AML Checks Explained—A Quick Guide

AML checks, or Anti-Money Laundering checks, are essential processes used by businesses such as banks, real estate agencies, and financial service providers to ensure that money flowing through their operations comes from legitimate sources rather than criminal activities such as fraud, drug trafficking, or tax evasion. By verifying customers and monitoring suspicious activity, AML checks help prevent funds originating from illegal sources from being "laundered" into the legitimate financial system.

For example, imagine a bank onboarding a new customer running a local catering business. As part of the process, the bank will request identification, proof of address, and details about the customer’s business finances. This helps confirm their legitimacy and flags any risk associated with criminal activity. Without these measures, banks risk being used for illegal operations, potentially harming their reputation and incurring legal consequences.

AML checks are akin to airport security. Just as passengers and their belongings are carefully screened to ensure compliance with travel regulations, AML checks scrutinise the flow of funds to protect the integrity of the financial system.

AML checks are critical in safeguarding the financial sector and wider economy against financial crime. Globally, criminal organisations target financial institutions to legitimise billions of pounds worth of illicit profits annually. Without measures like AML checks, the credibility, functionality, and trustworthiness of the financial system face serious risks.

Some key reasons why AML checks matter include:

• Transparency and Accountability: They ensure businesses comply with international and local anti-money laundering regulations.
• Customer Confidence: Proper AML processes demonstrate a commitment to ethical practices, bolstering customers’ trust.
• Combatting Organised Crime: Preventing financial crimes such as terrorist financing or drug trafficking contributes to public safety and economic security.

For example, consider a case involving a high-value real estate purchase. A buyer transfers £2 million in cash to purchase a luxury property. Without AML checks, the real estate firm may unknowingly facilitate the laundering of funds earned from illegal drug trafficking. Regulatory authorities, once aware, could penalise the firm heavily—even if they were not directly complicit in the crime. AML checks prevent such vulnerabilities, promoting responsibility and legitimacy across industries.

For regulated sectors like banking, AML checks serve as a cornerstone of safe and successful operations.

AML checks follow a structured process to minimise risk and ensure compliance with regulations. Here’s how they typically work:

The first stage is Know Your Customer (KYC), where businesses verify and collect information about a client’s identity. This involves requesting documents that confirm names, addresses, and other details, such as a passport or utility bill.

For instance, let’s say Oliver, a freelance IT consultant, applies to open a bank account. He provides valid identification, and his application is initially approved. However, one month later, Oliver deposits £200,000 into the account—a sum vastly disproportionate to his declared earnings. This behaviour would be flagged for additional investigation under the bank’s AML policies.

After verifying identities, businesses screen customers against databases to identify any risks linked to their names or history. These checks include:

• Sanctions lists, identifying restricted individuals or organisations.
• Politically Exposed Persons (PEPs): Figures in governmental or critical public roles who face higher corruption risks.
• Adverse media searches: Scans for news articles linking the customer to illegal activities.

Screening solutions, such as LSEG World-Check, simplify the identification of risks by cross-referencing customer data with reliable sources globally.

Once screening concludes, customers are categorised based on their risk levels—low, medium, or high. High-risk customers, such as those in cash-intensive businesses or certain jurisdictions flagged as high-risk areas, undergo Enhanced Due Diligence (EDD).

For example, a business discovers that Oliver owns a secondary company in a country known for weak anti-money laundering regulations. Before processing his large deposit, the business requests additional documentation regarding the source of his funds.

AML compliance doesn’t stop after onboarding. Financial activities are continuously monitored to detect suspicious patterns, such as unusually frequent cash deposits or transfers to foreign accounts in high-risk regions.

When investigators confirm suspicious behaviour, a Suspicious Activity Report (SAR) is filed with regulatory authorities. These reports assist in broader investigations and ensure that the organisation complies with its AML obligations.

AML checks operate within strict legal and regulatory frameworks tailored to prevent financial crime. These are shaped by global standards such as the Financial Action Task Force (FATF) recommendations and jurisdiction-specific laws. Examples include:

• 5th Money Laundering Directive (5AMLD): Implemented across the European Union, expanding regulation to include areas like virtual currencies and pre-paid cards.
• The Bank Secrecy Act (BSA): This U.S.-focused law requires financial institutions to monitor customers’ transactions and report anomalies.

Failure to comply carries hefty penalties. In one high-profile case, Danske Bank was fined billions after its Estonian branch handled suspicious transactions without appropriate due diligence. Such incidents illustrate how robust AML processes are essential for avoiding regulatory risk.

Although crucial, AML checks can be difficult to carry out effectively due to several challenges:

1. High Numbers of False Positives: Automated systems often flag innocent transactions, requiring resource-intensive manual reviews.
   For instance, a common name like James Smith might be mistakenly flagged because another James Smith is listed on a sanctions database.
2. Regulatory Complexity: Rules often vary across countries, and they are regularly updated, requiring businesses to stay agile.
3. Incomplete Data: Limited or inaccurate information can hinder screening processes.

Tools like LSEG World-Check help mitigate these challenges with intuitive, technology-driven screening solutions that streamline checks and reduce false positives.

Businesses must conduct AML checks during high-risk activities, including when:

• A new account is opened: Verifying identities helps prevent onboarding risky individuals.
• Unusually large transactions occur: Transactions above set thresholds, such as cash deposits exceeding £10,000, automatically trigger scrutiny.
• Luxury items or property are purchased: Real estate and jewellery transactions are highly regulated due to their susceptibility to money laundering.

For instance, cryptocurrency transactions are increasingly monitored under global AML frameworks due to their use in illegal activities.

Technology plays a pivotal role in strengthening AML operations. Key solutions include:

• LSEG World-Check: A trusted tool that screens clients against global PEPs, sanctions lists, and adverse media databases.
• Biometric Verification Tools: These verify identities securely by matching customer signatures or facial recognition.
• Machine Learning Algorithms: These systems analyse customer behaviour to flag patterns linked to illicit activity in real time.

These innovations help businesses carry out robust AML checks efficiently and adapt to evolving regulations.

Businesses can optimise their AML compliance by:

1. Investing in Technology: Solutions like LSEG World-Check streamline and automate risk screening.
2. Continuous Staff Training: Team members should learn to spot unusual behaviours or patterns.
3. Monitoring Transactions Proactively: Adopt tools that flag problematic behaviour promptly.
4. Regular Data Audits: Keep customer information up to date.
   

Neglecting AML responsibilities exposes businesses to:

• Severe Penalties: Fines for non-compliance often reach hundreds of millions of pounds.
• Reputation Loss: Association with money laundering activities erodes customer trust.
• Operational Suspension: Regulators may severely limit or even shutter non-compliant businesses.