Expert Guide of Money Laundering Regulations in 2024

What is money laundering?

Money laundering is the process of disguising the proceeds of criminal activity as legitimate funds. This is typically done by moving money through a series of transactions to obscure its origin and make it appear as though it was obtained through legal means.

To prevent money laundering, law requires regulated entities to implement measures to detect and prevent money laundering. A variety of regulatory bodies such as the Financial Conduct Authority (FCA) enforce these measures to form money laundering regulation, requiring businesses to actively monitor money laundering, terrorist financing, and transfer of funds.

The United Nations Office on Drugs and Crime (UNODC) estimates that between 2 and 5% of global GDP is laundered each year, equalling between EUR 715 billion and 1.87 trillion each year. Therefore, the regulation of businesses to prevent money laundering is of paramount importance.

However, more stringent regulation correlates with increased friction so regulated entities must balance complying with regulation whilst ensuring that the customer journey doesn’t suffer.

Core components of money laundering regulations

There are many aspects to money laundering regulations which includes a significant amount more than the initial regulatory guidance. The entire process of money laundering regulation includes input from the regulatory bodies, through to regulated entities, auditors, and beyond.

The typical Money Laundering Regulations (MLRs) process is as follows:

1. Legal frameworks

Across the globe, countries have implemented laws and regulations to assist with Anti-Money Laundering compliance. Major legislation includes the USA PATRIOT Act in the United States and the EU 6th Anti-Money Laundering Directive in the European Union, setting stringent standards for regulated entities.

The Financial Conduct Authority (FCA) enforce the money laundering regulations and are primarily comprised of ‘The Money Laundering and Terrorist Financing (Amendment) Regulations 2023’ which builds upon the initial regulation set out in 2017. The amendment placed a focus on the requirement of Enhanced Due Diligence (EDD) on domestic Politically Exposed Persons (PEPs) to be less than in relation to foreign PEPs, which is a requirement by the Financial Services and Markets Act 2023.

The complexity for regulated businesses is that the FCA money laundering regulations are only applicable in certain jurisdictions. Whilst the FCA and other governing bodies are seeking to achieve the same goal, there are various nuances which complicates the compliance process.

The initial Money Laundering and Terrorist Financing Regulations 2017 required regulated entities to do the following:

Conduct a money laundering and terrorist risk assessment.
Implement systems, policies, controls, and procedures to address money laundering and terrorist financing risks and meet the requirements under the MLR 2017.
Apply policies, procedures, and controls across a business’ group structure.
Adopt appropriate internal controls.
Provide training to staff.
Apply for approval if someone is the Ultimate Beneficial Owner (UBO), officer, or manager of a firm.
Comply with new customer due diligence, enhanced due diligence, and simplified due diligence requirements.
Comply with requirements relating to Politically Exposed Persons (PEPs).
Make sure record keeping and data protection systems, policies and procedures meet the requirement of the regulations.
Comply with new obligations relating to record keeping and the provision of information about beneficial ownership if a business acts as a trustee of a relevant trust.
Source - “Quick guide to the Money Laundering Regulations 2017”

2. Customer Due Diligence (CDD)

Identifying and verifying customer identities at onboarding is the first crucial obligation for regulated entities to prevent money laundering. The requirement for Know Your Customer (KYC) procedures includes identity verification and checking against Politically Exposed Persons (PEPs), sanctions, adverse media and watchlists. Some of these checks such as adverse media are optional but help build a better picture of a customer risk profile, whereas sanctions and money laundering go hand in hand as sanctioned individuals, entities, and vessels are solid indicators of potential financial crime. Enhanced Due Diligence (EDD) is also required for high-risk customers.

3. Transaction monitoring & reporting

As part of money laundering regulations, businesses are also required to monitor customers past the point of account opening. This includes re-screening customers against PEP, sanctions, adverse media, and watchlists to identify any changes to customers. Transaction monitoring is also required which is the process of monitoring transactions such as transfers, withdrawals, and deposits to identify suspicious behaviour.

4. Recordkeeping

Regulation requirements mandate the maintenance of transaction records and evidence of all AML checks performed for auditing purposes. This holds regulated entities accountable for all Customer Due Diligence (CDD) performed.

5. Compliance programs and internal controls

Regulated entities must establish robust AML compliance programs which is a set of responsibilities for both financial and designated non-financial businesses, and implement internal controls to actively prevent money laundering activities.

6. Training and awareness

The emergence of IDV RegTech businesses such as FullCircl has helped significantly to automate the majority of the AML identity verification process. However, AML training is also imperative for employees as Money Laundering Reporting Officers (MLROs) and compliance teams may need to perform manual intervention. Strategies to enhance awareness and foster a culture of compliance are emphasised.

7. Penalties and enforcement

Non-compliance with Anti-Money Laundering regulations can result in severe penalties enforced by regulators. In banking alone, there were $835 million+ in fines incurred in 2023, ranging from inadequate AML systems to acceptance of onboarded customers without the correct investigation. Enforcement agencies play a pivotal role in ensuring adherence to AML laws to safeguard financial integrity.

One of the biggest enforcement actions from 2023 was a fine given to Binance of $4.3million for failings related to money laundering. Upon investigation, Binance had let the flow of illicit funds from countries including Russia, Cuba, and Iran and multiple sanctions failings. This fine alone demonstrates the importance of a secure AML system.

How does money laundering work?

In the last decade, financial transactions have become increasingly digitised, offering new avenues for laundering money through online platforms. Here’s how it typically works:

1. Placement

Financial systems accept illicit funds, often through small and discreet transactions to avoid detection. Cybercriminals may use techniques such as structuring, where large sums are broken into smaller ones, or smurfing, which involves using numerous individuals to make deposits.

2. Layering

The layering stage involves moving funds through various accounts or financial instruments to further hide their origins. Online banking services, cryptocurrency exchanges, and offshore accounts are commonly used for layering due to their anonymity and ease of access.

3. Integration

The final stage involves the laundered funds being reintroduced into the legitimate economy, appearing to be from legal sources. Online investment platforms, real estate transactions, and shell companies are used to integrate the laundered money back into the financial system.

As financial transactions have become more digitised, emerging threats have followed. Virtual currencies like Bitcoin offer pseudonymity, making them attractive for money laundering activities, online banking services provide avenues for rapid and global movement of funds, making tracking and detection more challenging, and the use of anonymising tools such as virtual private networks (VPNs) and encrypted communication further complicates efforts to trace illicit transactions.

The digital landscape has provided criminals with sophisticated tools to launder money through financial transactions online, requiring constant vigilance and collaboration between regulators, law enforcement, and financial institutions to combat illicit activities.

Evolution of money laundering regulations

Historically, money laundering emerged as a global concern in the 20th century with the rise of organised crime and the proliferation of illicit activities such as drug trafficking and smuggling. As criminal enterprises became more complex and sought to conceal the origins of their funds, the need for effective methods to launder money became apparent.

Milestones in the development of Anti-Money Laundering (AML) regulations include the establishment of the Financial Action Task Force (FATF) in 1989, which set global standards and guidelines for combating money laundering. The USA Patriot Act of 2001 in the United States initially introduced comprehensive AML measures, including enhanced due diligence requirements and the creation of financial intelligence units. More recently, The UK Government imposed The Money Laundering and Terrorist Financing (Amendment) Regulations 2023 to implement stricter requirements for regulated entities to track high-risk factors, e-money thresholds for due diligence, a closer focus on identifying Ultimate Beneficial Ownership, and reporting discrepancies to Companies House.

Due to the ever-evolving nature of complexity of money laundering, regulation is constantly developing, and the goalposts are moving for regulated entities to ensure they are fully compliant.

Key global organisations and initiatives to combat money laundering include the Financial Action Task Force (FATF), which coordinates efforts among member countries to prevent money laundering and terrorist financing through policy development, evaluation, and cooperation. Additionally, the United Nations Office on Drugs and Crime (UNODC) works to enhance global cooperation. These organisations underscore the importance of global collaboration in addressing the complex challenges posed by money laundering.

The impact of money laundering

Money laundering comes in many forms, ranging from drug trafficking and human smuggling to cybercrime and corruption. Drug trafficking remains one of the most lucrative criminal enterprises with organised crime syndicates funnelling massive sums of money through illicit channels.

Cybercrime, including hacking, identity theft, and online fraud has become increasingly prevalent in the digital age, providing criminals with more opportunities to launder money. Corruption, whether in the form of bribery, embezzlement, or illicit government contracts, also generate funds that require laundering to conceal their origins.

The consequences of money laundering for society and the economy are profound. Money laundering facilitates the growth and sustainability of criminal enterprises, perpetuating violence, exploitation, and global instability.

The flow of illicit funds distorts economic systems, undermining fair competition and fostering a climate of corruption. Money laundering enables criminals to evade taxes, depriving governments of vital revenue for public services and infrastructure. Therefore, the Defence Against Money Laundering (DAML) through stringent regulation aims to safeguard society and preserve the integrity of the global financial system whilst reducing and preventing financial crime.

The future of money laundering regulations

As digitisation of financial institutions continues globally, regulation is only going to become stricter and more complex. Criminals are becoming more intelligent, cross-border transactions are the norm, and the emergence of AI poses a serious threat. The importance of a strict compliance program has never been more important.

The future outlook of Anti-Money Laundering regulations and enforcement emphasises the necessity for a more collaborative approach. If regulators and regulated entities want to truly prevent money laundering over and above it being a tick box exercise, there cannot be a disconnect between the two. Global harmonisation of regulation, advanced technology to fight financial crime, and cooperation between regulatory bodies and entities can provide the balance needed to counter money laundering whilst ensuring regulated entities can maximise revenue by providing an efficient customer journey.

How FullCircl can help

FullCircl provides a full suite of AML screening and monitoring including global PEPs, sanctions, and adverse media to actively identify the risk of money laundering at onboarding and through ongoing monitoring. On top of that, we understand that service providers need to offer much more than AML checks alone. We offer a consultative and collaborative approach to understand your unique requirements, the regulation you must comply with, and have a core understanding of how best to balance regulatory requirements with great customer experience.

FullCircl removes the regulatory and verification roadblocks to drive revenue growth by providing a full IDV orchestration platform including KYC in 160+ countries, document verification with facial comparison, Know Your Business (KYB) checks, anti-fraud, and more. FullCircl is data agnostic and uses 20+ data suppliers delivered via leading technology to provide clients with the most secure AML compliance product on the market.

Clients trust FullCircl to keep ahead of evolving regulation whilst giving their customers the best possible onboarding experience to drive customer advocacy and revenue growth.

Interested in hearing more? Contact us today for a free consultation and demonstration of the FullCircl platform.