Understanding Anti-money Laundering

  • Soumyaa Rawat
  • Oct 13, 2021
  • Financial Analytics
Understanding Anti-money Laundering title banner

Money and other materialistic riches can turn one’s destiny upside down. With money comes power, and so does a price. While some manage to invest their money in profitable opportunities, others fail to balance the power that money brings along, and perhaps end up committing fraud or laundering scams. 

 

In this blog, we will be understanding anti-money laundering and the various stages involved in it. But first, we must understand what laundering means. 

 

 

Anti-Money Laundering

 

By concealing one’s true financial records (savings and expenditures), one commits money laundering by integrating false records in the legitimate financial stream. 

 

That said, money laundering is a quite prevalent criminal offense that has led the government and various financial institutions to prevent money from being laundered. 

 

However, with increasing rules against money laundering, such cases have also risen in light of more enhanced ways to launder money and hide financial records from the eyes of the government. 

 

Yet, anti-money laundering continues to be a topic much-discussed worldwide. Anti-money laundering (AML) refers to gatekeeping systemic activities that are performed by financial organizations in order to actively keep a track of suspicious financial activities. 

 

In a way, it is an act of preventing money laundering by complying with legal requirements to actively supervise and keep an eye on financial activities. 

 

(Must read: An Introduction to Capital Budgeting)

 

Since financial crimes have been on the rise in recent decades, anti-money laundering is a much-crucial and inevitable protocol that involves policies, laws, and rules to fight back money laundering and related crimes in the realm of finance. 

 

Every company has to conform to AML protocols that enable it to monitor the financial records of companies and figure out if some anomalies are noted. Anti-money laundering compliance also defines the way a company foresees financial frauds and acts towards the prevention of it. 

 

Money that is retrieved through ill sources or malicious transactions must be tracked by anti-money laundering organizations to filter out legitimate and illegitimate transactions and thus, monitor the financial field altogether. 

 

Over time, Financial Action Task Forces (FATF) have been deployed to carry out AML operations so that criminals with financial crimes can be chalked out and detained. 

 

“AML laws and regulations target criminal activities including market manipulation, trade in illegal goods, corruption of public funds and tax evasion, as well as the methods used to conceal these crimes and the money derived from them.”

Anti-Money Laundering Offenses   

 

Some of the top money-laundering offenses involve terrorist financing, bribery, tax  evasion, fraud scams, and money theft. As a criminal offense, money laundering has some serious consequences on the social, economic, and security aspects of society. 

 

Not only does it fuel an underground economy in a nation, but it also encourages other illegal activities to carry on like drug trade, smuggling, terrorist organizations, etc. 

 

(Related blog: Types of taxes)

 

 

Stages of Money Laundering 

 

In order to understand how anti-money laundering works, we shall now look into the 3 anti-money laundering stages that will help us to get deeper insights into the concept. Broadly, the process of money laundering are as follows -


This banner introduces the readers to money-laundering stages - 1. Placement 2. Layering 3. Integration

Stages of Money Laundering, Source 


  1. Placement

 

The first and foremost stage of money laundering is placement. This stands for the ‘placement’ of laundered money in legitimate financial records, making it legally valid. 

 

Once the money from ill sources is received, it is time to place it in various offshore accounts where it would escape the eyes of AML organizations and perhaps stand to be legitimate in the eyes of the law. 

 

Placement is the beginning step towards laundering money that opens windows to committing financial crimes. 

 

  1. Layering

 

What is layering in money laundering? As soon as the placement of laundered money is successfully accomplished, the next stage of money laundering is layering the money. By placing the laundered money into offshore accounts by processing it into the legal system, it is then to be layered by using fraudulent bookkeeping. 

 

Moreover, the strategic layering of financial transactions allows financial criminals to layer laundered money and thereby conceal the true source of finances. 

 

This stage is also known as the structuring stage because herein, the total amount of funds is broken down into small amounts that help money launderers to add layers to such transactions.

 

“Layering is a significantly intricate element of the money laundering process. Its purpose is to create multiple financial transactions to conceal the original source and ownership of the illegal funds.”

Stages of Money Laundering 

 

  1. Integration

 

The last stage of all, integration, is when the laundered money returns back to the launderer and is finally concealed from the eyes of the law. 

 

Unlike the first stage where the launderer holds the money on illegitimate grounds, this stage provides the launderers the chance to keep hold of their money in a legitimate manner. 

 

That said, integration refers to the stage wherein the laundered money can be successfully integrated into the launderer's account with full validation by law. 

 

(Also read: Economic growth vs economic development)

 

 

How to Stop Money Laundering

 

While the above-mentioned segment enlists the various stages through which money is laundered, this segment will throw light on the ways that can help one detect money laundering, also recognized as a money mule. 

 

Anti-money laundering often involves suspicious reports of financial transactions that direct AML organizations to suspect money laundering. Here is a list of ways that can give way to anti-money laundering, thanks to artificial intelligence technology. 

 

(Must read - How is AI used in fraud detection?

 

  1. Detect False Positives

 

The first and foremost way to detect money laundering scams is to detect false positives. That said, it is important for banks and AML institutions to develop various applications of AI in finance, to empower tools and techniques that differentiate between false positives and cases that are truly suspicious in nature. 

 

What’s more, this also saves time while increasing the efficiency of AML officials as they do not have to dig into all suspicious transactions manually. 

 

Rather, false positives can be detected and eliminated timely, leading to more attention to suspicious elements in a transaction that indicate money laundering.

 

 

  1. Identifying Possible Networks

 

Another way to detect money laundering cases is through identifying possible networks. 

 

Now, one might ask how to do so. Well, to begin with, banks and other financial institutions develop an instinct regarding money laundering and that is how they end up suspecting any such cases. 

 

Having said that, it is significant to identify possible networks and recognize high-risk countries or regions in a country to develop resistance from the same. 

 

Not only will this prevent money laundering, but it will also help AML officials to filter through such networks and dig deep for more information.  

 

 

  1. Data Analytics and ML Algorithms

 

Lastly, AML officials can also develop and train machine learning algorithms that take the help of data analytics tools and search for similar patterns of money laundering techniques.  

 

To achieve this, one needs to develop machine learning algorithms that are substantially trained to filter unorganized data and pick out any anomalies or transactions that are different from others. 

 

The way data analytics and machine learning have come together in the case of other technologies, the duo can also prove to be highly helpful in the case of anti-money laundering too.


 

Money Mule Scams 

 

Having read about such insights into anti-money laundering, one might be thinking of some popular money laundering scams that made it big. Well, here is one of the biggest examples of money laundering scams. 

 

One might have heard about the ‘lottery’ emails that flood our inboxes. Well, this is none other than a money-laundering scam that is used to cheat the masses and extract large sums of money from their bank accounts. 

While one might feel ecstatic on reading such emails or messages wherein cash prizes or lottery bonuses are claimed, it is simply a trap where money acts bait. 

 

Once an innocent individual is cheated and his/her money is laundered, this money is then processed through the 3 above-mentioned stages of money laundering and ultimately concealed in the legitimate financial ring. 

 

By demanding your personal bank account details, these money laundering scams have cheated 1000s of people and are still successfully doing so. Even though anti-money laundering officials are doing the best they can, such scams always get the better of innocent people as they flash the power of money. 

 

(Suggested blog: Economic analysis)

 

Therefore, one should not participate or even click on such links for a number of reasons. Firstly, these lottery competitions and cash prizes are illegal to be a part of. Secondly, no such competitions or prizes demand one’s personal details. 

 

Lastly, such messages pop out of nowhere and are perhaps randomly thrown out to trap people. 

 

In the end, it is always suggested to stay clear from money laundering scams and be an honest tax-payer. Even though we hear about successful money-laundering scams, we also notice how well AML officials work in order to bust such scams. 

 

Henceforth, money laundering is a criminal offense that one must not indulge in.   

Comments