AML Checks

AML Checks: The Ultimate Identity Assessment

Are you an organisation subject to Anti-Money Laundering regulations? If so, you will want to invest in AML checks as a vital part of your identity assessment and verification process. Not only do AML checks provide you with improved compliance measures for potentially high risk customers, but they can also help build trust with those individuals by providing them with the assurance that their financial transactions are secure.

When it comes to identity assessment, AML checks are often considered the gold standard. With an AML check, organisations can accurately and quickly identify potential customers or clients. This allows them to properly assess risk levels before starting a business relationship. But how does an AML check work exactly? And what should you be aware of when conducting one? In this article we'll take a look at everything related to AML checks - from understanding their purpose, benefits and drawbacks to discovering how they operate and what solutions exist on the market today.

What is an AML Check?

An AML Check, or Anti-Money Laundering Check, is a type of identity verification process used to establish whether an individual is involved in money laundering activities. It is a legal requirement for companies to undertake these checks on customers as part of their anti-money laundering compliance efforts. 

The purpose of the check is to ensure that individuals are not engaging in illicit financial activities such as terrorist financing and other criminal activities which could put organisations at risk. 

The checks involve examining personal data such as name, address, bank account details and employment information against relevant databases and other sources. 

Organisations must maintain records of all AML checks conducted on customers so they can demonstrate their compliance with applicable regulations to the AML officer if necessary. This information may need to be shared with government or regulatory authorities should it be requested, in the UK or abroad. 

Businesses must keep records of all this information for a period of time - typically five years - to demonstrate their compliance with relevant AML laws and regulations to their designated AML officer.

AML Checks as Part of Perpetual KYC

AML checks are a necessary part of any perpetual KYC process. These checks help to identify and prevent money laundering, terrorist financing, fraud, or other financial crimes. They involve verifying the identity of customers, reviewing their transactions for suspicious activity or patterns and assessing the risk associated with them. This helps companies ensure that they are compliant with laws and regulations as per the AML officer.

The scope of AML checks can vary depending on the requirements of individual jurisdictions. Generally speaking, though, they will involve gathering customer information such as name and address, examining documentation establishing identity, screening against sanctions lists, analysing customer behaviour, conducting enhanced due diligence on high-risk customers, performing regular reviews of customer accounts and reporting suspicious activity to the relevant authorities.

The AML checks should also be tailored to meet specific requirements of each jurisdiction, since laws and regulations can differ from one country or region to another. Companies must also ensure that their AML processes are continuously updated in order to stay ahead of new threats or changes in regulations.

Finally, all companies should have a policy for monitoring customers on an ongoing basis and for re-verifying identity details when necessary. This helps ensure that any change in customer status or risk level can be identified and addressed quickly, helping to protect both the organisation and its customers. 

By implementing robust and comprehensive AML checks as part of a perpetual KYC process, companies can protect themselves and their customers from financial crime. Doing so not only helps ensure compliance, but also provides greater peace of mind to all parties involved. 

Companies must make sure that their AML checks are up-to-date, tailored to meet specific requirements, and conducted on an ongoing basis in order to remain effective. With the right tools and processes in place, companies can be confident that they are mitigating the risk of money laundering and other financial crimes.

Why are AML Checks Necessary?

Protection

AML checks are critical for UK businesses to protect themselves from financial crimes and reputational risk. Businesses must take measures to ensure they are not inadvertently involved in activities such as money laundering, terrorist financing or other forms of fraud. AML checks assist by identifying suspicious activity that may be linked to these illegal activities.

Compliance

AML checks are an essential part of compliance with the UK's Proceeds of Crime Act 2002 and Money Laundering Regulations 2017. AML checks enable organisations to identify, assess and mitigate money laundering risks within their activities. These regulations apply to both companies and individuals doing business in the UK, or using services from the UK.

The Legal Framework Governing AML Checks

AML checks in the UK are heavily guided by both domestic and international legislation, providing a regulatory landscape that seeks to tackle money laundering and other illicit financial activities robustly. Key elements of this framework are the EU's Fourth and Fifth Anti-Money Laundering Directives, as well as regulations established by global bodies such as the Financial Action Task Force (FATF).

The EU's Fourth Anti-Money Laundering Directive (4AMLD), implemented in 2015, deepened the fight against money laundering and terrorist financing. It placed a heightened emphasis on risk assessment, requiring firms to apply enhanced due diligence for higher-risk situations, and introduced stricter transparency measures around the beneficial ownership of companies and trusts.

Following the Fourth Directive, the EU's Fifth Anti-Money Laundering Directive (5AMLD) was introduced in 2020. The 5AMLD extended the scope of regulation to include virtual currencies, prepaid cards, and other high-risk third countries. It increased the level of scrutiny on complex, high-value transactions, particularly those involving politically exposed persons (PEPs).

On the global stage, the FATF plays a critical role in setting standards and promoting effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The UK, being a member of FATF, commits to implementing its recommendations, which serve as the international benchmark for AML.

In the UK, these international standards are enforced by various domestic bodies such as the Financial Conduct Authority (FCA), HM Revenue and Customs (HMRC), and the National Crime Agency (NCA). These organisations hold businesses accountable, ensuring they conduct proper AML checks and maintain the overall health and integrity of the UK's financial markets.

AML Check Process - Step-by-Step

AML checks comprise a series of rigorous processes designed to identify and manage potential risks associated with money laundering and terrorist financing. This step-by-step guide outlines the main stages involved in conducting an AML check.

Customer Due Diligence

The first step in any AML check is CDD. During this phase, firms gather and analyse information about a customer to ascertain their identity, understand the nature of their activities, and assess their risk level. The process typically includes verifying a customer's identity using reliable, independent source documents, data or information, and obtaining information on the purpose and intended nature of the business relationship.

Risk Assessment

Once initial information is gathered, firms perform a risk assessment. This includes analysing the customer's geographic location, nature of business, transaction behaviour and political exposure. The goal is to determine the potential risk of the customer engaging in money laundering or terrorist financing activities.

Enhanced Due Diligence

For higher-risk customers, businesses must perform Enhanced Due Diligence. EDD is a more detailed examination of a customer's background and intent, which might involve further checks to verify the source of funds, closely scrutinising their transactions, or conducting regular reviews of the business relationship. EDD is particularly required for business relationships with Politically Exposed Persons (PEPs). 

Ongoing Monitoring

AML checks do not end after onboarding a customer. Firms need to continually monitor customer transactions to identify any unusual or suspicious patterns that might indicate money laundering or terrorist financing. This process also involves keeping customer information up to date and reviewing their risk levels at regular intervals.

These steps work together to form a robust AML check process, enabling firms to protect themselves and the wider financial system from the risks of money laundering and terrorist financing.

What Systems Support AML Checks?

Client Screening

Client screening is a key part of compliance for any Anti-Money Laundering program. The systems used to support AML checks can vary significantly depending on the size, scope and nature of an organisation's business activities. 

For smaller businesses, basic KYC checks may suffice. This involves establishing the identity of customers and making sure they are who they say they are. This can be done through manual processes or leveraging basic software solutions such as automated customer due diligence tools. 

For larger organisations, more sophisticated technologies may be required to ensure full compliance with local regulations. The options available will depend on the type of business and the level of regulation to which it is subject. Automation and data analytics are two key areas where advanced technologies can be used to improve AML checks.

Transaction Screening

Transaction Screening is another key part of any Anti-Money Laundering system. It involves monitoring transactions and customer activity to detect potentially suspicious activities and transactions, which can then be flagged for further review.

The effectiveness of transaction screening comes down to the level of detail it provides. The more data points that can be monitored, the better. This means systems should be able to capture customer information such as name, address and contact details; transaction data including date, time and references; as well as any other relevant pieces of information.

To ensure maximum accuracy in AML checks, it’s important to regularly review and update the system’s rules, as well as introducing additional layers of control if necessary. By doing this, organisations can ensure their transaction screening systems remain up to date and in compliance with the latest regulations.

Transaction Monitoring

Transaction monitoring systems are the primary means of supporting AML checks. These systems can be used to detect and investigate unusual financial activity that is associated with money laundering or other suspicious activities. 

Transaction monitoring systems typically use data from multiple sources such as banks, card issuers, payment processors, and third party services to identify potential AML violations. The system then applies sophisticated analytics and algorithms to identify suspicious activity that may warrant further investigation. Transaction monitoring systems can also be used to detect fraud, suspicious activities associated with terrorist financing, and other criminal activities. 

For UK based companies, the Financial Conduct Authority (FCA) requires financial institutions to implement transaction monitoring systems as part of their AML compliance program. Transaction monitoring systems can also help organisations to meet their obligations under the Fourth Money Laundering Directive (MLD4).

When Do You Need to Conduct AML Checks?

The Fifth Money Laundering Directive (5MLD) requires UK firms to conduct AML checks on customers prior to the commencement of a business relationship and at regular intervals throughout their relationship. 

The checks should be conducted on customers who are individuals or corporate bodies, including trusts. 

All customers should also be re-verified at least every three years and whenever there is a significant change in the customer’s circumstances or risk profile. For example, this can include changes in the customer’s background or a significant change in their financial situation.

AML checks should also be conducted on employees and third parties with whom the firm is considering establishing a business relationship.

The Consequences of Non-Compliance with AML Checks

Failing to adhere to the requirements of AML checks can expose UK businesses to significant financial, reputational, and legal consequences.

Financial Consequences

Regulatory bodies have the power to impose heavy fines on businesses that fail to comply with AML regulations. These fines can run into millions or even billions of pounds, especially for severe or repeated violations. Beyond fines, companies may also face the costs of rectifying non-compliance issues and the potential loss of business resulting from damaged reputations.

Reputational Consequences

In an era where transparency and corporate ethics are increasingly important, allegations or findings of AML non-compliance can severely damage a firm's reputation. This could lead to a loss of trust among customers, investors, and partners, potentially resulting in reduced business opportunities and loss of market share.

Legal Consequences

Serious breaches of AML regulations can lead to criminal charges against both the business and the individuals involved. Penalties can range from imprisonment to being barred from certain business activities.

In light of these potential consequences, adherence to AML regulations should be considered not just a legal obligation, but a vital aspect of risk management and corporate responsibility.

Challenges in Conducting Effective AML Checks

Businesses often encounter certain challenges when conducting AML checks. Some of these include:

False Positives

A false positive occurs when a legitimate transaction or activity is flagged as suspicious. This can lead to unnecessary investigations, wasting valuable time and resources. While stringent measures help prevent illicit activity, an overabundance of false positives can undermine the effectiveness of AML systems.

Evolving Criminal Techniques

As AML measures become more sophisticated, so do the techniques employed by criminals. Money launderers often use advanced methods to disguise their activities, making detection increasingly difficult.

Globalisation and Digitalisation

With an increasingly interconnected and digital world, the scale and complexity of transactions have grown, making the task of identifying suspicious activities more challenging.

To overcome these challenges, UK businesses must continuously update and refine their AML processes. Utilising advanced technologies such as machine learning and AI can help improve accuracy in identifying suspicious activities and reduce false positives. Regular training for staff is also essential to stay updated with evolving criminal techniques. Effective AML checks require a dynamic, risk-based approach that is constantly adapting to the changing landscape of financial crime.

Have Nexis Diligence Conduct Your AML Checks For You

Nexis Diligence+™ offers a secure and reliable AML compliance checking service. Our proprietary technology helps you to stay compliant with up-to-date financial regulations and standards. We provide a holistic solution designed to meet your AML compliance requirements in the UK.

Contact us today at contact@lexisnexis.co.uk or call 0330 161 1234 for more information.