However, I could not find a single example that states what is actually done in AML. So: Which kinds of checks are run in AML?
source: I used to alongside the AML team on other (trading) compliance but this was a few years back and I was mostly involved with a specific system.
Most of the AML check that are done are to check:
The person or organisation being checked (either per transaction or at account opening time and frequent times thereafter):
- are who they claim to be, especially that they aren't intentionally misspelling their name to prevent the checks working. Criminal records are also usually checked for the person being involved in crimes "adjacent" to money laundering such as drug taking.
- are not personally on any red lists or connected to anyone on red lists. Similarly they check if the person or connected persons are already flagged for (suspected) AML. The checks for being "connected" to someone are complex and use a number of different factors including people living in the same residence, with connected accounts (not just bank accounts and financial transactions but things like utility bills) etc.. Sometimes even using the same bank teller exclusively or using one who is linked to money laundering can get you flagged even if it is a coincidence.
- has links to a high risk country; I travel to an African country which is on the high risk for fraud, corruption and money laundering quite frequently but when I first went I had some fun with AML teams. At some point my frequency of travel there will mean I have to jump through more AML hoops.
- has a link to the source or destination of the funds by account, country, region etc.. This is known in the business as "Know Your Customer" or KYC.
That the source or destination of any funds:
- isn't flagged as an AML risk or has transactions with an account flagged as an AML risk . This isn't a straight yes or no answer - a small number of "questionable" transactions won't always flag an account for AML and sometimes you don't know that the person you're transacting with is also cleaning money.
- is "explainable"; if a person with a job earning $75,000 a year suddenly starts receiving $100,000 in a day the account will be flagged. If the source of those funds comes from another party their links to the account owner will be investigated as well. If my father transfers me $100,000 he has lying around in an account from 40 years of working that explains the source of funds and will either not trigger or remove a flag.
- isn't part of a pattern that might suggest money laundering - is any part of the money actually being spent on things a person might need or is it just going round and round the financial system? These patterns are very complicated and a lot of firms use specialized data mining and AI techniques to spot new patterns. These include the amounts being reasonable as well as the sorts of businesses being reasonable - spending exactly $1000.00 in a grocery store might be suspicious, for example, because whole number amounts are very unusual at those types of business. That can typically indicate that the account is just being used to buy gift cards to try to clean the money.
Financial institutions share a lot of information both between each other and to regulators to ensure all of this works. None of this is an exact science either and a full investigation, with law enforcement involvement, will be triggered when there is a reasonable suspicion of money laundering. I use the term "flagged" above to cover a multitude of sins but essentially an AML flag is the first step towards being investigated. The bank and other financial institutions will start to take more of an interest in your dealings and try, with the help of other banking and clearing institutions and the regulators, to further trace the transactions to show that they may or may not have been the proceeds of crime.
There are quite a few books on Amazon, from a cursory search, on this subject if you're really interested!
There are several concepts which are linked together: AML (anti-money laundering), CTF (counter terrorism financing), KYC (know you customer), and PEP (politically exposed person).
The goal is to make sure the account is not used to manipulate funds of dubious origin or with a dubious intent:
- proceeds of crime
- financing of crime or terrorism
- tax evasion ...
It all starts with KYC: know your customer. That's why when you open an account you need to prove your identity, tell them what you do, how much you make and so on. The bank (or other financial or payment institution) will check your identity against some databases, including list of politically exposed persons (PEPs), which are people in a position of power (ministers, MPs, top managers of large public companies, etc.), which could be subject to corruption, and more. PEPs will be subject to more stringent checks, and of course anyone on sanctions lists, linked to crime, terrorism, or countries under sanctions will usually not be able to open an account, or be under careful observation.
Once they know who you are and open an account for you, checks are made on incoming and outgoing operations. Anything above a certain amount will be reported to the relevant authorities (e.g. Fincen in the US, Tracfin in France, etc.). Anything out of the ordinary likewise. If you send or receive money to/from a suspect person, organisation or country, you will be flagged. If you suddenly send or receive large amounts of money which don't match you usual income or spending, you will be flagged.
In some cases they will ask you questions. It might be a perfectly legitimate operation that's just a bit out of the ordinary. In other cases they will just report to the authorities and it's up to them to follow up, possibly cross-referencing with other reports or any other information they may have. Depending on the nature of the unusual or suspect transaction, it may then be reported to the tax authorities (e.g. IRS in the US) if tax evasion is suspected, to the police/justice if other forms of fraud are suspected (money laundering, proceeds or crime...), or even to counter-terrorism (FBI in the US) if it may involve terrorism financing.
Note that even though in many places there are thresholds for operations to be reported (like 10K), splitting a transaction in a several smaller transactions (called "structuring") will not prevent the reporting (quite the contrary, it makes things even more suspect).
Sometimes all these measures mean that even the most innocent of people will be burdened with questions and delays and whatnot just because something unusual happens. But all these measures are not going away anytime soon (and banks which have not complied with those and turned a blind eye have regularly made headlines, getting huge fines, to deter others).