What Is Anti-Money Laundering?

Money laundering is a financial crime conducted by criminal-minded individuals and organizations. Money laundering is a criminal act that involves taking illegally obtained proceeds or funds and disguising the source of these funds to make it seem like they are legitimate proceeds. Recently, money laundering activities have been on the rise, and they are explicitly using cryptocurrency by converting these illegal proceeds into cryptocurrency. The Anti-money laundering (AML) regulation is being deployed in all facets with complete enthusiasm to curtail these activities.

Anti Money laundering (AML) involves the operations and activities conducted by financial institutions to ensure compliance with the requirement and monitor suspicious economic activities. According to Chain Analysis, over $23 billion worth of cryptocurrencies and up to $2 trillion in fiats have been laundered between 2017 and 2021. That is about 5% of the global GDP. With such a figure and continuous increase, it is expedient to tighten the laws and regulations towards apprehending financial criminals and bringing money-related crimes to the barest minimum.

What Is Anti-Money Laundering (AML)?

Anti-money laundering refers to the various laws, regulations, rules, and procedures geared towards uncovering efforts to disguise illegal funds as proceeds from legitimate ventures. Anti-money laundering (AML) legislation became necessary to checkmate the growth of international financial activities, the growing ease of conducting multiple chains of transactions, and the ease of crypto transactions.

Since money laundering seeks to conceal financial crimes such as tax evasion, drug trafficking, proceeds of public corruption, and terrorism/ civil unrest financing, it is expedient to have regulations and laws to prevent these illicit acts and punish the actors. The rules and regulations are the Anti-money laundering legislation, and Anti-money laundering puts strict measures to make it difficult to conceal profits from crime. Those who engage in money laundering continue to devise various ways to disguise illicit funds and make them seem legal. They go as far as registering businesses, lobbying financial institutions, and several other methods to conceal the criminal nature of such funds.

AML legislation is a joint effort between financial institutions, government agencies, corporate bodies, and law enforcement bodies to develop due diligence plans and put tangible measures to detect suspicious transactions or assess the risk of money laundering-related acts. For instance, the United States Anti-Money Laundering regulation that has been in use since 1970 requires banks to report cash deposits exceeding $10,000. The AML regulation is now advanced to a complex regulatory framework that requires banks to do due diligence and fish out suspicious transactions. The process is called “Know Your Customer (KYC).

How Does Anti-Money Laundering Work?

The presence of money laundering activities necessitated rules and regulations. Therefore, the increase in the illicit act calls for more stringent measures. The money laundering practice can be summarized into three steps.

• Placement: Deposit of illicit funds into the financial system.

• Layering: Transactions designed to conceal the illegal origin of the funds.

• Integration: The use of the illicit funds to acquire real estate, financial instruments such as cryptocurrency, or commercial investments.

The Anti-money laundering legislation seeks to uncover and tackle these three distinct ways money launderers engage in their acts. How to recognize these money laundering acts.

• Placement: Illegal funds do not lie around; they need to be placed somewhere. Money launderers usually place payments to cash-based businesses, make payments for false invoices, put small accounts below the AML threshold into bank accounts, put money in thrust or offshore accounts, use foreign bank accounts, etc. The Anti-money laundering regulation works by putting these placement methods on ‘red alert’.

• Layering: Actors in money laundering use layering to separate illicit funds from their source. The proceeds from criminal activities such as public corruption or tax evasion will be converted into profits from another legit venture. Complex layers of financial transactions will be created to disguise the origin and ownership of the fund. It is a tedious task for AML investigators, financial institutions, and government agencies to trace the actual source.

• Integration: This process involves ingesting the laundered funds back into the economy. The fund re-entry will go through a legitimate channel or venture. Launderers keep repeating this routine and can increase their wealth in integration. Anti-money laundering seeks to confiscate injected funds and properties.

Why Is Anti-Money Laundering Important?

There are two main reasons that reinforce the importance of AML policies. The first one is the reduction in money-related crimes. AML regulation has continued to record giant strides in tackling money-related crimes. The illegal act is getting reduced, and those who engaged in the action are now on the run.

Also, the clampdown on criminals is notable when compared to a decade ago. The punishment varies by jurisdiction. Anyone found guilty of money laundering will be severely punished, and in recent times, money launderers are feeling the heat more than ever.

Despite that, countries and government agencies do not have the same anti-money laundering regulations. Some countries have relaxed punishment for money laundering compared to others. In some countries, there is the option of a fine. Criminals perpetrate money laundering and elope to countries with ‘featherweight’ punishments.

Also, Anti-money laundering activities are capital intensive. From tracking suspicious activities to apprehending criminals, it requires a lot of processes, investigations, and funds.

Anti-Money Laundering and Cryptocurrency

The problem of money laundering affects many sectors, including that of cryptocurrencies. The lack of understanding of digital assets and the blockchain itself by governments and regulators has caused a tightening of regulations in the field of Anti-Money Laundering. These regulations typically require financial institutions and other businesses that handle financial transactions, including cryptocurrency exchanges, to implement a number of controls to prevent money laundering.

As already mentioned, a know-your-customer (KYC) procedure is one of the key measures that companies must apply. As a result, businesses must confirm the identity of their consumers and maintain records of their transactions. This makes it easier for companies to spot and report suspicious activity.
Another control that businesses must implement is transaction monitoring. This requires businesses to review their customers’ transactions to identify any unusual activity. For example, businesses may be required to flag transactions that involve large sums of money or that originate from high-risk jurisdictions.

In reality, it must be said that the blockchain makes it easier for a government to track illegal activities, because transactions are recorded on a public blockchain and can be traced back to the address from which they came. In fact, it is technically fair to say that cryptocurrency transactions are pseudonymous and not completely anonymous, as many still believe. It suffices to know that, even today, most money laundering (or fraud in general) activities come from “regulated” entities that are connected to traditional finance. Indeed, it is claimed that less than 0.5% of Bitcoin transactions are used for illicit purchases.

Conclusion

The anti-money laundering regulation became necessary to check the rising number of money laundering cases spread across the globe.

Financial institutions, legal businesses, and corporate bodies now engage in money laundering, making it difficult for law enforcement agencies to detect and track the trustworthy source of these illicit funds.

Aside from the Customer Due Diligence (CDD) and Know Your Client (KYC) measures, tools and software are in place to ease tracking and detecting money laundering. Industry players are therefore optimistic that this illicit activity will reduce and the perpetrators will face the full wrath of the law.