In the world of finance and corporate transactions, particularly those involving money that heads offshore, anti-money laundering (AML) rules are of critical importance. Fund and investment managers must comply with the Bank Secrecy Act, as well as the implementing regulations surrounding it, as reviewed under the Financial Industry Regulatory Authority’s rule 3310. These regulations collectively support the detection of unlawful activities related to market manipulation, securities fraud, tax evasion, and potentially the financing of terrorism. In particular, illicit funds can be made to appear to be of legitimate origin through a money laundering process.
An evolving field, AML legislation has tightened in ways that reflect a lifting of capital controls and the digital ease with which complex series of financial transactions are completed. One 2020 United Nations panel estimated annual money laundering flows at $1.6 trillion, which makes up around 2.7 percent of the global GDP.
AML rules have their roots in the 1970 Bank Secrecy Act, which required that cash deposits exceeding $10,000 be reported. They have grown into a complex regulatory framework that requires proactive actions on the part of banks. Financial institutions are required to prepare customer-facing due diligence plans that flag suspicious transactions and review overall money laundering risks. Other potential red flags include unusual changes in amounts or activities and transactions that involve cash-heavy businesses, such as gambling. Jurisdictions with money laundering histories or connections with potential money launderers are another area of concern.
It is essential that companies of all sizes that face transactional risks develop an AML compliance template. This begins with being aware of patterns that indicate that money does not derive from legitimate activities.
Warning signs include significant cash transactions, coupled with a large number of transactions that might indicate a layering strategy. This involves splitting up deposits, such that they each remain individually under reporting thresholds. Countering this is the AML holding period, which has a requirement that deposits stay in accounts for at least five trading days, prior to being transferred to another location.
A comprehensive AML screening program involves the gathering of data from a variety of established regulatory sources, from law enforcement agencies to government watchdogs.
Through keeping a close watch on suspected entities, it is possible to single out those with potential links to anything from drug trafficking to arms proliferation. This process of verifying new clients’ identity is known as Know Your Customer (KYC).
Following the initial onboarding of a financial client, KYC compliance mandates require ongoing monitoring across an array of metrics. One focus, emphasized under the Corporate Transparency Act, involves uncovering beneficial ownership structures, or who actually owns companies (or has a stake in the operation exceeding 25 percent). This can be a challenge, given a potentially global structure of shell companies that makes true ownership difficult to ascertain. Laundered funds through shell entities may be applied toward commercial investments, various financial instruments, and real estate developments.
It’s important to note that a number of AML requirements are applicable to individuals as well as financial institutions. For example, US residents must self-report any receipts of cash exceeding $10,000 using IRS Form 8300 each year. This requirement covers multiple related payments within a 24-hour period, as well as those across a full year, exceeding $10,000.
