutions (and often service providers, depending on the jurisdiction) are required to develop and maintain AML policies and procedures. These programs typically are overseen by dedicated compliance officers who are responsible for ongoing monitoring and risk assessment.
Financial organizations also have Know Your Customer (KYC), Know Your Partner (KYP) and Know Your Transaction (KYT) policies and systems in place to ensure due diligence and to verify the legitimacy of customers and business partners. This involves understanding, identifying and monitoring suspicious transactions that should raise red flags.
Many banks and other financial organizations have required holding periods for deposits, which means deposits are to be held in place in an account and are not permitted to be transferred elsewhere during this period. The holding period is usually around 5 business days.
Technology and software play a big part in AML efforts. AI and big data machine learning systems are used to monitor and flag suspicious transactions. AML software tools is an industry in its own right and there are a great deal of players across the spectrum, servicing clients of all sizes.
AML requirements can be imposed by banks, financial partners or service providers, and by local government. Small or new businesses moving to the eCommerce arena for the first time are frequently taken aback when presented with their AML obligations by their banks or financial services providers. But it is important for these businesses to understand the risks of money laundering and what they can do to mitigate their risk.
Your bank and payment partners will have their own AML systems in place already, including monitoring and KYC. Frequently an eCommerce business will be required to have an AML policy statement on their website, and your providers should be able to assist you in this regard. Businesses can also employ the services of AML consultants and service providers – there are many that specialize in small businesses either on a once-off or ongoing basis.
Education and understanding are key in fighting financial crimes. Small online merchants are actually in a good position to recognize suspicious transactions, more so than large organizations that process a lot of transactions and are more reliant on automated monitoring solutions. Some of the things that should raise red flags for small merchants:
- Very small transactions by new customers – criminals could be testing out stolen credit card numbers
- Very large transactions by new customers – again criminals could be using stolen credit card data
- Transactions from a country you don’t usually do business with, or a country or territory that is considered rife with crime
- A sudden change in spending habits, or an unusual delivery address from an existing customer – their account may have been hacked
If you have any suspicions about a transaction, raise it with your bank or payment provider prior to releasing any goods.
At Baer’s Crest we know that AML policies are very intimidating for small or new businesses. Our payment partners have strong and evolving AML processes in place, and the burden of some processes such as Know Your Customer could be handled by a provider, leaving you to get on with your business. Talk to us about payment solutions for your business.