AML or anti-money laundering regulations are useful in lowering illegal financial activities. The goal of AML is to protect the integrity and stability of international finances and prevent money laundering. The IMF has made an effort to make it more difficult for criminals to access sensitive information from financial institutions.
AML is not a new concept. It has been evolving for a very long time. As people try new ways to try money laundering, new anti-money laundering regulations are brought into force to counter the dynamic instrument that money laundering is.
Let's learn about the impact of AML in banking and financial institutions, its history and its evolution.
What is AML: Its history and evolution
AML or anti-money laundering refers to the amalgamation of different strings of laws and regulations that help to uncover the disguised illicit funds being passed off as legitimate income. The AML regulations were created to combat money laundering problems and perform complex chains of financial transactions easily.
The first major milestone of AML legislation was done by implementation of the 1970 Bank Secrecy Act. This Act was passed to thwart any form of organised crime and tax evasion. The main objective of the 1970 Bank Secrecy Act was to report cash deposits amounting to more than $10,000. This would require the bank legislation to identify the individuals who are conducting these transactions and further maintain their records.
In 1974, the US government finally coined the term "Money laundering" shortly after the Watergate scandal. This led to the passing of more acts gradually from 1980-1990 that would expand financial monitoring and cut off illicit funds for terrorist organisations.
The Anti-Money Laundering Act of 2020 was passed in 2021 that overhauled the US AML regulations prescribed in the Patriots Act of 2001. The Act henceforth prescribed utmost transparency, making it difficult for the shell companies to evade AML sanctions.
Impact of AML regulations on banking and other financial institutions
The AML regulations on different financial institutions, including banks and fund houses, have impacted the money market immensely. It has helped in keeping fiscal transparency in the global economy. Let's read about its impact.
Banks are considered to be one of the largest institutions in the field of finance. They have been the main targets of criminals as well when the concept of money laundering came into being. As the banks are mediators of worldwide transactions, throughout the day, it is highly likely to be targeted for financial terrorism. Let's read how AML regulations have impacted banking.
- Implementing KYC and Due Diligence: With the impact of AML legislations made on the banks, it has been easier to identify the money launderers by implementing KYC and due diligence procedures. The banks are now performing enhanced due diligence that ensures customers' safety and identity.
- Monitoring customers and non-customers: Banks are known to have a broader customer portfolio than other financial institutions. The transactions are not limited by their own customers. Due to the rising threat of money laundering, banks are now obligated to monitor the other people who are involved in the transactions. Hence, it becomes easier to identify the threats and mitigate any kind of risks that might harm the customers or the management.
- Implementation of modern technology: Manual money laundering has become ineffective and outdated. Thanks to modern technology, banks can screen through the transaction procedures of their customers and see whether they comply with the AML regulations or not.
Other financial institutions
Financial institutions like investment companies, brokerage firms and investment banks maintain severe regulations to maintain the utmost security for their clients. They are:
- Elementary employee training: The employees of these financial institutions are trained in an elementary way to identify and monitor illicit funds and other suspicious customer activities.
- Dedicated departments to track frauds: The result of AML regulations has made financial institutions have dedicated departments to track fraud or other mishaps. There are AML compliance officers appointed in financial institutions to mitigate the risks of money laundering.
- Immediate involvement of law enforcement: Transactions and procedures in financial institutions are monitored carefully. This results in law enforcement tracing back to the source of the crime if anything goes wrong.
The impact of modern AML regulations to fight illegal financial activities has positively impacted the financial markets. It has helped in uplifting the global economy and reduced risks of manual money laundering like never before.
Every part of the world now has its AML compliance laws that safeguard the money in their financial institutions. They are however likely similar to each other but contain certain differences that are best suited for their country.
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