If you work in an industry that’s considered high risk, you’re probably familiar with the concept of money laundering. Money laundering is a process that criminal enterprises use to hide the origins of illegally obtained earnings. Criminals use these funds to buy assets such as properties, cars or other everyday items without arousing suspicion.
According to the United Nations Department of Economic and Social Affairs, about $1.6 trillion — 2.7% of global GDP — was laundered in 2020 worldwide. The UK government estimates that organised crime costs the economy £37 billion per year, largely due to money laundering.
Laundered money has even been used to finance terrorist activities. Understandably, this has led to an increased global effort to stamp out money laundering, as cash moves around the world quicker and more freely than ever before.
Despite TV shows often depicting money laundering as an easy way to "wash cash", there are strict measures in place to ensure businesses aren’t used to launder money for criminal enterprises. This is where anti-money laundering (AML) comes in.
But before we look at exactly what AML is and how technology like open banking can help, it’s worth defining the three main stages of money laundering.
What are the three stages of money laundering?
Money laundering involves these three stages:
Placement: when criminal organisations move money into legitimate accounts or businesses. These could be bank accounts or business accounts owned by legitimate companies (also known as a “front”). AML procedures look to identify any suspicious activity during this stage. Businesses and individuals should always be able to account for where the money has come from.
Layering: once illegally obtained money has been placed, criminals look to break it down into smaller sums and move it around, including across borders. This makes it much harder for authorities to track the money and prove that it was laundered.
Integration: the money is then reintroduced into the legitimate economy. At this point, the money laundering cycle is complete and the criminal has successfully laundered their money.
What is anti-money laundering (AML)?
AML refers to the measures that certain businesses must take to mitigate the risk of money laundering.
The United States was one of the first countries to introduce AML legislation with the establishment of the Bank Secrecy Act in 1970. In 1989, several countries formed the international Financial Action Task Force (FATF) to combat money laundering on an international level with a specific focus on preventing its use for terrorist financing.
Countries set national AML frameworks based on standards and recommendations from the FATF. AML legislation requires businesses to adequately identify customers so the origins of their proceeds can be tracked and traced.
What is an AML check?
Customer due diligence obligations, sometimes unofficially referred to as "AML checks", are required under law for regulated businesses. They can include know you customer (KYC) verifications, real-time screenings, enhanced due diligence checks and more.
The types of checks required vary depending on the type of business and the risks associated with the clients and transactions.
AML — know your customer requirements
At the start of a new business relationship, companies must make an effort to identify and verify customers as part of the AML risk assessment.
Banking, financial services and online gambling and betting are a few of the industries required to perform KYC checks on new customers as part of their AML obligations.
In the UK, several documents can be accepted from new customers to prove their identity as part of a KYC check. These include:
Proof of identity:
Photocard driving licence
National ID card
Proof of address:
UK driving licence with residential address
UK or foreign bank statement
UK mortgage statement
UK tax bill
UK TV licence letter
Voter roll search
In most cases, customers are required to upload these documents and submit them using an online portal. It’s then down to the business to conduct the relevant checks and decide whether they pass the KYC process.
What AML checks are required for banks and financial institutions?
Millions of payments are made through banks and other financial institutions every day — some of which move across international borders with varying financial regulation. The movement of this high volume of money naturally makes banks more concerned about the risks of money laundering.
To combat this risk, banks and financial institutions are subject to some of the strictest AML regulations across all industries. These include:
Customer due diligence
Customer and transaction screening
Suspicious activity monitoring
With more financial services activity taking place online, there are new opportunities for money laundering. The industry is adapting to these threats by implementing new AML requirements like recent updates to AML regulation requiring businesses to notify the FCA when transferring cryptoassets. Open banking makes it easier for companies to meet those requirements.
What AML checks are required in the online gambling industry?
AML checks in the UK online gambling industry require operators to carry out KYC in accordance with a risk based approach. These checks include identifying and verifying their customers are who they say they are and checking their source of funds.
Online gambling operators are also required to perform adequate age verification and affordability checks. This is usually done by asking the customer to upload documents such as passports, driving licences, bank statements or payslips.
How can open banking support businesses with AML checks?
Open banking helps businesses meet their AML requirements by using application programming interfaces (APIs) to compare the information a customer has provided against real-time account and transaction data directly from their bank. This supports businesses in fast tracking their KYC processes in a secure way.
Open banking APIs are secure and don’t require customers to share sensitive information like card details or passport images. This protects them against fraud, but also protects businesses against potential data breaches that could compromise trust in their brand.
According to a study conducted by YouGov, two out of three players said they’d abandon signing up to a new gaming site after five minutes. With KYC checks potentially taking hours or days to complete, and the error-prone and admin-heavy nature of manual uploads, there’s demand for solutions that help speed up the KYC process.
TrueLayer’s verification API helps businesses verify customers in seconds without the need for them to upload proof of account or identity documentation, improving the user experience. To find out more about how open banking can help your business meet its AML requirements and how else you can benefit, check out our open banking guide.