Anti-money laundering in banks: How technology helps combat fraud

In the modern world, the banking sector is a vibrant industry that displays a robust growth pattern, augmenting its high-tech roster and expanding the range of services provided to billions of clients. However, among the latter, one can find not only law-abiding citizens and respectable organizations. 

Financial institutions have always been a magnet for unscrupulous swindlers and hardened criminals who attempt to keep in them their ill-gotten cash. Today, this list of traditional offenders is amplified to include mobsters, drug traffickers, and terrorists actively involved in various money-laundering schemes. 

The illegal practice of money laundering boils down to depositing “dirty” money into a bank to perform a series of fund movements between several accounts aimed at disguising its dubious origin. The motifs behind such concealment endeavors may vary: evading taxes, increasing revenues, hiding wealth, escaping prosecution, or just legalizing unlawful income. Yet, whatever reasons may move people to be engaged in money laundering, banks and financial institutions are under an obligation to put a halter on it by introducing consistent anti-money laundering (AML) measures.  

In this article, we will answer the question “What does the term anti-money laundering mean?” and show how bank anti-money laundering efforts can be implemented via leveraging specialized software. 

What does anti-money laundering mean?

What is broadly defined as anti-money laundering guidance is an umbrella term embracing a wide gamut of regulations, obligations, and rules whose ultimate goal is to identify and prevent financial crimes in their entirety with a special focus on money laundering. Since banks are the principal venues where monetary activities are carried out while considering compliance with AML banking and financial institutions come to the forefront.  

Even the smallest banks mediate hundreds if not thousands of transactions daily. On the global scale, it spells a slew of financial operations worth billions of dollars. Naturally, not all of them involve legally-obtained money. As UNODC estimates, up to 5% of the world’s GDP is a part of money-laundering schemes bringing their participants from $800 billion to $2 trillion a year. How does this prodigious sum affect people and organizations? 

As far as the financial realm is concerned, money laundering threatens the stability of both standalone financial institutions and entire financial systems, hamstrings national and especially foreign direct investments, and hampers international capital flows to say nothing of dealing a severe reputational blow to banks implicated in it.  

Security-wise, complying with anti-money laundering bank regulations and recommendations enables blocking the resource base terrorists draw upon and making it harder for criminal actors to capitalize on their illegal practices.  

Being aware of the paramount importance of anti-money laundering in banking, national governments and supranational institutions issue ordinances that banks are to comply with, making them a benchmark for their AML policies not to incur major penalties. 

Here’s what we do for banks.

How to do it by the book: The latest AML regulations

The globalization drive that has become the dominant trend of civilization development in the early third millennium underscores the inadequacy of any law-enforcement efforts implemented locally. The world’s largest nations were wise enough to realize this truth and in 1989 inaugurated the creation of the Financial Action Task Force (FATF), an international body called to combat money laundering. The European Union published its first AML directive in 1990, and since then, it has been working in close cooperation with FATF, coordinating their joint efforts. 

The significant milestone in this process was the adoption of the modernized EU regulatory framework in 2015 that, followed by the 5^th anti-money laundering Directive of 2018, established high standards in the domain and increased the efficiency of law enforcement authorities in identifying and hunting down criminals and terrorists. 

In May 2020, the European Commission issued an action plan that included six premises of money laundering prevention policy in the EU. In July this year, the same body presented a comprehensive package of legislative proposals that are expected to boost AML rules and harmonize them across all member states, initiating the creation of a dedicated EU anti-money laundering authority.  

Anti-money laundering initiatives evolve along the same lines in other countries as well. In 2020, the USA adopted the AML Act that drastically reformed the rather outdated Bank Secrecy Act and the Patriot Act and limited anonymity in the sector.  

The existing AML regulations all over the world are constantly amended to intensify transparency of financial transactions, empower financial intelligence institutes, and enhance cooperation and data flow between all stakeholders. Special stress is put on operations with virtual currencies that are included in the legal framework in Singapore, South Korea, and the US. 

The wealth of legal regulations concerning anti-money laundering banks have to shape their AML programs accordingly. 

Banks’ take on implementing AML policies

Although officially mandated to carry out all AML regulations, banks are often reluctant to do it. Some of them find such measures expensive to implement, others consider accomplishing them too time-consuming, the third believe them ineffective. Such an attitude resulted in symptomatic neglecting AML obligations by banks which didn’t pass unnoticed by regulators.  

They intensified their auditing efforts and discovered a great number of violations, imposing heavy fines on perpetrators. And the sums keep growing exponentially – the already exorbitant $4.3 in 2018 almost doubled in 2019 and amounted to the eye-watering $10 billion last year. Such expenditures are gradually encouraging banks to make AML compliance one of their top priorities.  

To fulfill anti-money laundering obligations, financial institutions launch training programs for their employees who are taught to identify and track transactions that look suspicious. All operations and activities that occur within bank accounts are extensively registered and documented. Such records are then by law enforcement bodies in their investigations with the purpose of getting down to the source where dirty money came from.  

What is AML in banking: Nuts and bolts

The cornerstone of AML in banking is the risk-based approach. It assumes that each customer and each country they come from, differ in their risk levels. Banks are to determine these levels individually for each case and employ control procedures that are conditioned by a certain level. The application of such control procedures is affected across four mission-critical areas.  

Know your customer (KYC) 

This is the point of departure in all anti-money laundering endeavors. When a client opens an account at a bank, the latter must obtain all information on the client’s identity. It is performed in two stages. At the first, all available customer data is collected; at the second its accuracy is checked. The major goal of this procedure is to prove a customer’s digital and real-world identities match so that the bank can be sure their new client is the very person they claim.  

How do banks do that? They leverage face and ID document verification as well as check the customer’s address by analyzing their bills and/or bank statements. 

Customer due diligence (CDD) 

After the client is identified, the bank is to check whether they have a clean record as far as money laundering or terrorist financing is concerned. CDD methods aren’t across different countries, but all of them involve online database screening (the more data pools are involved the better). The principal databanks to pay attention to are government records, watch lists, sanctions lists, and rosters of politically exposed persons (PEPs). If a person is registered in any or, God forbid, all of them, the odds are that they are under the potential risk of participating in money laundering activities.  

Additional data that are taken into account while determining a person’s risk rating are their dossier of financial transactions and nationality (some countries are notorious for their endemic money laundering practices).  

Transaction and customer screening 

Banks conduct thousands of transactions and not only within their own clientele since money moves between customers of different banks as well. Yet, whatever type these transactions are, banks must control all of them because such transactions may be performed by sanctioned people. If it happens, banks will be subject to administrative fines that are rather harsh and are accompanied by reputational and credibility losses to boot. To avoid this or at least minimize the probability, banks have to track and report all cash transactions above $10,000. 

Suspicious activity reporting 

Banks must watch out for unusual or inconsistent activity that occurs with accounts and transactions. What activities are considered suspicious? Anything unusual that didn’t take place before, sudden movements in long-disused accounts, money transfers to third parties, off-market transactions, insider trading, operations inconsistent with the declared domain – in a word, everything that might attract attention by its anomaly or unexpected complexity. All such cases should be communicated to compliance analysts who step in to deal with each dubious situation on short notice. 

As you see, the AML routine is a no-nonsense activity that requires processing tons of information and the cooperation of specialists hailing from locations strewn all over the globe. Luckily, modern state-of-the-art technologies offer effective tools to be used in AML compliance programs.  

AML compliance software: features to look for

Being seasoned experts in the fintech realm, specialists of DICEUS can tip you on choosing adequate anti-money laundering compliance tools. An ideal platform of this kind should contain the following features. 

• Identity substantiation. This is what all anti-laundering compliance procedures start from. This module is responsible for implementing KYC and CDD techniques. It should be able to search for the client’s personal data (names and aliases, place and date of birth, mailing and residential addresses) and obtain a specimen of the signature. Another must-have is the information on the type of business they are involved in. 
• Name screening. As a rule, governments issue black lists of people and organizations that financial institutions must shun (for instance, in America it is the Specially Designated Nationals List and the US Office of Foreign Assets Control sanctions list). Another category of people who are at risk as potential money-launderers are PEPs plus their relatives and close associates (RCAs) whose official status and connections give all grounds for such suspicions. AML software must identify such persons and warn the bank about the plausible wrongdoers. 
• Transaction tracking. This module draws upon historical data to spot unconventional transaction patterns, transactions with PEPs or sanctioned persons, transactions exceeding the regulatory threshold, dealing with high-risk nations, negative information about the client aired in mass media, etc. The software can be automatized to detect and mark out certain transactions like any proceedings above $10,000.  
• Suspicious activity reporting (SAR). Such documents must be submitted every time something out-of-the-way happens with accounts so AML software is to include this component. 
• Recordkeeping. Hoarding a plethora of data related to customers is the foundation of any AML compliance analysis so this module is called to amass such information for further usage. Besides, it can store data on personnel training, submitted reports, and appointed or conducted audits. 
• Compliance monitoring. This module enables keeping track of all current AML compliance regulations so that banks could keep abreast of novel development in the sphere.  

Naturally, working with such huge amounts of diverse data presupposes heavy reliance of AML compliance software on high-end search algorithms. Besides, automation of compliance procedures requires API integration that is indispensable while dealing with thousands of customers every day. 

What are the solutions that tick most boxes? 

The best AML compliance solutions

DICEUS recommends paying attention to the following 8 AML compliance tools.  

SEON 

While being primarily honed for other purposes (mostly, for fraud detection in the iGaming industry) this solution has a wide scope of modules and features to be applied in anti-money laundering endeavors or to be integrated with other tools. Among other boons worth mentioning are behavioral analytics and real-time alerts (for payments over $2,500). The major downside is the absence of a sanctions list and PEP check. 

Actico 

This decisioning platform contains a dedicated AML module that enables PEP and sanction lists screening, risk identification, and transaction tracking. Being superb for banks that are under heavy regulatory scrutiny, it has to rely on shared databases in its KYC practices, though. 

AML check 

This solution that has a number of blue-chip ventures as its customers is available for on-premise installation and has a highly reliable PEP list. However, only financial institutions based in Spain can make use of it so far. 

Dow Jones risk and compliance 

This is one of the oldest screening engines that allows monitoring PEP sanctions, high-risk domains, and in-depth due diligence reports. Being present on the market since 1982, this comprehensive solution offers high-quality AML services that will fit any market on the globe.  

Ondato 

This tool performs well in the majority of AML practices (such as KYC, PEP, sanctions, etc.) but its main forte is identity verification that has the photo and live video dimensions as well as document verification and ID checks. Its unique offer is the white label option thanks to which you can deploy it as a brand of your own.  

Token of trust 

It is a turnkey solution that covers most aspects of AML compliance especially excelling at ID scanning and document verification. Among its unquestionable benefits is universal compliance across numerous markets, including the USA, the UK, and the EU. 

Refinitiv 

Its user-friendly interface gives access to virtually all features a solid AML tool must possess, including negative media monitoring and global regulatory lists. If you are a compliance officer or a risk manager, this software is just what the doctor ordered. 

ComplyAdvantage 

This solution with its seamless API integration and the whole set of anti-money laundering features is foolproof enough to be employed even by rookies in the field. Naturally, startups that have a lot to learn about in the domain will enjoy it immensely.  

On balance, no tool is a perfect fit for every bank so you have to consider your own standing and approach the choice with care, trying to compare their basic merits and demerits against each other. Or you can commission a custom AML solution from DICEUS. Our extensive experience in the industry and a team of skilled specialists serve as a guarantee that the final product will let you comply with all anti-money laundering regulations and safeguard your financial institution against fraud attempts. 

Final thoughts

The 21^st century is witnessing the ever-increasing globalization of crime. Fraudsters, tax dodgers, terrorists, and lesser offenders from all corners of the world stick at nothing to legalize money obtained by criminal means to further use it for their vicious purposes.  

Since most financial operations are performed through banks, these institutions become a primary target for money-laundering schemes. By complying with AML regulations, banks take relevant precautions against being involved in criminal practices. Such compliance is greatly facilitated via leveraging AML software that can take anti-money laundering efforts to a new level.