In a world with ever-present financial crime, knowing the three stages of anti-money laundering (AML) can be the difference between keeping your business safe – or facing huge financial penalties and reputational damage.
Yet staying up to speed with AML is a tough process that requires business owners to:
- Spend money on training staff and new technology to stay fully AML-compliant
- Find the right balance between robust compliance and a positive customer experience
- Stay up to date on rapidly evolving money laundering risks and regulations.
If you find yourself in this situation, you’re probably searching for the best way to carry out AML integration within your business.
Continue reading to find out how to do that, and how a new wave of technology is helping businesses get better at fighting financial crime.
Table of contents
- What is anti-money laundering?
- Why is anti-money laundering so important right now?
- What are the 3 stages of anti-money laundering? How new tech can help you through them
- Prepare your business for the three stages of anti-money laundering with Berkeley Payment
Want to protect your business from fraud and meet AML compliance? Sign up with Berkeley Payments to find out how our real-time payments platform can help you do this.
What is anti-money laundering?
Anti-money laundering seeks to stop money laundering activities that introduce illicit money (obtained through drug trafficking, terrorism, or fraud) into the legitimate financial system.
AML compliance is the official way of getting companies to do this. This is made up of processes and regulations that businesses must follow to prevent criminals from disguising illegal money as a legitimate source of income.
Three examples of AML are verifying the source of funds, monitoring transactions for suspicious activity, and reporting anything unusual to the authorities.
By following these guidelines (including some set by the United Nations), businesses help protect themselves from severe financial and reputational risk. They also help safeguard the financial system.
Why is anti-money laundering so important right now?
A recent rise in geopolitical turmoil has promoted law enforcement agencies to aggressively intensify their compliance requirements.
This has led to regulators taking severe legal action against major banks, including HSBC and Deutsche Bank. Crypto platform Binance also agreed to pay over $4 billion to the US Justice Department in 2023, a record year for AML banking fines.
Major banks and exchanges received record fines in 2023
Source: AML Watcher
The threat of non-compliance action has created a surge in demand for new AML measures, including KYC requirements for banks – and new technology is stepping up to the plate.
Artificial intelligence (AI) and machine learning (ML) are the two forces driving this transformation, and they’re already essential tools, according to Niall Twomey, Chief Product & Technology Officer for AML software firm Fenergo.
“AI and AML play an indispensable role in helping banking compliance leaders battle financial crime to build operational resilience, prevent regulatory fines, fortify the bank’s reputation, and increase profit margins”, says Twomey in a recent Forbes article.
As we enter a new era of AML measures, business leaders should be fully informed about which new tools are available to them in the fight against financial crime.
The next section aims to answer this by looking at how the likes of AI and AML will help during the three stages of anti-money laundering.
What are the 3 stages of anti-money laundering? How new tech can help you through them
The financial crime of disguising illegal funds as legitimate income happens in three stages known as the money laundering cycle.
Anti-Money Laundering (AML) efforts aim to disrupt this process at every turn, which is why there are also three stages of anti-money laundering.
Understanding the three stages of money laundering – the placement stage, layering, and integration – is crucial for building robust AML defenses.
Stage 1: Preventing placement
How does the money laundering process usually begin? Well, the first stage, known as “placement”, focuses on getting "dirty money" (often from activities like drug trafficking) into the financial system.
AML efforts at this point concentrate on identifying and preventing suspicious activity using well-known methods.
Know Your Customer (KYC) & Customer Due Diligence (CDD)
Financial institutions (FIs) must thoroughly verify the identities of customers and the source of their funds by law. This helps identify high-risk individuals and businesses associated with criminal activity.
KYC/CDD goes beyond basic information gathering and may require an investigation into the source of wealth for high-risk clients.
Transaction monitoring
FIs monitor account activity for suspicious patterns, like large cash deposits, unusual wire transfers, or smurfing attempts – these are multiple small deposits below reporting thresholds).
Sanctions screening
FIs check customers and transactions against government sanctions lists to identify individuals or entities linked to illegal activities, including terrorism. This screening also includes checking against foreign bank accounts and any money laundering activities associated with them.
How new technology is helping
The first stage is focused on keeping payment fraud prevention high with thorough checks, and new technology is helping greatly.
Automating tasks like data entry with Optical Character Recognition (OCR) helps speed up KYC customer onboarding so that financial entities free up more resources for more complex tasks and reduce human error.
Artificial intelligence (AI) also greatly enhances biometric verification, like facial recognition, so that companies can identify customers in seconds instead of manually checking documents.
AI tools can also screen vast swathes of data for unusual transaction patterns in just seconds, compared to the vast amount of hours needed in the past.
Stage 2: Disrupting the layering stage
The second stage in the process of legitimizing funds is called layering, but what is an example of the layering phase of money laundering?
The short answer is that criminals try to muddy their trail through a series of complex transactions across different financial instruments and jurisdictions once money enters the system.
AML efforts at this stage focus on disrupting these tactics and include the following tactics.
Structuring detection
One of the most important AML layering examples is when FIs monitor for financial transactions just below reporting thresholds that might indicate criminals attempting to avoid detection through structuring.
Suspicious patterns of money orders, foreign currency exchanges, or even cryptocurrency transactions, are common examples of this tactic.
Cross-border collaboration
AML authorities work together across borders to track the movement of funds and identify suspicious patterns that might not be evident in a single country.
This is where information sharing becomes crucial as officials can identify money laundering schemes that exploit loopholes in different regulatory systems.
Enhanced reporting
Stricter reporting requirements for certain types of transactions, like large cash movements or real estate purchases, make it harder for criminals to exploit loopholes.
For instance, AML regulations might require reporting suspicious activity related to high-value purchases of real estate, a common tactic in the next integration stage.
How new technology is helping
This second stage is often the most problematic, but several new layering anti-money laundering tools are helping.
Machine-learning algorithms, for example, can detect unusual activity such as frequent money order purchases, rapid foreign currency exchanges, or even a surge in cryptocurrency transactions – all potential red flags during the layering and integration stages of money laundering.
Stage 3: Integration roadblocks
The final stage of money laundering aims to integrate illicit funds back into the criminals' legitimate financial activities.
Here's where AML efforts focus on exposing these attempts.
Suspicious Activity Reporting (SAR)
FIs are required to report suspicious activity to authorities so that they can start investigating money laundering schemes.
These reports (SARs) might include suspicious transactions involving shell companies, casinos, or attempts to use false invoicing to disguise the original source of funds.
Law enforcement cooperation
AML investigations often involve financial institutions and law enforcement agencies to join forces to track and seize laundered funds. Law enforcement uses transaction monitoring data and SAR reports to build a case against money laundering activities.
Shell company scrutiny
Authorities pay close attention to companies with no apparent legitimate business activity, which could be used to hide the source of funds. This may involve investigating the source of wealth used to establish these shell companies and uncovering any links to criminal activity.
How new technology is helping
AI-powered due diligence tools can root out shell companies by analyzing company formation records, ownership structures, and financial activity.
The fight against money laundering is a constant battle, but new technologies are emerging to empower companies offering financial services.
This battle is made easier thanks to real-time payment platforms and card providers now offering built-in, AI-powered AML tools within their financial solutions.
Prepare your business for the three stages of anti-money laundering with Berkeley Payment
Robust anti-money laundering (AML) compliance is no longer optional – it's essential for keeping your business safe.
Navigating AML, however, can be a daunting task, one that can go wrong without expert guidance.
Fortunately, Berkeley Payment is stepping up to the challenge.
Our embedded finance platform comes with built-in AI and ML tools that help streamline your AML compliance process. With us, you can:
- Automate KYC/CDD: Streamline customer onboarding with AI-powered data entry and biometric verification. Reduce manual errors and free up resources for complex tasks.
- Integrate via a single API: Our AML solutions quickly integrate with your existing financial infrastructure.
- Real-time protection: Enjoy peace of mind with 24/7 transaction monitoring and risk assessment.
- Expert support: Our dedicated team is here to guide you through every step of your AML compliance process.
Don't let AML compliance become a burden. Partner with Berkeley Payment and fight financial crime with the power of AI.
Guessing how to meet AML regulations is a dangerous game. Contact Berkeley Payments today to find out how our payment systems and APIs can protect your company from costly financial mistakes.
