AML, and how it all started!
AML or Anti-Money Laundering is a very well known concept nowadays. But not many people know more than the fact that it deals with financial crimes. Let’s take a look into how the concept of Money laundering and Anti-Money laundering came into existence and the basic concepts attached to it.
Brief History
Money Laundering and financial crimes originated and evolved hundreds of years ago. In the 1930s there was a prohibition in the United states that banned production, import and export of alcohol fundamentally and Anti Money Laundering laws were enforced against mafias and organised crime families involved in illicit activities such as sale of alcohol. Gangsters such as Al Capone brought in a lot of attention to financial crimes such as tax evasion and laundering and the laws pertaining to it.
They used traditional methods such as conversion of illicit cash into moveable and immovable assets. This practice is common, even nowadays. The laws were not strong enough and had several loopholes back then. Proceeds of alcohol and drug related crimes are one of the main reasons AML rules and regulations came into force. Unfortunately, they still are the strong pillars of money laundering offences till date. Crimes such as gambling, insider trading in companies, extraction via blackmail etc. gave rise to this form of crime and it evolved with time.
What is Money Laundering?
Money laundering is a process by which income acquired through criminal activities is cleaned in order to conceal their origin, which is usually illegal in nature. They’re made to look legal and legitimate by the alleged offenders by discovering safe harbours for their profits, which could avoid seizure of their criminal proceeds. The unethical or dirty money criminals obtain from such crimes are later laundered or cleaned in order to decriminalise it. Such normalisation is what Money laundering consists of. The Oxford dictionary describes it as “The concealment of the origins of illegally obtained money, typically by means of transfers involving foreign banks or legitimate businesses.”
There are three fundamental components involved to launder illicit money. The three steps are, Placement, Layering and Integration.
Placement is the first step, which basically is introduction of these funds into the financial structure.
Layering was the process of moving this cash by way of financial transactions to different accounts by concealing the illegitimate origin. It is a method of distancing the funds from its source by camouflaging it into funding companies, trading, selling, buying etc.
The third step, Integration is the final one. The money returns to the criminal through legitimate sources in this stage.
Criminals find several ways to do this by means of real estate, smurfing, currency exchanges, online bank transfers to overseas accounts, gambling, creation of shell companies, virtual currencies, auctions etc. and later investing this money for personal and professional gains, by making it seem lawful and untraceable to the law and officials.
The whole concept of combating money-laundering crimes came into force as authorised, lawful rules that demand financial establishments and regulated structures to identify and avoid such activities and make an official report of the same. The recent years have seen an escalation in terrorist financing, where terrorists or criminals use precious metals or stones as a cover to launder funds. Another common development in the world of financial crimes is transaction laundering, which is a relatively new form of laundering funds by the businessperson themselves. It is a rising financial illicit activity nowadays with the use of technology and several means of laundering illegal funds.
Several regulatory bodies have been formed in order to combat money laundering and financial crimes such as the IMF and FATF. They also estimate the amount laundered and embezzled along with their root causes every year in order to keep a check on this issue. They even made a list of nations that had fragile AML laws and were not collaborative with respect to forming AML regulations as an initiative to strengthen anti international money laundering standards and combat mechanisms.
As per the FATF guidelines, “The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. Starting with its own members, the FATF monitors countries’ progress in implementing the FATF Recommendations; reviews money laundering and terrorist financing techniques and counter-measures; and, promotes the adoption and implementation of the FATF Recommendations globally.”
This encouraged Governments to cooperate with banks and introduced several compliance mechanisms such as strong and substantial background checks and regular scrutiny. In my next post, I’ll be throwing a bit of light into the AML legislations in the UK. Until then, stay safe and healthy!