How banking AML works?
Banks serve as the cornerstone of the financial system, making it imperative for them to detect suspicious activities. Their advanced technology and comprehensive services ensure security and trust, reinforcing their expertise and reliability in safeguarding financial transactions.
Like all regulated institutions, banking AML policies are shaped by the framework set by the FATF. On top of this, country-specific regulatory bodies have enacted critical AML legislation with compliance requirements banks must follow. These include:
- US: US Patriot Act, Bank Secrecy Act.
- Europe: EU Sixth Anti-Money Laundering Directive (6AMLD).
- Canada: Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
- Australia: Anti-Money Laundering and Counter-Terrorism Financing Act of 2006.
Although AML regulations vary by jurisdiction, financial institutions, such as banks, undertake the following measures to meet compliance requirements:
Staff training
Frontline employees in banks must be trained in anti-money laundering techniques and legally required to report suspicious activity.
On top of this, banks have their own AML compliance officers. These people can boost the company’s anti-money laundering practices and help educate others. These compliance officers are also responsible for developing and writing AML policies, reviewing suspicious transactions, and reporting them when required.
Customer identification programs/know your customer (KYC)
Financial institutions such as banks, must have proper customer identification and verification processes in place to ensure that their customers are genuine people who are making legitimate transactions.
For a bank, AML compliance starts with verifying the identity of a new customer. Once an individual’s identity has been established, banks must also understand the nature of that customer’s activity. Banks are also required to verify that deposited funds are from legitimate sources. Banks must verify key information to confirm customer identity and legitimacy for KYC and AML compliance. This includes:
- Personal Identification: Full name, date of birth, and government-issued ID (e.g., passport, driver’s license).
- Address Verification: Residential address, supported by utility bills or official documents.
- Source of Funds: How the customer funds their account (e.g. salary, investments).
- Employment Information: Employment status and occupation, especially for corporate accounts and high-net-worth individuals.
- Tax Identification: Tax identification or social security numbers for tax compliance.
- Purpose of Account: Intended use of the account (e.g. savings, business transactions).
- Risk Assessment: Performing due diligence to assess the customer’s risk, such as Politically Exposed Persons (PEP) checks, sanctions list screening, and adverse media searches.
- In addition to these fundamental details, banks may also need to verify the customer’s employment status, source of income, and any existing credit history to help assess financial reliability and reduce the risk of fraud. These verifications help banks mitigate risks related to fraud, money laundering, terrorist financing, and other financial crimes, while complying with local and international regulations.
This is why banks ask customers to supply identity documents when they open an account. To add an extra layer of security to the process, many banks also now use facial biometric analysis as part of remote identity verification.
Large transaction reporting
AML requirements call for institutions, such as banks, to file a regulatory report for transactions above a certain threshold. A single customer makes that during a business day.
Monitoring and reporting suspicious activities
Regulatory agencies publish AML guidelines about the behavior that banks and financial service providers should monitor. For example, if a customer makes numerous cash deposits or withdrawals over several days to avoid a reporting threshold, this should be recorded and reported to authorities.
As part of this process, when a bank’s AML compliance officer uncovers behavior that exceeds reporting thresholds and has no apparent business purpose, they file a report with the relevant authority in their country to fulfill regulatory requirements.
Before they report a suspicious activity, the compliance officer must determine whether:
- A customer may use proceeds from illegal activities in a transaction
- The purpose of the transaction may be related to financing of terrorism
- The transaction has been made under unusually complex circumstances
- The transaction seems to have any reasonable economic purpose
Sanctions compliance
Regulatory bodies such as the US Treasury Department, US Office of Foreign Assets Control, the United Nations, the European Union, Her Majesty’s Treasury, and the Financial Action Task Force on Money Laundering have requirements for financial institutions to check customers against lists of sanctioned individuals, companies, institutions, and countries.
To be compliant, regulated institutions such as banks, brokers, cryptocurrency exchanges, and real estate firms must meticulously screen both new and existing customers daily. This involves checking against various watchlists, including sanctions lists, politically exposed persons (PEPs), and adverse media reports. Insurance companies, casinos, and luxury goods dealers are also required to perform similar screenings due to the high-value transactions they handle. These processes ensure that institutions adhere to regulations and mitigate potential risks associated with illegal activities or reputational harm. By maintaining this diligent oversight, these businesses play a crucial role in upholding the integrity of the financial system and preventing financial crime.
Customer due diligence
Customer due diligence is an essential part of a bank’s KYC processes, and it can help banks detect common money laundering strategies.
The process starts by ensuring that the information a potential customer provides during the onboarding process is accurate and legitimate. However, customer due diligence is an ongoing process, which also extends to existing customers and their transactions.
The customer due diligence process requires an ongoing assessment of the risk posed by each customer. Customers who are flagged as at higher risk of non-compliance are then monitored more closely than those seen as lower risk.
The process must be continuous, because a customer’s risk level will change throughout their time with your company. For example, some of your customers may be added to sanctions and PEP lists. If this is the case, it’s important that your company is aware of this.
Banks are required to establish a comprehensive AML compliance policy, a cornerstone of their security measures. This policy, crafted with precision and expertise, must receive written approval from senior management and be under the vigilant oversight of a designated AML compliance officer. These steps underscore the bank’s commitment to trust, reliability, and leadership in financial security.These compliance policies must specify risk-based procedures for conducting ongoing customer due diligence. In addition, the bank must commit to conducting ongoing monitoring to identify and report suspicious transactions.
AML transaction monitoring software
Of course, many large banks have thousands of customers and process millions of transactions. Due to this, it’s impossible for them to monitor every transaction manually.
As a result, banks use AML transaction monitoring software to help them monitor transactions on a real-time basis. Software like this can analyze an account holder’s history, their risk level, and the details of their individual transactions (including the total sum of the money, countries involved, and the nature of purchase). If a transaction is considered high-risk, it’s flagged by the system as suspicious activity. It can then be reviewed by the AML compliance officer, who can report it if necessary.