Anti-money laundering (AML) rules and laws are created for financial institutions and other companies to follow. AML compliance is needed to prevent financial crimes, including tax evasion and terrorist financing.
AML compliance programs are crucial for many companies. Fintechs, electronic money institutions (EMIs), and many online businesses need to be aware of the risk of financial crimes. Any company that handles customer payments must comply with regulatory standards.
What is AML compliance?
What is AML compliance for businesses? The term AML is commonly used to describe anti-money laundering regulations. The most important point is that this stops illegal funds from entering the financial system.
These AML regulations apply to banks and EMIs, as well as payment service providers (PSPs), and fintechs. Merchants also sometimes have to comply with a robust AML compliance program.
Once you understand the AML compliance meaning, there are several key components needed that help businesses to stop money laundering in its tracks.
Risk assessment
This stage is when the company assesses the money laundering risks it faces. What are the most important vulnerabilities it needs to mitigate to carry out anti-money laundering processes effectively?
It can include high-risk customers, such as those with political exposure that may present the risk of terrorist financing in their dealings. Certain industries and regions are also classed as high risk, meaning a tighter approach to AML compliance is needed.
Products such as crypto products and wire transfers also need to be taken into account, together with the delivery channels used.
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Why AML compliance matters
What is money laundering, and why does it matter? It’s a financial crime that can lead to substantial losses for companies that fail to spot it. This way of protecting financial systems from money laundering has some key benefits that make it so important.
It protects businesses from fraud and financial crime. Money laundering is one of the key aspects of many crime organizations.
Avoids regulatory fines and sanctions. AML laws often have strict fines or sanctions for companies that don’t do everything to spot and report possible financial crimes.
Builds trust with customers. Genuine clients can feel more confident knowing that the anti money laundering legislation is met.
Required for operating legally in financial services. The AML compliance process is part of the requirements for obtaining a licence in regulated jurisdictions.
Supports safer online payments. By being vigilant in looking for signs of money laundering activities, businesses ensure that the online payment process is safer for all genuine users.
Key components of AML compliance
The following aspects are all part of a professional approach to protecting the financial system. While there are constantly changing AML regulations, these are always parts that can’t be overlooked.
Customer Due Diligence (CDD)
The way that the customer identity is verified is the main element of customer due diligence. It is where the relevant documents are requested to confirm that the person is who they say they are.
Enhanced Due Diligence (EDD)
An enhanced version of customer due diligence may be requested at times. It is typically only needed for higher-risk customers or transactions. It involves looking more deeply into their background and financial history.
KYC & KYB checks
Know your customer KYC checks and know your business KYB checks are needed as part of the AML compliance programs. It is where the customer identity is verified on a personal or business account.
Transaction monitoring
The next stage to combat terrorist financing and money laundering is where transactions are monitored on an ongoing basis. This ongoing monitoring allows unusual or suspicious activity to be detected as quickly as possible.
Screening (sanctions, PEP lists, adverse media)
By checking these lists, financial institutions can identify customers or transactions that may be sanctioned, high risk, or otherwise restricted and take appropriate action.
Reporting suspicious activity
Any suspicious transactions need to be reported using SARs. It is part of the AML obligations to mitigate risks and ensure compliance.
Recordkeeping
This aspect of an AML strategy involves keeping all of the relevant identity documents and financial data. It is done for audit purposes in banks and other financial institutions to meet regulatory requirements.
AML regulations in the EU
The European Union (EU) AML Directives include AMLD4, AMLD5, and AMLD6. The list of financial institutions that must comply with these regulations includes banks, EMIs, and PSPs.
It’s also worth remembering that PSD2 and AML overlap in payments. Financial intelligence units (FIUs) and regulatory bodies carry out their respective roles in protecting the financial sector through international cooperation.
AML vs. KYC vs. KYB: What’s the difference?
Name of process | Overall purpose |
AML | Prevent financial crimes. Stop illicit funds and terrorism financing from entering the system. |
KYC | Verify the identity of the customer |
KYB | Verify business customers when opening accounts. |
Payment behaviors that suggest money laundering risk
Here are some of the behaviours that suggest customer risk in terms of laundered funds and other financial crimes.
Large unexplained transactions. It is particularly true of cash transactions.
Frequent failed payments. If this occurs, it could be a sign that they’re testing cards or accounts.
Unusual account activity. An effective AML program should pick this up as a red flag.
Mismatched sender/receiver data. It may be an attempt to avoid revealing the person’s true identity.
Use of high-risk countries. Sanction screening is critical, with bank accounts blocked from interacting with certain countries, while others are classed as high risk.
How Genome ensures AML compliance
Genome is a licensed EU Electronic Money Institution that carries out full AML & fraud monitoring in line with regulations.
KYC/KYB verification ensures that we only open verified accounts for legitimate funds. SEPA transfers and international transfer monitoring keep us aware of any financial crime risks to be monitored.
We use transaction risk scoring to understand the risk while monitoring transactions. Automated tools and a manual compliance review keep our due diligence up to date.
Secure dedicated IBANs for businesses are another important part of the fight against money laundering. Our PSD2 and AML-compliant systems mean that we always comply with the latest rules.
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How businesses can strengthen their AML compliance
Take these steps to make your AML compliance as strong as possible.
Verify identities by using automated KYC/KYB tools.
Always maintain fully up-to-date customer records.
Implement continuous transaction monitoring processes to spot suspicious activity in real time.
Carry out employee training to help all team members understand the importance of this subject.
Only work with compliant partners, like Genome.
