What is Money Laundering?
If you have watched television in the past ten years, then you have probably seen or heard of Breaking Bad. The show’s main character – the meth-making mastermind Heisenberg – realizes early on in his risky career that he somehow needs to legitimize the money he makes – for his family’s sake of course.
This process of legitimizing money is called laundering – you take “dirty” money, and you need to make it “clean.” In our tragic hero’s case, he chooses the most common way to launder money: By running it through a legitimate cash-based business. He buys and begins to operate a car wash where he had previously been fired. Karma.
In the real world, there are many other ways of laundering money. You could sneak it into a foreign country and deposit it there, or you could deposit it in small increments over time across multiple accounts. Sometimes, brokers (who should be good guys in all this) go along with helping to invest laundered money because they’re able to get larger commissions.
Money laundering isn’t new, so this should all be a primer. However, the Internet has drastically changed the game. The Internet helps nefarious individuals or organizations avoid detection through online banking institutions, anonymous online payment services, peer to peer transfers on mobile phones, virtual currencies, proxy servers…the list goes on. Money can be transferred or withdrawn with almost no trace of an IP address.
Anti-money laundering (AML), on the other hand, has been slow to catch these types of crimes, since most of the procedures are set up to catch criminals through traditional banking institutions. AML is a set of procedures, laws, and regulations to stop individuals or companies from generating income through illegal means. AML is a significant challenge for many institutions since it is difficult and time-consuming to process and comply with regulations.
Today, most institutions have some sort of AML software, which filters customer data and classifies it on levels of suspicion. From there, anomalies create alerts, which employees then have to check with the customer to confirm or dismiss. This is a time-consuming process, and the US Treasury’s Financial Crimes Enforcement Network reported that it has to research almost 5 million reports a year – that’s a lot of time spent.
Hopefully, this doesn’t need to be said, but money is a limited resource. With no regulation on dirty money, it prevents capital from going into productive places. This creates an imbalance in money flow, which can lead to inflation, which creates a crippled economy. That’s why AML is so important.
Anti-Money Laundering Regulations & Compliance
It all started with the Bank Secrecy Act in 1970 (BSA), which set up requirements for record keeping and reporting, and helped financial institutions identify the source, volume, and movement of currency. Sixteen years later, money laundering was officially established as a federal crime, and a new law was put in place that directed banks to establish and maintain procedures to ensure and monitor compliance with the BSA. In 1992, we finally saw a push to monitor non-traditional movement of money – through wire transfers – with the Anti-Money Laundering Act.
In 1994, a new law was introduced that puts the responsibility into the financial institutions’ hands, by requiring them to review and enhance training and develop their own AML examination procedures. Since then, it has been up to banks to verify where large sums of money come from, look out for suspicious account activity, and report large cash transactions. This greatly limits transparency, which makes it hard to reduce these crimes.
To fully comply with regulations, there are many steps an institution needs to follow. Perhaps the most important of which is to have a procedure in place that allows financial institutions to verify and identify their customers quickly and efficiently. Institutions need to look for new solutions to help them reduce the burden of being vigilant, but at the same time increase their control over the process.
What You Can Do To Stay on Top of AML
Of course, the easiest thing to do is to keep up with the changing regulations. As more transactions migrate online, the regulations will change to accommodate. However, if you want to protect your organization from the fallout that comes with money laundering, you need to do more.
The challenge and problem lies in traditional monitoring – a lot of alerts come in, and you need people to deal with and triage them appropriately. Artificial intelligence can help with this, but the development is slow to implement. If you utilize artificial intelligence and machine learning, you can teach computers to detect and recognize customer behaviors and triage them. For this to work though, you need high quality data on your customers. To have that kind of data, you need to Know Your Customer (KYC). KYC is something that banks have struggled with since its inception, but to truly achieve that level of information, they need to utilize something like blockchain.
Since there currently isn’t a lot of data sharing between banks, you will often get an incomplete view of a customer or a transaction. By utilizing blockchain and KYC you can get a more complete picture of customer behavior.
There are a lot of pieces that would need to fit together to achieve a more efficient AML procedure, but these are some of the first steps. If you are looking for a silver bullet, there isn’t one, but there are new innovations to be excited about to better combat money laundering in the future. As Heisenberg’s associate would say, “no more half measures.”