Articles, Banking

AML Strategies for Effective Money Management in Banking

Bolster your AML measures with these strategies.
Written By: Eric Williams
Reviewed by: Mike Reyes
Last Updated February 20, 2024

This content is not intended to provide financial advice; rather, it’s for information and entertainment purposes only.

Always consult a licensed advisor for investment decisions.

Some of the links in this article may be affiliate links. If you click on a link, the affiliate may provide compensation to this site at no cost to you, regardless if you decide to purchase something. You can read our affiliate disclosure in our privacy policy.

Finally, this article has been written, reviewed, and fact-checked. Portions of this article have been written using assistive AI tools to help with tasks like research, spell-checking, grammar, and translation. Please have a look at our editorial guidelines for more information about how we create content.

  • Banks need robust AML strategies to comply with regulations, avoid fines, and protect their reputation. The article highlights the financial and reputational risks banks face if they unwittingly facilitate money laundering. It emphasizes the importance of understanding AML regulations, implementing transaction monitoring systems, and training employees to identify suspicious activity.

  • Effective AML strategies involve a multi-layered approach. The article outlines several key components of an effective AML program, including KYC, transaction monitoring, and risk management.

  • Technology plays a crucial role in combating money laundering. The article emphasizes the importance of using AML software to automate tasks, flag suspicious activity, and improve transaction monitoring accuracy. This frees up human resources for more complex tasks and helps ensure comprehensive coverage.

Hard Cash on a Briefcase

Money laundering is a serious issue plaguing the modern world. According to the United Nations Office on Drugs and Crime, nearly 2 to 5% of the global GDP (gross domestic product) is laundered worldwide. To put this into perspective, consider almost $800 billion to $2 trillion being laundered globally for nefarious schemes.

Launderers pump the money obtained through illegal means (‘black’) into the financial system to turn it legal (‘white’). Since this whitewashed money is later used to finance illicit activities, banks must undertake effective AML (anti-money laundering) strategies to minimize such instances and manage money efficiently.

Why Should the Banking Sector Adopt Robust AML Strategies?

Bitcoins and U.s Dollar Bills

To understand why the banking sector needs to adopt robust AML strategies, it’s essential to consider the importance of AML.

In theory, there’s nothing wrong with a business or organization depositing cash into a financial system and using said cash to pay for things down the line. 

However, problems arise because the money deposited in a bank is obtained illegally, like selling drugs. When this money finally achieves legal status, it’s used to fund activities like drug trafficking, organized crime, and terrorism. 

The entire process endeavors to conceal the criminal origins of the laundered money. As such, there are three crucial steps involved in money laundering, including:

  • Placement: Black money is deposited in a financial institution, like a bank, by “money mules.”
  • Layering: The deposited amount is transferred to a shell corporation or offshore bank account as a loan or payment.
  • Integration: The money is used to make luxurious purchases or invested in other businesses (owned by the criminal organization).

While the three steps are essential for the money laundering process to come full circle, it’s important to remember that the first two steps can be combined or repeated multiple times to throw sniffing government agencies off their scent.

Moreover, the widespread adoption of online payments has made it necessary for banks to adopt the AML strategies to comply with the Bank Secrecy Act, effectively manage money, and avoid paying the levied fines.

Since money launderers need to complete step one (placement) to move forward, AML strategies can keep banks from unwittingly aiding and abetting criminal organizations. Adopting these strategies is also necessary for banks to steer clear of legal troubles and improve their goodwill in the market.

Become fluent in AML regulations ruling the global landscape

Buildings With Glass Windows

All your hard work will be for naught if you and your employees aren’t familiar with the prominent AML regulations. The regulations tend to differ from country to country, so find out the prevalent norms in your place of business and ensure everyone (from the top down) follows them to a T.

AML regulations are expected to become more airtight in the future to nix money laundering in the bud and cut off financial assistance to terrorist activities (at least through this channel). A few prominent regulations to keep in mind are:

  • If you operate in the US, you’ll have to primarily comply with the BSA since it serves as the bedrock for AML laws in America. 

Moreover, become familiar with the AMLA (Anti-Money Laundering Act) of 2020. This comprehensive regulation aims to eliminate shell companies with anonymous owners. It also brings digital currencies and traders of antiquities into the fold. 

Moreover, to remove all anonymity surrounding certain business owners and make it difficult for them to hide behind the shroud of shell companies, FinCEN has introduced the Corporate Transparency Act (CTA). 

The Beneficial Ownership Information form

From January 1, 2024, many companies will have to fill out the Beneficial Ownership Information form to declare who owns and controls a particular company.

  • If your bank falls under the purview of the EU (European Union), become fluent with the sixth AML/CFT directive. Dubbed AMLD6, this AML directive aims to eliminate discrepancies in previous directives and tighten the laws regarding money laundering and terrorist financing. 

Most importantly, the sixth version will allow government agencies to prosecute individuals and businesses (including employees) for being involved in money laundering. The revised prison times and penalties are another thing of note.

The Parliament and Council have also agreed to form a new European agency to ensure financial institutions closely follow the EU’s AML/CFT directives.

Similarly, other jurisdictions around the world have regulations you must follow to eliminate money laundering.

Additionally, keep your eyes and ears open. Make it a habit to go through important news disclosures to stay in the loop about the latest happenings in the world of financial crime. You don’t want to miss out on critical information when the next Pandora Papers are released.

Set up AML transaction monitoring

Black Payment Terminal

If you see this article, it mentions how AML transaction monitoring aids a bank in lowering its instances of unknowingly laundering money. These solutions aren’t just built to recognize transactions that don’t comply with the government’s laws. 

They also allow you to add your rules for each transaction and overall monitoring, like the number of transactions and deposit limit. You can use the solution to screen individuals and corporations against the Office of Foreign Assets Control (OFAC) and other government lists to ensure you’re not harboring customers you shouldn’t. 

This gives you added flexibility and ensures your monitoring system doesn’t accidentally let suspicious transactions through the spread safety net. That’s not all. Such solutions also help:

  • flag large transactions,
  • discover the connection between such transactions and an identity, and
  • submission of SARs with adequate information for successful filing.

Besides custom rules, you benefit from real-time data log monitoring and alerts. Moreover, you don’t have to worry about recording or sifting through enormous piles of data. The solution will do it for you at a fraction of the time without flouting data protection and privacy norms.

The best part, though? You won’t have to settle for a solution you don’t feel is compatible with your bank’s requirements. Given the growing importance of AML solutions, this software market is expected to reach a valuation of $8.7 billion by 2032. This means that you’ll have your pick of the best solutions.

Implement risk management procedures

Three People Sitting Beside Table

As a financial institution, it’s your prerogative to educate your employees and keep them updated. Training sessions with an experienced team member will help drive the point home, but it’s your job to ensure your employees are familiar with the AML best practices in the first place. 

So, try putting in a few best practices in writing and spread it around the institution to ensure everyone has their copy and can’t plead ignorance.

For instance, cover topics like how to recognize suspicious activities. A few red flags include:

  • A sizable cash deposit falling beyond the set limit—deposits of $10,000 or more in one go.
  • Multiple deposits from the same amount, even if the transaction amount falls below the limit amount. 
  • Too much movement of money from the same account, as it could indicate layering.
  • Noticeable increase in the cash deposits or transactions.
  • Transactions tied to suspicious individuals or corporations.
  • A huge transaction made out to a PEP (potentially exposed people) as a bribe.
  • Transactions made to and from businesses that use cash primarily, like casinos.
  • Any transaction made to corporations of countries with a proven history of money laundering.

Additional Tips

Define your criteria and stick to them. A rule of thumb is to educate your employees to keep an eye out for unusual behavior and patterns to detect potential sources of money laundering. This is the first step in ensuring your financial institution is compliant with the AML/CFT regulations. 

But don’t forget to tell them how to communicate flagged transactions to the concerned parties, or this exercise will be for nothing.

To illustrate, ensure they know financial institutions must report suspicious activities within 30 calendar days of detecting them. In case the institution isn’t successful in identifying the suspect’s identity within this period, they may take an additional 30 days to sort things out. 

However, you shouldn’t take more than 60 days to report suspicious activity since its detection. Similarly, the bank must use the Bank Secrecy Act’s E-Filing System’s supported forms to file suspicious activity reports (SARs) for optimal submission and record-keeping.

Screen all transactions 

man touching security icons with binary

Don’t limit your cautious approach to just your customers. As a bank, you’re bound to process transactions from other banks to your customers (or the other way around). Just because the sender or receiver isn’t a registered customer with your institution doesn’t absolve you of all responsibilities. 

Make it a practice to monitor the money sent and received throughout the day, along with the people included in the transaction. This exercise will prevent you from facilitating money laundering and processing transactions to (or from) people and corporations gracing the government’s sanctioned and banned lists.

Wilful ignorance on your part will lead to heavy administrative fines and negatively impact your goodwill. Your bank will also have to deal with more scrutiny than usual.

But this sort of undertaking might not be feasible with just manual means. Granted, your trained employees will be better equipped to identify instances of money laundering, it won’t be enough, especially if you handle thousands of transactions in a day. 

So, you must invest in the AI revolution and arm them with the relevant solutions to thwart launderers.

Know your customer (KYC) inside-out

White Sitting Behind Counter Under Television

After you tighten security internally and educate your employees, it’s time to know your customers. Optimal KYC practices allow you to identify your customers and authenticate their identity proofs.

With synthetic identity fraud on the rise, it’s more important than ever to verify your customers’ identities during onboarding and ensure they’re who they say they are. This will prevent identity theft. 

Vet the customer’s ID, address, and face for all-around protection. This will help you develop customer risk profiles before they become a problem.

You can utilize technology in your business and employ identification solutions to make the process seamless for your employees and customers, as KYC is necessary to follow BSA’s compliance guidelines. 

Slacking off this step or writing it off as unimportant can cost you deeply, as you might end up serving illegal customers (individuals or corporations) without knowledge. 

You’ll also be wilfully ignoring the Financial Crimes Enforcement Network’s (FinCEN) CDD (customer due diligence) rule that prescribes banks to recognize and authenticate the identity of beneficial owners to mitigate unwarranted risks.

Once the KYC processes are complete, determine the risk rating of all your customers. Don’t leave any stone unturned. Use online databases, sanctions screening, government records, and watchlists to know your customers truly

These lists usually contain information about individuals (or corporations) involved in money laundering or other terrorism-related activities. Consider this data to assign each of your customers a risk profile. 

If you provide services worldwide, don’t forget to account for a customer’s nationality to determine their risk profile. Taking these extra steps will let you be prepared for the risks any of them might subject your bank to.

However, KYC isn’t an isolated activity. You must regularly update customer information and maintain clear records.

Appoint a compliance officer

Man Sitting With Laptop Computer on Desk and Lamp

Banks can become AML-compliant by appointing a compliance officer. This individual would take charge of the financial institution’s AML strategies and develop best practices. Simply put, they would be responsible for compliance requirements. They’ll also be the unofficial face of your institution in front of government authorities.

Since the role is significant, hiring someone with comprehensive knowledge of AML regulations is best. Bonus points if they also possess practical experience leading the compliance team and legally taking charge of unpleasant circumstances.

They would conduct audits regularly to ensure there are no gaps in the process and that the implementation is seamless. In case there are some discrepancies, it’s their job to identify the issues and suggest changes. Such officers would even record their findings to keep the management abreast of their latest findings. 

Simultaneously, the compliance officer would consistently host training sessions to ensure all internal stakeholders are up-to-date on the latest regulations and can detect suspicious activities. This would allow them to become familiar with AML fundamentals and their importance.

Review your AML policies and implement changes

Pile of Folders

Following the strategies listed above is just one part of the puzzle. They make for excellent starting points and will help cushion your bank against money launderers and bad actors. But it’s crucial to keep in mind that they’re not the end-all and be-all. That’s why you must review your AML policies regularly.

If you have a compliance officer, they’ll take care of the audits and keep you informed about their findings. However, the onus falls on you if you don’t have a compliance officer yet. You can also hire a third-party auditor. 

Proactively reviewing your AML policies will give you in-depth information about the policy’s success and offer actionable data. You can use this data to implement changes and tweak your bank’s AML policies as you go. 

Maintain a rigid auditing schedule to weed out outdated practices and improve compliance. A few random checks wouldn’t hurt either, especially if you have doubts about a few (or more) internal members.

Moreover, ensuring everyone in your institution is familiar with the set policies—from the intern to the management-level employees—will go a long way in assisting you in countering money laundering.

While at it, monitor the compliance regulations followed by all third parties your bank comes into contact with. Being aware of their practices and AML measures will let you gain operational security. Remember, this is different from a financial audit. Its sole purpose is to help you ascertain your external partner’s AML policies.

Banish money laundering from your financial institution

Financial institutions, like banks, mediate several daily transactions—domestic and international. This makes them the perfect target of launderers looking to hide the questionable source of money and launder their dirty funds. However, this isn’t in the institution’s best interest or the economy at large.

Since prevention is better than cure, the banking industry can adopt a few AML strategies for effective money management and the sector’s growth. Following them will help it comply with the rules laid down by government agencies and avoid hefty taxes, improving its operational efficiency and protecting its goodwill in the market.

AML Strategies FAQs:

What are AML strategies?

AML strategies help high-risk businesses, like financial institutions, detect and eliminate instances of money laundering. They support effective money management and ensure the institution complies with the relevant AML/CFT laws.

What are the effective ways to combat money laundering?

The effective ways to combat money laundering include becoming familiar with the AML/CFT regulations, developing internal programs, monitoring transactions, training employees, following updated KYC practices, conducting due diligence for each customer, and using robust software to flag suspicious activities.

What are the key components of an effective AML/CFT program?

An effective AML/CFT program comprises several key components, such as forbidding acts of money laundering and financing terrorism-related activities, being aware of the imposed laws and regulations, and implementing risk management strategies.

Leave a Comment


Stay in Touch With Us

Get latest from The Financially Independent Millennial in our Friday Newsletter