This is what your business needs to know about anti-money laundering
Is your business subject to the Anti-Money Laundering (AML) Directive? Then it’s important to know the fundamentals of money laundering, and why it’s necessary to have local and international anti-money laundering laws and regulations.
In this article you can learn more about money laundering, including:
- What is money laundering?
- How is money laundering committed?
- What does international and european law say about money laundering?
- 4 important terms when it comes to money laundering
- Guide to anti-money laundering checks
- How the NewBanking platform ensures that your company is 100% AML-compliant at all times.
Read more about the platform here or contact us to hear more about how we can help your company with KYC compliance.
What is money laundering?
Money laundering is predominantly about making illegal means – black money – legal. That means cloaking the financial gains from criminal activities and using it with legal vendors and in broader society. The origins of the black money can, for example, come from dealing illegal substances or weapons, tax evasion and much more.
All activities that help criminals obfuscate, conceal, or transform black money into legal tender (which can be documented and used legally) is called white washing or money laundering.
How is money laundering committed?
There are many ways to launder money. Below is an example of how it could transpire:
A drug dealer has sold illegal substances for 25,000 EUR and now has a lot of black money in his possession.
The drug dealer finds a used car that’s privately for sale for 75.000 EUR. He offers to buy the car for the full amount – in exchange for paying partially in cash.
The drug dealer goes to the bank and gets a loan, where he explains he’s buying a car for the price of 50.000 EUR.
The bank grants the loan and transfers 50.000 EUR directly to the seller, but the drug dealer pays him 25.000 EUR in cash.
The drug dealer now sells the car to a third-party for 75.000 EUR that is transferred directly to his bank account. He can now document that the money originates from the sale of the car. He pays off his loan to the bank.
Now the 25.000 EUR have been laundered as they seem to be payment for a simple car sale.
In principle, money laundering can also be achieved through registered car dealers as a go-between. The drug dealer can have straw men buy and sell cars, boats, art, property, and other physical items to white wash the black money.
What does the law and regulations say about money laundering?
In the EU all financial businesses are subject to and regulated by the Anti-Money Laundering (AML) Directive.
Its full official title is: "Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing" (read it in full here). The directive exists to hinder criminals from being able to earn money from illegal activities which can then be used legally or to finance terrorism.
It’s important to combat money laundering because this type of crime makes it difficult for law enforcement to discover criminal acts. By stopping the laundering of illegal money you simultaneously prevent other forms of financial crime as the perpetrators will have a more difficult time spending or storing their ill-gotten gains. Furthermore, the Anti-Money Laundering Directive also exists to prevent opportunities for financing terror acts and organizations. Most European countries have local laws and regulations based on the EU-directive, which is continuously being formed and developed by the European Parliament. At the present time, the EU has developed six different directives (AML1-6) for the prevention of money laundering.
A number of different business fields and sectors are legally obliged to conduct themselves in accordance with anti-money laundering regulations. Here’s a brief overview:
- Auditors and external accountants
- Real estate agents
- Financial companies
- Service providers
4 important terms when it comes to money laundering
There are quite a few technical, legal and other terms or abbreviations regarding money laundering. The four most important ones to know are:
1. CDD - Customer Due Diligence
Customer Due Diligence (CDD) is a cornerstone of businesses’ anti-money laundering initiatives and procedures. The term covers all actions undertaken by companies to verify the identity of their clients or customers, as well as perform background checks and risk evaluations. Companies and organizations subject to anti-money laundering laws and regulations are required to perform risk assessments, wherein they – on a client-to-client basis – assess the risk of the client being used or using the business for money laundering or the financing of terrorism. Read more about CDD and risk assessment.
2. KYC - Know Your Customer
There are many reasons for why it’s important for businesses to “know their customers.” Among them is – in relation to CDD – evaluating whether or not they are a risk for the business. KYC-screening or verification is a process in which the business identifies or verifies the identity of their customers and clients. In other words, they get to know their customer. This can be achieved by gathering personal information and identification data about the customer or client, which needs to be verified. Read more about KYC (Know Your Customer).
3. PEP - Politically Exposed Person
A PEP, or Politically Exposed Person, is a strictly defined category of people, who – on the basis of their political position or power – are considered to be customers that are at greater risk of being subject to money laundering or other criminal activities. The concern is that they - because of their position - can be exposed to blackmail, bribes or otherwise (both willingly and coerced) can be embroiled in money laundering. Read more about PEP and PEP-lists.
4. AML - Anti-Money Laundering
AML is an abbreviation for “anti-money laundering”. The term refers to a broad swath of laws, regulations, directives and procedures that exist to prohibit or stop the laundering of illegal money.
Guide to anti-money laundering checks
Businesses in the affected sectors have to constantly adapt to a plethora of laws, directives and regulations. Most of these require or encourage specific forms of anti-money laundering checks.
With AML 5, which was implemented in January of 2020, a number of changes were introduced, including a transition to a risk-dependent approach to precautionary measures regarding anti-money laundering. The new approach demands more of the businesses’ ability to assess their customers or client relationships.
Roughly speaking, businesses need to assess the risk that they’re being misused for money laundering or the financing of terrorism. One of the central and foundational concepts is the creation of the risk assessments, policies and business procedures, as well as the underlying control and evaluation that ensures that overall compliance.
NewBanking Identity – steer clear of money laundering with our intelligent platform
We hope you now have a more clear understanding of money laundering – and have given you an insight into what your business needs to be aware of to be AML-compliant. Do you have a clear standard for your processes, data handling and the verification of new clients?
If not, NewBanking can help.
NewBanking is a Danish company and software platform that helps businesses with their data security, onboarding and overall compliance.
With NewBanking Identity you can:
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