AML in Banking: Financial Institutions on the Frontline

Anti-Money Laundering (AML) in banking represents a framework of laws, regulations, and procedures aimed at preventing the misdirection of illicit funds into the legitimate financial system. Instituted in response to the increasing sophistication of financial crime, AML safeguards help detect, track, and report financial activities that may involve money laundering, counter-terrorism financing (CTF), or fraud.

By implementing AML protocols, banks play an integral role in fighting financial crime globally. AML compliance ensures that the sources of funds in the financial ecosystem do not support illegal activities, such as drug trafficking, corruption, and tax evasion.

Quick example: If an individual deposits a large sum of cash without justifiable sources and makes frequent international transfers to high-risk jurisdictions, bank monitoring systems will flag these transactions for further review under AML protocols.

The importance of AML in banking cannot be overstated. Global financial institutions act as gatekeepers, providing access to services that can be exploited by bad actors to clean illegally obtained money. Below are key reasons for stringent AML measures:

• Banks Handle Vast Cash Flows: As the primary channel for moving money across borders, banks enable trade and investment but also face risks of money laundering abuse.
• Regulatory Accountability: Authorities such as the Financial Conduct Authority (FCA) and Financial Crimes Enforcement Network (FinCEN) mandate banks to build robust AML processes, holding them accountable for failures.
• Severe Consequences for Violations: Weak AML compliance results in penalties, reputational damage, operational setbacks, and even licence suspensions. For instance, Danske Bank faced a €2 billion fine for AML negligence in its Estonian branch.
• Maintaining Trust: By preventing the abuse of legitimate banking systems, AML frameworks reassure businesses and individuals of financial integrity.
  

Banks’ AML strategies consist of multi-faceted frameworks to identify and prevent money laundering. Below are the primary components forming the AML process:

CDD involves verifying customer identity and assessing risk levels based on transactional behaviour and financial history. For high-risk categories, EDD steps in to apply stricter review measures.

Example in action: A politically exposed person (PEP) opens a corporate account. The bank implements EDD to check their background, affiliations, and sources of funds.

Monitoring software examines activity trends, flags anomalies, and identifies suspicious behaviours, ensuring continued AML compliance.

The cross-referencing of customer profiles against sanctions lists, such as those issued by the Office of Foreign Assets Control (OFAC), safeguards banks against penalties related to sanctioned individuals/entities.

When anomalies occur, reports are filed with the authorities for review. LSEG Risk Intelligence solutions can support banks by enabling them to identify trends and provide insights to enhance accurate SAR submissions.

Banks routinely reassess high-risk customers to adapt their controls, applying a risk-based approach tailored to evolving customer behaviour and jurisdictional guidelines.

Implementing an effective AML compliance structure is integral to mitigating risks while staying audit ready. Banks’ compliance programs typically include:

• Appointment of Money Laundering Reporting Officer (MLRO): Responsible for overseeing AML compliance and investigating risks flagged internally.
• Establishment of Internal Policies and Controls: Tailored policies aligned with respective jurisdictions offer clarity on AML operations.
• Regular Training Initiatives: Bank employees are equipped with updated knowledge on evolving money laundering tactics.
• Advanced Technology Integration: Innovations like AI and machine learning enhance the detection of anomalies within vast datasets while reducing false positives.
• Independent Audits and Reporting: External reviews validate that control mechanisms effectively meet AML regulations.

LSEG risk intelligence solutions can assist banks in deploying advanced analytics to optimise compliance program efficiencies.

Banks must follow a systematic approach for AML fraud detection. These stages ensure thorough coverage at all junctures:

1. Onboarding: CDD/EDD compliance and ID verification occur immediately upon a customer’s entry.
2. Monitoring: Real-time examination of transactions detects patterns of money laundering risks.
3. Escalations: Alerts are raised internally or externally based on identified violations. SARs are prepared for submission if required.
4. Reporting: Comprehensive records are maintained and shared with regulatory teams.
   

Modern financial institutions rely on cutting-edge AML technology, enhancing their detection and prevention capabilities.

• Rule-Based Monitoring Systems leverage pre-programmed criteria to identify anomalies.
• Advanced AI/ML Algorithms detect complex laundering behaviours through predictive data.
• Global Watchlist Screening cross-checks beneficiaries and accounts against international sanctions systems.
• SAR Review Platforms support case management with priority attention to suspicious accounts.
  

Jurisdictional Requirements:

• UK: FCA enforces adherence under the Money Laundering Regulations 2017 (MLR17).
• US: The Bank Secrecy Act (BSA) is a cornerstone regulation, supplemented by FinCEN’s enforcement authority.
• EU: Adaptations to 5th and 6th AML Directives outline obligations to address new risks like cryptocurrencies.
• Global Oversight: FATF ensures seamless AML procedural alignment across borders.