Preventing financial crimes is increasingly complex these days. Businesses, banks, and financial institutions of all stripes need to take steps to protect themselves and their customers. 

A significant method for combating financial crimes is AML compliance. By implementing an Anti-Money Laundering compliance program, organizations can take a key and necessary step in the war against financial crimes and fraud.

What is AML?

To begin, let’s establish an understanding of what AML is exactly. 

Anti-Money Laundering includes any legislation or state policy that compels banks and other financial institutions to take steps to monitor transactions and prevent money laundering. 

While AML laws can vary from one nation to the next, generally speaking, they require that organizations report signs of money laundering to the relevant supervisory authority or regulator in their country.

AML Compliance and FATF

AML efforts exist to prevent criminal organizations from “cleaning” their money by filtering it through the financial system. 

By engaging in money launder, these criminal organizations can hide the fact that their funds came from criminal activities. Organizations involved in money laundering can be traditional criminal groups, but can also include terrorist entities, as well.

The majority of AML standards and efforts in the world exist as a result of the Financial Action Task Force, or FATF. This organization came together in 1989 and includes 37 member countries. 

Its goal is to fight all forms of financial crimes, including the funding of terrorist cells and organizations. The FATF created a framework that all member countries use to fight financial crimes. When countries do not adhere to FATF recommendations, the FATF flags that country as a violator, thereby encouraging nations to revise their financial policies and adhere to recommendations, including AML compliance.

Why AML Compliance Matters

AML compliance meaning extends beyond legal obligations in many countries. It's crucial because financial criminals can exploit various avenues to infiltrate organizations and perpetrate financial crimes.

The techniques used to commit a financial crime can be surprising. One startup, for example, decided to use a popular digital payment service when setting up its payment interface. The fee costs were low and many customers already enjoyed using this payment method, so it was a win-win scenario for the startup.

The company created a crypto exchange that would allow users to create a cold wallet for financial entities such as bitcoin. The customer could then use a bank card to buy cryptocurrency and store it in their wallet. Additionally, the customer received a public and private key for receiving and sending money respectively.

While the company had done what they thought was their due diligence, problems arose soon after launch. Shortly after release of the application, the startup realized that cybercriminals had discovered their solution and were using it to launder money. 

The method was simple: the cybercriminals stole bank card numbers and then purchased cryptocurrency to “wash” their money clean. They would then trash the used bank cards and transfer the crypt funds to other wallets. Soon enough, the startup was receiving complaints from customers. 

This all occurred even though the company was working according to the payment company’s requirements. The payment company ended up banning cryptocurrencies and the startup lost a good deal of money.

As you can see from this example, fraud is prominent and can happen in unexpected places. As such, implementing a comprehensive AML compliance program is essential for many businesses. 

That being said, then, let’s explore how AML compliance works and what steps a business can take to implement it internally.

What is AML Compliance?

If you search for the AML compliance definition, you will see that it is a screening and monitoring process organizations use to spot signs of money laundering in customer transactions. 

Screening involves comparing customer transactions, for one, against watchlists, sanctions, and lists of what are called PEPs, or Politically Exposed Persons, around the world. 

Establishing an AML compliance program requirements at an organization is an essential step in KYC, or “Know Your Customer” verification, which is mandatory for companies in finance, real estate, cryptocurrency, and more. Below, you will find a complete fintech compliance checklist. 

How AML Compliance Works

As stated above, AML compliance requirements can vary from one jurisdiction to the next and can even vary from one industry to the next. There are, however, some mandatory components that are always part of an AML compliance program, including:

• establishing a set of in-house AML policies
• maintaining an AML compliance department and officer
• training employees
• screening customers

Let’s look at each in detail.

AML Policies

Every organization seeking to create AML compliance must create a set of internal policies related to AML. These measures define how the organization will execute AML screening of customers and how they will rate the risk of each customer.

Compliance Department / Officer

Each organization also must have a compliance department and an officer in charge of overseeing AML compliance internally. This can be an in-house department, but some organizations hire third-party entities to perform these tasks. 

Any AML compliance officer must have expert knowledge on the AML regulations particular to that business’ industry. As policies in an industry evolve, the AML officer must also keep the company abreast of any changes. 

It is also the job of the AML officer to report any flagged transactions to the appropriate authorities.

Training Employees

Training employees is also a required and important part of any AML compliance program. 

Not only do employees need to understand AML regulations and protocols, they also need to know what to watch out for, as fraudsters can use techniques to influence employees into making bad decisions. 

Employees should learn how to spot fraudulent transactions and behaviors that may indicate potential fraud.

AML Screening of Customers

AML screening of customers can be performed via an internal solution or via third-party software. This screening is typically performed in tandem with the KYC screening that an organization performs when registering a new customer.

Legislative Regulation of AML Compliance

AML regulations maintain global financial stability and security. They consist of a comprehensive network of laws, regulations, and procedures that detect and prevent the laundering of money derived from criminal activities, such as tax evasion, human trafficking, drug trafficking, and public corruption, and curb the financing of terrorism. Our anti money laundering compliance checklist takes into account the latest legislative regulations.

Historical Context

AML efforts have evolved significantly, with key legislative milestones including: 

• 1970: Bank Secrecy Act (BSA) required reporting large cash transactions.
• 1980s: Enhanced legislation to combat drug trafficking.
• 1990s: Additional laws for financial surveillance.
• 2000s: Patriot Act targeted terrorist financing.
• 2020: AML Act extended compliance to cryptocurrency exchanges and other sectors.

Core Requirements and Procedures

AML compliance checklist is based on several key components, notably Know Your Customer (KYC) and Customer Due Diligence (CDD):

• KYC: Financial institutions must verify the identity of customers and ensure their funds are legitimate. This includes screening customers against lists of high-risk individuals and entities, such as those under economic sanctions or politically exposed persons (PEPs).
• CDD: Institutions must maintain accurate records of transactions and customer information, monitor for suspicious activities, and update customer profiles to reflect changes in risk. Suspicious transactions are reported through Suspicious Activity Reports (SARs) to relevant authorities for investigation.

The following section will review these AML checklist components in more detail.

International Framework

In the U.S., the Financial Crimes Enforcement Network (FinCEN) provides guidance and regulations that interpret and implement the BSA and other AML laws. 

The Financial Action Task Force (FATF) promotes the adoption of international AML standards through its 40 Recommendations, which cover CDD, transaction monitoring, reporting of suspicious activities, and international cooperation. 

The European Union's Anti-Money Laundering Directives (AMLD) and the Basel Committee on Banking Supervision's guidelines also contribute to the global AML framework. 

Keep reading to explore the complete anti-money laundering compliance checklist.

Top Essential Components of an AML Compliance Checklist

An anti money laundering compliance checklist helps organizations mitigate the risks associated with money laundering and terrorist financing. It encompasses various critical components to adhere to regulations and safeguard financial systems.

1. Customer Due Diligence (CDD)

CDD is a cornerstone of any AML checklist, requiring institutions to verify the identities of their clients. It involves gathering information about customers' identities, beneficial owners, and the nature of their business activities. It helps institutions identify and verify customers' identities, ensuring they are not dealing with individuals or entities involved in illicit activities.

2. Know Your Customer (KYC)

KYC procedures are integral to AML compliance. They require financial institutions to establish and maintain a customer identification program. This includes verifying customers' identities, assessing their risk profiles, and monitoring their transactions for suspicious activities. KYC helps prevent criminals from using financial institutions to launder money or finance terrorist activities.

3. Risk Assessment

Effective AML compliance involves conducting regular risk assessments to identify, evaluate, and mitigate risks associated with money laundering and terrorist financing. Institutions must consider customer demographics, geographic locations, and product or service types. Risk assessments inform the implementation of appropriate policies, procedures, and controls tailored to mitigate identified risks.

4. Transaction Monitoring

Transaction monitoring is crucial for detecting and reporting suspicious activities indicating potential money laundering or terrorist financing. An anti money laundering checklist should include procedures for monitoring transactions in real-time or periodically, using automated systems and manual reviews. It helps institutions identify unusual patterns or transactions inconsistent with a customer's normal behavior.

5. Suspicious Activity Reporting (SAR)

AML compliance requires institutions to file SARs with relevant authorities when they detect suspicious activities indicative of money laundering or terrorist financing. SARs provide law enforcement agencies with critical information to investigate and prosecute criminal activities. Any compliance checklist for banks should include procedures for identifying, documenting, and reporting suspicious transactions promptly and accurately.

6. Training and Awareness

Educating employees about AML regulations, risks, and compliance obligations is essential for effective implementation. A comprehensive AML checklist should include training programs to ensure staff understand their roles and responsibilities in detecting and preventing money laundering. Regular updates and refresher courses help maintain awareness of evolving threats and regulatory changes.

7. Compliance Monitoring and Audit

Regular monitoring and independent audits assess the effectiveness of AML policies, procedures, and controls. AML checklist should include measures for conducting internal reviews and audits to evaluate compliance with regulatory requirements and identify areas for improvement. Monitoring ensures ongoing adherence to AML standards and enhances the institution's ability to adapt to changing regulations.

The AML Compliance Checklist

Implementing a practical anti money laundering compliance checklist is crucial for organizations to mitigate the risks of money laundering and terrorist financing. Below is an AML checklist outlining key steps and protocols for achieving compliance:

Step	Description
Maintain a Compliance Department and Officer	Designate a compliance officer responsible for overseeing and implementing AML policies and procedures. Ensure the compliance department is adequately staffed and equipped to handle AML-related tasks.
Draft Internal AML Policies	Develop comprehensive AML policies tailored to the organization-specific risks and regulatory requirements. Ensure your AML compliance policy addresses customer due diligence (CDD), transaction monitoring, and suspicious activity reporting (SAR).
Employee Training	Conduct regular employee training sessions to raise awareness of AML risks, regulatory obligations, and the organization's AML policies. Keep your staff informed of updates and changes in AML regulations.
Transaction Screening	Implement robust systems for screening transactions in real time to detect and prevent suspicious activities. Monitor transactions for unusual patterns or large cash transactions that may indicate money laundering or terrorist financing.
Identity Verification	Verify customers' identities through electronic means, utilizing personal information such as date of birth, name, and address. Ensure customers are who they claim to be and comply with regulatory requirements, particularly in regions like the EU.
Politically Exposed Persons (PEP) Checks	Screen customers against PEP lists to identify individuals with high-risk political positions who may be susceptible to corruption. Enhance due diligence measures applied to PEPs to mitigate associated risks.
Sanctions Watchlist Screening	Screen customers regularly against sanctions watchlists from global regulatory authorities. Avoid doing business with individuals or entities on these watchlists to prevent severe legal and financial consequences.
Compliance Monitoring and Auditing	Establish procedures for ongoing monitoring and independent audits to assess the effectiveness of AML controls and policies. Conduct regular audits to identify gaps or weaknesses in the compliance program that require corrective action.
Reporting and Record-Keeping	Maintain comprehensive records of all AML activities, including customer due diligence, transaction monitoring, and SARs. Ensure timely and accurate reporting of suspicious activities to relevant authorities as required by law.

In Conclusion

The world of finance and payment may seem to be getting riskier by the minute, but there are steps organizations can take to protect their interests and the interests of their customers. If you would like to take steps to ensure that your company is AML compliant. Contact us and we will find the AML pro who can help you take the necessary steps to get this essential financial task in order at your business.