A Quick Guide to Money Laundering and its Prevention Using AML Compliance


Money laundering, as the name suggests, is the process of cleaning dirty money into a financially legal form so that it can be used in normal day-to-day operations. Blacklisted criminals and fugitives often use this money to pursue their unethical motives like financing terror activities, drug trafficking, bulk smuggling and other kinds of a serious offense.

According to Europol, Almost 3 to 5% of the global GDP is laundered each year which makes almost 1.87 trillion USD. While regulatory authorities like EU, FinCEN and FATF enforce financial laws to deter criminal activities, implementing these frameworks remains a challenging problem. AML/KYC compliance is a good bet when it comes to tackling financial crime and keeping criminals at bay. 

Stages of Cleaning Black Money

Money Laundering is usually carried out in three main steps where the illegal money is first placed into the financial system, then is washed using different methods for safe use.

1- Placement

This stage of money laundering involves the placement of currency into the legal banking system. This could be performed by any of the following means:

  • Cash Businesses

The money acquired from illegitimate sources is added to small businesses which don’t have proper rules and regulations for cash flow.

  • Fake Invoices

Another method to show that cash was put into the financial system is by generating false invoices with different details.

  • Structuring

Also known as smurfing is used to divide a large accumulation of dirty money into smaller segments and store it over various platforms so that banking regulators may not be able to detect suspicious and large transactions.

  • Foreign Banks

Criminals tie links with foreign companies to hide their assets from the government. By storing a handsome amount of black money in these accounts, and sending it back to the country of their stay, money launderers get a good bang for their buck.

  • Offshore Companies and Trusts

Hiding behind the veil of a noble cause, criminals even use trust organizations or other offshore organizations to hide their identity.

2- Layering

The main purpose of this stage is to repeat a cycle of transactions over multiple channels over and over again to hide the origin of dirty money. This makes transactions hard to detect since a very long money trail is required to catch a fake user.

3- Extraction

Criminal identities use many ways to get their hands on genuine user identities to steal sensitive data and use it to launder money from over-the-counter channels. This helps them avoid law enforcement authorities from tracking them down easily. Criminals often have to pay huge sums in order to wash money to legitimize its use. The act of integrating the dirty money into the legal system is carried out using certain ways and means which include:

  • Employees with Synthetic Identities

These individuals are paid to receive black money from launderers and act as an intermediary between the cash and the criminal.

  • Loan Agreements

Fake loan requests often initiated by fraudsters with no guarantee of return come in false loan agreement frauds.

What is Anti Money Laundering?

Financial obligations like Anti Money Laundering (AML) guidelines are issued by regulatory authorities to minimize and control money laundering activities worldwide. The European Union requires all financial organizations to perform AML checks during 

 and checkouts. The recent directive, 5AMLD, not only focuses on the need for AML compliance but also presents recommendations to regulate the cryptocurrency market, which has now become the biggest platform for money laundering crime.

AML/KYC Compliance to the Rescue

Today, with the constant rise in fraudulent incidents, AML/KYC presents a viable solution to protect business and customer identities. Intelligent AML solutions designed by enterprises regularly conduct employee training and internal audits to make sure international compliance standards are met to the fullest. AML/KYC compliance is the driving force in fighting against potential cybercrime and unauthorized use of genuine user identities. With implementing proper AML checks, criminals will always get the better of financial entities.

Today, banks and online businesses invest in intelligent AML screening solutions which helps detect unusual patterns in transactions, and based on the user history and portfolio, mark the profile as suspicious or flagged. Unlike previous means of preventing money laundering, these systems are fully automated which saves operational expenses for the organization and also eliminates criminal activities.

To sum it up, money laundering poses a serious threat to financial organizations like banks and digital enterprises. Criminals employ various methods to wash dirty money to legally use it. Anti Money Laundering solutions backed with the power of artificial intelligence provides identity cover for customers as well as business entities with AML compliance.