Anti-money Laundering, abbreviated as AML, refers to any attempts made for the prevention of money laundering and related criminal acts. AML compliance is a set of rules and regulations that are devised by regulatory authorities to combat money launderers.
AML compliance is mandatory for financial institutions in the United Kingdom. To stay compliant, Know Your Business have to devise efficient AML programs to win the battle against money launderers.
AML Regulations in the United Kingdom
The main AML law against money laundering in the UK is known as the POCA or the Proceeds of Crime Act of 2002. After this act was introduced, numerous steps have been taken to prevent fraudulent activities in the UK. Under this law, banks and financial institutions became liable to verify customer identities along with performing background screening. Additionally, authorities in the United Kingdom have also mandated the implementation of the 5th AMLD as implemented in the EU.
The Financial Conduct Authority (FCA) is responsible for monitoring regulatory compliance in the UK. Apart from monitoring, it also ensures the integrity and security of the financial system. A major focus of the FCA is to minimize the risk associated with money laundering. Under the laws it has passed, financial institutions such as banks are required to maintain AML compliance. Currently, 59000 financial service providers are being regulated by the FCA on this account.
Maintaining regulatory compliance is crucial for abiding hefty fines, penalties, and major lawsuits due to non-compliance. Considering this, an effective AML program in the UK consists of the following five features.
Devising an AML Program
To conform with regulations in the UK,verifying businesses are required to devise an AML program. An effective Anti-money Laundering compliance program comprises all the necessary steps that can be taken to avoid the act of money laundering, financing of terrorist activities, and related threats. Typically, an AML program includes Customer Due Diligence procedures, Know Your Customer (KYC) processes, and the monitoring and reporting of suspicious transactions. Once KYC and AML regulations are combined, a robust security mechanism is created.
A Compliance Officer
Once an AML program has been assigned, an authoritative party is needed to ensure its implementation. This is where an AML compliance officer steps in. An AML compliance officer is responsible for using all necessary measures to ensure the execution of anti-money laundering practices. By making sure the company monitors every transaction, implements Enhanced Due Diligence (EDD) on high-risk customers, and files suspicious activity reports in a timely manner, it acts as a bridge between the company and the regulators.
A Risk-Based Approach
Any effective AML program has to be made on the basis of a risk-based approach to money laundering. The objective behind a risk-based approach is to employ a control program based on the level of risk associated with every onboarded customer. The failure of an AML compliance program generally results due to a company’s approach of implementing the same control on every customer, regardless of the risk level. However, a risk-based approach not only makes compliance easier, but allows the company to safeguard itself against external threats from established criminal organizations, thus minimizing the chances of money laundering.
Implementation of KYC and CDD
Just like in every other country, financial institutions in the UK have to know your customer and customer due diligence processes to verify the true identity of customers. This process typically takes place during the onboarding process. It involves the verification of the customer’s official identity document. Data from the document is extracted through an automated process that is completed within seconds.
This step is necessary to ensure that only legitimate customers are onboarded and fraudsters are filtered out.
In the second step, a risk rating is assigned to every customer that is onboarded. The CDD process involves the verification of customer identities by assigning them with the risk rating.
This rating is evaluated and assigned by cross-matching the existing and potential customers against criminal watch-lists, Politically Exposed Persons (PEP) lists, adverse media stories, and global sanction lists. Once the customers have been evaluated based on a risk-based approach in the CDD process, a company is able to provide enhanced security measures. Additionally, by hiring an identity verification service provider, both of these steps can be completed through an automated process to attain the highest levels of accuracy at lower costs.
The final feature of an effective AML program involves the monitoring of suspicious customers and their transactions. Financial institutions are mandated by the UK’s regulatory body to report suspicious transactions of their customers as they carry the risk of financial crimes.
The report is then analyzed by regulatory authorities through AI-powered AML compliance and screening software. This reduces the burden of manual verification processes of a company, as only the transactions that are deemed suspicious create alarms to notify the authorities. Apart from minimizing manual workload, filing a Suspicious activity Report (SAR) is also crucial for maintaining high standards of accountability, integrity and compliance within a company.