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Introduction to KYC Know Your Cusotmer Due Diligence obligation
Anti-money laundering compliance regulations are a challenge for financial institutions and other obliged entities.

Local regulators do not hesitate to impose huge fines and mandatory corrective measures. Negligence of the fight against money laundering poses a great risk not only economically but also in terms of security.



What is Money Laundering?

Money laundering is a process in which illegal proceeds are transformed to make them look as if they were obtained from a legitimate source. At work, money laundering can be very harmful. Globally, it's considered the third largest criminal industry, worth an estimated $500 billion annually.

Money laundering is a complicated and often misunderstood process. The term is used to describe the act of taking the proceeds of crime and transforming or disguising them so they can be used without attracting suspicion.

Please refer to the European Commission AML dedicated web section to keep your business aware of the latest anti-money laundering updates and regulatory changes.

How is money laundered?

Criminals frequently "launder", obtained illegal funds via illicit activities such as for example drug trafficking. One technique most frequently used in business transactions is to distribute the revenue over a legitimate Cash - Based business. The supposed legitimate company deposits the money so that it can be withdrawn from the criminal network.

Foreign Money Launderers also have the possibility to sneak cash into foreign countries to deposit cash to reduce suspicions or use illicit cash to buy various currencies. Occasionally they invest with untrustworthy brokerages who may refuse to obey rules in return for large fees such as huge commissions from dishonest brokerage firms.

What is the European AML Legal Regulatory framework?

Anti-money laundering efforts rose in 1989 when a coalition of countries formed the Financial Action Task Force. The IMF pressed 189 member states to comply with.

The EU introduced laws into AML in 1990 to stop the concealment of money sources from suspicious or criminal activity. The EU has continuously reformed the legislation that covers the fight against money laundering and the financing of terrorism. Initially, they developed 91/308/EEC in 1991, which was later revised with 2001/97/EC in 2001 and then EU Directive 2005/60/EC in 2005. Eventually, this legislation became more firm with Directive 2006/70/EC.
In 2015, the 4th AML Directive 2015/849 (AMLD4) took into account the 2012 recommendations of the Financial Action Task Force (FATF), and went further on a number of issues to promote the highest standards. The 5th Anti-Money Directive 2018/843 (AMLD5) was published in June 2018. The Member States had to transpose this Directive by 10 January 2020.

On November 12, 2018, the European Parliament issued new rules to strengthen the fight against money laundering through the 6th EU Money Laundering Directive 2018/1673 (AMLD6). Member States have until 3 December 2020 to transpose the Sixth AML Directive and bring into force the laws, regulations and administrative provisions necessary to comply with this Directive.




AML Risk assessment

Risk assessment is a critical part in AML compliance and a crucial first step in forming an effective AML program.
No two organizations have an equal number of AML vulnerabilities and the program should take into account factors and services your product or service offers, your clients and customers. One-size-fits-all solutions do not cover the inherent challenges in financial geography; individual institutions may require a solution that works on their risk profile.

Your approach to AML risk mitigation should conform to the specific needs of your company - ideally, your plan will help reduce the administrative burdens of regulatory compliance and the potential legal risks of non-compliance.



How does AML affect financial institutions?


AML importance for Financial institutions
AML is important in the financial industry because it protects against money laundering, terrorist financing, sanctions evasion, and the like. The primary function of AML is to monitor and identify potentially illegal activities and transactions.


Financial institutions are subject to stringent requirements regarding the effectiveness of their money laundering detection procedures.

The establishment of a robust customer identification, verification (and acceptance) process that meets regulatory requirements for risk assessment and control is their first risk control obligation.

These obligations outline the first step in the due diligence process for the customer profile and business relationship. To ensure effective security of financial market abuse against money laundering and terrorist financing, customer risk control and monitoring of the business relationship must be ensured throughout the relationship. Transaction monitoring, change surveillance and reporting obligations are part of the ongoing due diligence obligations.

AML Sanctions and Reputation Risk


Banks and other financial institutions are, as reporting entities, legally required to comply with the regulations set forth in the AML Act. Failure to do so can result in huge fines and reputational damage.

Organizations that were unaware of AML obligations faced heavy administrative fines. In 2018, organizations that violated federal law requirements were assessed penalties worth $31 billion. The fine nearly doubled and the value of the penalties nearly doubled in 2021 to $80 million. But by 2020, a total of 104 million people were in default. (sources)

Financial institutions that fail to comply with anti-money laundering regulations also risk reputational damage and loss of customers. The institution's reputation is damaged when it is associated with corrupt individuals or businesses and is subject to fines and penalties.

To help them deal with this onerous task, traditional financial institutions are beginning to turn to recent innovations that deploy machine learning algorithms that are trained to identify suspicious transactions, notify regulators when necessary, and create alerts for the highest risk accounts.




AML Compliance Officer

AML compliance officers must have adequate experience and leverage within their institution to be able to perform their duties effectively. AML compliance officers must be experts in local regulatory requirements. Oversight of AML activities is the responsibility of the Money Laundering Reporting Officer. The AML officer's expertise must extend beyond regulatory procedures to determine the details and methodologies of the financial crimes he or she is responsible for detecting and reporting.
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