What are AML Checks and Why They Are Important?

Money laundering is a serious crime that involves hiding the illegal source or destination of money or assets obtained from criminal activities, such as drug trafficking, tax evasion, terrorism financing, or corruption. Money laundering enables criminals to evade taxes, avoid prosecution, and fund further illegal activities. According to the United Nations, the estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars.

Anti-money laundering (AML) is a set of laws, regulations, policies, and procedures to detect and prevent financial crimes, and report money laundering and related crimes. AML also covers combating the financing of terrorism (CFT) and proliferation financing (CPF), which are the use of funds or assets to support terrorist or nuclear activities.

An AML checks verifies a customer's or business partner's identity and background to ensure they are not involved in money laundering or other criminal activities. An AML check also involves screening the customer or the business partner against various sanctions lists, watchlists, blacklists, and other sources of information that indicate potential risks or red flags.

What are AML Checks?

An AML Check, abbreviated for Anti-Money Laundering Check, is a procedure designed to confirm whether an individual is participating in activities related to money laundering. As a legal mandate, companies must perform these checks on their customers as an integral component of their anti-money laundering compliance initiatives.

An AML check consists of the following steps:

• Collecting and validating customer information and documents, such as name, date of birth, address, nationality, identification document, proof of address, source of funds or wealth, purpose and nature of the business relationship or transaction, beneficial owners and controllers, etc.
• Screening the customer or the business partner against various lists of individuals, entities, countries, or regions subjected to sanctions, restrictions, or warnings by governments or international organizations.
• Monitoring customer transactions and activities for unusual or suspicious patterns or behaviors that indicate potential money laundering or financial crimes.
• Reporting any suspicious activity to the relevant authorities, such as regulators, law enforcement agencies, or financial intelligence units.

An AML check is a legal obligation for many businesses and organizations that operate in regulated sectors, such as banking, finance, insurance, gambling, real estate, etc. An AML checks is also a good practice for any business or organization that wants to protect itself from financial and reputational risks, comply with local and international laws and regulations, and contribute to social responsibility and global security.

Including AML Check as Part of KYC Procedures

Conducting AML (anti-money laundering) checks should be integral to the KYC (know your customer) process. AML checks allow companies to monitor customer activity for suspicious transactions tied to financial crimes. Combining AML checks with standard KYC identity and risk assessments enables ongoing due diligence and risk mitigation. Regular AML checks on new and existing clients are key for meeting KYC regulatory compliance obligations.

What Data is Necessary for AML Compliance Checks?

The information required for AML checks depends on the level of risk associated with the customer or the business partner, as well as the jurisdiction and industry of operation. However, some common information that is usually required for AML checks are:

• Name
• Date of birth
• Address
• Nationality
• Identification document (passport, driver’s license, national ID card, etc.)
• Proof of address (utility bill, bank statement, etc.)
• Source of funds or wealth (salary slip, tax return, inheritance document, etc.)
• Purpose and nature of the business relationship or transaction
• Beneficial owners and controllers (if applicable)

Why Is It Important to Do AML Compliance Checks?

Conducting AML checks is a legal obligation for many businesses and organizations and a good practice to protect themselves from financial and reputational risks. Some of the benefits of conducting AML checks are:

• Compliance with local and international laws and regulations
• Prevention of fines, penalties, sanctions, or legal actions
• Protection from fraud, theft, corruption, or other financial crimes
• Enhancement of customer trust and loyalty
• Improvement of operational efficiency and performance
• Contribution to social responsibility and global security

What Systems Play a Role in Supporting AML Checks?

Some various systems and tools support AML checks, some of these include:

1. Customer due diligence (CDD) systems:

These systems collect, verify, and store customer information and documents for AML purposes. CDD systems can also perform risk assessment and classification based on predefined criteria.

2. Transaction monitoring systems: 

These systems monitor customer transactions and activities for unusual or suspicious patterns or behaviors. Transaction monitoring systems can also generate alerts or reports for further investigation or action.

3. Sanctions screening systems: 

Here, the system screens customers and business partners against various lists of individuals, entities, countries, or regions subjected to sanctions or restrictions by governments or international organizations. Sanctions screening systems can also flag or block transactions that involve sanctioned parties.

4. Watchlist screening systems:

Watchlist screening systems can identify and flag high-risk parties to prevent transactions involving individuals or entities associated with criminal activities.

When are AML Checks Required?

An AML checks is a vital part of financial sector regulations and compliance measures. It is designed to prevent and detect illegal activities related to money laundering and terrorism financing. You should conduct anti-money laundering checks at different stages of your business relationship or transaction with your customers or business partners. There are three common stages of Anti-Money Laundering (AML) checks that businesses should undertake to verify customer identity and assess their risk levels. These stages are:

1. Onboarding 

Onboarding refers to the initial process when a customer starts a relationship with a financial institution or another regulated entity. During onboarding, the institution typically collects vital customer identification data and evaluates the customer's risk profile. For high-risk customers or those who pose a potentially higher risk of money laundering, Enhanced Due Diligence (EDD) may be applied. Onboarding creates a baseline against which future customer activities can be assessed.

2. Ongoing

Ongoing monitoring refers to the continuous monitoring of a customer's transactions and activities after they have been onboarded. Ongoing monitoring enables institutions to ensure that a customer's behavior aligns with their profile and the expected transaction patterns. It can also help detect deviations or anomalies. This phase also involves updating customer risk profiles if necessary, and it can involve periodic renewals or updates of customer information, especially for those deemed higher risk.

3. Trigger

Trigger events refer to specific occurrences or changes in a customer's profile or transaction behavior that require an immediate review or reevaluation of their risk profile. These events might include a sudden large transaction, a change in transaction type or pattern, the initiation of cross-border transfers, a change in beneficial ownership, or any other activity that seems out of the ordinary or inconsistent with the customer's known profile or behavior. When a trigger event is detected, it might prompt the institution to conduct a new round of due diligence or investigate the transaction/activity further.

Challenges Faced When Performing Efficient AML Checks

Conducting effective AML checks can be challenging for many businesses and organizations. These challenges stem from numerous factors:

• Complexity: The complexity of AML laws and regulations can vary across different jurisdictions and industries. It can take time to keep up with regulators' and authorities' changing requirements and expectations.
• Cost: AML compliance can be high, especially for small and medium-sized enterprises (SMEs) with limited resources and capabilities. It can be expensive to implement and maintain AML systems and tools and train and hire AML staff.
• Data: The data quality and availability can affect the accuracy and efficiency of AML checks. It can be challenging to collect, verify, and store customer information and documents, as well as to access and integrate various sources of information for screening and monitoring purposes.
• Technology: Technology adoption and innovation can pose opportunities and threats to AML compliance. On one hand, technology can enable faster, smarter, and more automated AML checks. On the other hand, technology can also facilitate new forms of money laundering and financial crimes, such as through cryptocurrencies, online platforms, or digital wallets.

Benefits of FOCAL Solution for AML and KYC Checks

Focal is a leading provider of AI-powered solutions for AML and KYC compliance. Focal offers a comprehensive suite of products and services that can help you conduct effective AML and KYC checks (KYC & AML checks), such as:

• AML Compliance: This solution enables you to automate and simplify your Anti-Money Laundering (AML) compliance procedures.
• Risk Scoring: This allows you to accurately evaluate potential risks associated with new customers. Utilizing the innovative Rule Builder, a customizable, algorithm-driven tool that allows you to fine-tune assessment criteria, ensuring alignment with both industry standards and your unique needs. Amplifying regulatory compliance and enabling informed decision-making.
•  KYC: Streamline your customer onboarding process and enhance compliance by leveraging data-driven decision-making. With automated tools, you can confidently assess your customers and automate growth, all while ensuring adherence to regulatory requirements.

Conclusion

AML and KYC checks prevent and combat money laundering and related crimes. They also help businesses and organizations comply with laws and anti-money laundering regulations, protect themselves from risks, and enhance customer trust and loyalty. However, AML and KYC checks can be challenging due to various factors, such as complexity, cost, data, and technology. Focal offers a comprehensive suite of AI-powered solutions that can help you overcome these challenges and streamline your AML and KYC compliance processes. 

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