Anti Money Laundering and Customer Due Diligence

Anti-money-laundering (AML) refers to procedures, laws and regulations aimed at stopping the generation of income through illicit activities. AML laws – and the consequences for breaching them – are far-reaching. As part of AML regulations, institutions that allow customers to open accounts or those that issue credit are required to complete due-diligence procedures to ensure they are not aiding in money-laundering activities. It is the responsibility of those institutions to complete their Customer Due Diligence.


As Old as Money

‘Money laundering’ was first coined at the beginning of the 20th Century. It describes operations that intended to legalize income derived from illicit activity, thus facilitating their entry into the monetary flow of the economy. There is no scientific data or record that reports when money was first introduced as a form of trade, however, there are records that indicate that tax evasion, plundering and moving money or goods without authority has taken place all over the world throughout history.

In the Middle Ages, usury was declared a crime and money lenders and merchants attempted to evade the authorities using elaborate methods that were, in effect, money laundering.

In the 16th and 18th Centuries, pirates were expert at laundering gold, moving it across the Atlantic Ocean using European commercial vessels. In 1612, England offered all pirates who abandoned their profession unconditional pardon and the right to keep the product of their treacheries.

In modern times, drug trafficking, human trafficking, tax evasion, trade of illegal goods, funding of terrorist organizations and funding for the proliferation of weapons are some the illicit activities at the core of money laundering operations.


Making Changes

While the practice of money laundering is ever-changing and increasingly complex as new systems and technology are introduced to society, the laws that attempt to keep pace with these changes are also evolving.

In 1989, the United States declared money laundering a crime and the Financial Action Task Force (FATF), which sets international standards for fighting money laundering, was established. Organisations like the FATF aim to maintain and promote the ethical and economic advantages of a legally credible and stable financial market.

In 1990, the European Union adopted its first anti-money laundering Directive in order to prevent the misuse of the financial system for the purpose of money laundering. The focus of this directive was to introduce transparency and traceability to the European financial system to fight money laundering.

Since that time the directive has been revised five times, and Member States will have to implement the 5th Directive rules into their national legislation by the 10th of January 2020.



One of the common factors in attempts to deter money laundering since the times of piracy is the heavy punishment aimed at those who facilitate money laundering.

Although authorities are more concerned with those who are at the core of the illicit operation from which the money comes, punishments for those who facilitate money laundering are often very harsh by comparison.

This is a twofold deterrent attempt:

  1. The punishment for money laundering far outweighs the punishment for those who commit the illicit activity at the source of the funding, so it becomes an unattractive risk.
  2. The perpetrator of the money laundering activity might be more likely to reveal the source of the original illicit activity for a reduced punishment or amnesty, so it gives authorities leverage to try and uncover the source of the illicit activity.


AML Enforcement Groups

On the 11th of September 2001, the United States was targeted in a terrorist attack. This event was the catalyst to the intensification of the International Monetary Fund’s (IMF) work in determining AML regulations.

Since 2000, the IMF – which has 189 member countries – has been expanding its AML efforts. Its goals include fighting the financing of terrorism. It assesses the compliance of its member countries using an international standard for combating terrorist financing. The body also monitors the effects of money laundering and terrorist financing on the economies of its member countries.

The IMF helps its members stop money laundering and terrorist financing by acting as an international forum for the exchange of information and by helping countries develop common solutions to money laundering activities and to develop effective policies to guard against them.

The FATF sets the international standard for combating money laundering. The international body – formed by the association of governments and organizations around the world – sets standards for preventing money laundering and promotes the implementation of these standards. This body works to prevent the funding of terrorist organisations and works to implement international standards for the maintenance of the international financial system.

In February 2012, the FATF released a series of recommendations that were adopted by its 35 member countries and two regional organizations. The comprehensive measures are aimed at fighting against money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction.

While the FATF promotes the implementation of these measures, it is up to the governments of each member country to adopt the measures, which must be adapted to make them appropriate for each nation.

The FATF provides its members with AML compliance guidelines and best practices. In 2000, the body introduced a name-and-shame system by which countries that fail to legislate and enforce comprehensive AML laws, as well as those countries that have minimal to zero participation in the international fight against illegal money-making activities, are publicly announced.

The IMF also helps evaluate each country’s compliance with AML measures and identifies how each country could improve its regulations. It focuses on assessing the strengths and weaknesses of each member’s financial sector using the FATF’s AML compliance recommendations.

The IMF provides its members with technical assistance in bolstering their legal and financial institutions and offers its members advice on how to develop policies that comply with the FATF’s measures.


Customer Due Diligence

AML investigations focus on parsing financial records for inconsistencies or suspicious activity, as such financial records can link suspected perpetrators with their criminal activity.

Records of significant financial transactions are often used to uncover the identity of a criminal, as an increasingly stringent regulations system means greater access to more authorities and greater information sharing.

Financial institutions that issue credit or allow customers to open accounts must investigate all customer applications by performing Know Your Customer checks and practising Customer Due Diligence checks to ensure that they are not participating in a money-laundering scheme.

The institution must verify where any large sums of money originated, monitor any suspicious activity and report all cash transactions exceeding US$10,000.

Financial institutions are also responsible for ensuring that their customers know about AML laws and they must guide their customers on how to comply with the regulations.

Funding for illicit activities and terrorist operations comes mainly from money laundering. By applying AML regulations and reducing access to money laundering channels, financial institutions are helping to reduce crime rates overall and support their customers who are acting legally.