What is Anti-Money Laundering?

Delving into the world of anti-money laundering (AML) begins with demystifying its foundation: money laundering. Imagine these two words, "money" and "laundering," coming together to form a puzzling yet crucial concept.

Think of laundering as cleaning and hiding dirt. Similarly, money laundering is the shady act of concealing illegally earned money. This isn't just frowned upon – it's a crime across most countries.

Countries worldwide have crafted laws and rules to stop this deceptive practice in its tracks. Let's explore how these measures work and why they matter in the fight against financial crime.

What is the meaning of anti-money laundering?

Anti-money laundering (AML) is a widely recognised term that describes efforts and measures aimed at preventing and combating financial crimes associated with money laundering. 

Financial institutions and banks are legally obligated to adhere to anti-money laundering regulations to prevent their services from being used for illegal financial activities, particularly those involving converting illicitly acquired funds into legitimate assets. These regulations are crucial in safeguarding the financial system's integrity and preventing criminals from laundering the proceeds of their unlawful activities.

While your organisation may diligently adhere to AML compliance regulations, it's vital to recognise that your partners and business associates may not necessarily follow the same AML standards. This risk is particularly pertinent in international business transactions where counterparties must fully comply with government-established anti-money laundering regulations.

What is an example of anti-money laundering?

Anti-money laundering examples can be as simple as the bank calling a customer to verify the source of a large sum of money deposited into the customer’s account. Other times, it could be more complex frameworks, policies, and protocols. 

Banking industry is one of the best examples when it comes to anti-money laundering (AML) measures. Banks and financial institutions must implement various AML procedures to detect and prevent money laundering activities. Here's an example of how AML works:

1. Customer due diligence (CDD): The bank conducts customer due diligence when a new customer opens an account. This process involves verifying the customer's identity using documents such as passports, driver's licenses, or utility bills. The bank also assesses the customer's risk profile based on their financial activities and background.

2. Transaction monitoring: Banks employ sophisticated software to monitor real-time customer transactions. This software can detect unusual or suspicious activities, such as large cash deposits, rapid movement of funds, or transactions to high-risk jurisdictions.

3. Suspicious activity reporting: If the bank's monitoring systems identify a suspicious transaction, it is reported to the appropriate authorities, often through a suspicious activity report (SAR). These reports provide detailed information about the suspicious activity, and the authorities can investigate further.

4. Currency transaction reports (CTR): Banks must report large cash transactions to the government. The bank must file a CTR if a customer deposits or withdraws significant cash. This protocol helps track large cash movements often associated with money laundering.

5. Sanctions screening: Banks screen customer names and transaction details against government sanctions lists. These lists contain individuals, entities, or countries subject to economic or trade sanctions. Transactions involving sanctioned parties are blocked or reported.

6. Employee training: Bank employees are trained to recognise signs of money laundering and to adhere to AML procedures. This procedure includes ongoing training to stay updated on evolving money laundering tactics.

7. Record keeping: Banks must maintain detailed records of customer transactions and AML-related activities. These records must be kept for a specified period and should be available for regulatory inspections.

8. Risk-based approach: AML programs often use a risk-based approach, meaning higher-risk customers or transactions receive more scrutiny. For example, a customer involved in international trade might be considered a higher risk, requiring enhanced due diligence.

9. Regulatory compliance: Banks are subject to oversight by government agencies and regulatory bodies responsible for enforcing AML laws. Non-compliance can result in fines, penalties, or loss of banking licenses.

What are the 3 stages of AML?

The primary aim of money laundering is to legitimise money from criminal activities. For money laundering to be complete, it often goes through three crucial stages. The three stages are placement, layering and integration or extraction in the order of mentioning. 

For example, placement, which aims to place illegal money into legitimate business or accounts so that is looks natural, is the first stage of money laundering, and below are some of the techniques it uses.

1. Cash businesses: Criminals may integrate illicitly gained cash into legitimate businesses that primarily deal in cash transactions. Mixing illegal proceeds with legal earnings makes it challenging to distinguish between the two.

2. False invoicing: Criminals create fake invoices to make it appear that they received legitimate payments for goods or services. This action allows them to explain the source of their funds as business revenue.

3. Smurfing: Smurfing, also known as structuring, involves breaking down large sums of money into smaller, less suspicious amounts. These smaller amounts are deposited into bank accounts or used for various expenses, making it less likely to trigger anti-money laundering reporting thresholds.

4. Trusts and offshore companies: Criminals may establish trusts or offshore companies to hide their identity as the beneficial owners of assets. These entities can make it difficult for authorities to trace the source of funds.

5. Foreign bank accounts: Money launderers might physically transport cash abroad, keeping the amounts below the customs declaration threshold to avoid suspicion. Once abroad, they deposit the money into foreign bank accounts and then transfer it back to their home country through legal channels.

6. Aborted transactions: Criminals may initiate transactions through lawyers or accountants, depositing funds into a client account for a proposed transaction. If the transaction is cancelled or falls through, the funds are returned to the client, appearing as if they came from a legitimate source.

What is the AML law in Latvia?

The Law on Prevention of Money Laundering and Terrorist Financing, adopted in 2002, is the body of regulations and policies created to combat and enforce anti-money laundering in Latvia.

This legal framework has been adjusted and amended severally to mirror the international best practices and laws on anti-money laundering. Like most other countries, Latvia understands the importance of anti-money laundering because it is crucial in protecting financial institutions. 

A key component of the Latvian anti-money laundering policy is the requirement on concerned financial institutions like banks to conduct CDD (customer due diligence) or KYC (know-your-customer) protocols or measures. This process allows these institutions to possess the basic data of their customers to eliminate anonymity. Furthermore, corporations and businesses sometimes are issued certificates. 

Another crucial aspect of the anti-money laundering policy in Latvia is the requirement on the part of financial institutions to monitor, question and report suspicious activities from clients, such as the deposit or transaction of large sums of money, especially on the part of businesses and corporations.  

As a legal framework, there are multiple protocols and mechanisms alongside frameworks enshrined to combat money laundering. Numerous clients have expressed displeasure with some anti-money laundering procedures, but the merits have always outweighed the disadvantages.