28.09.2023Insight

The evolution of аnti-money laundering (AML) measures - regulations, challenges & solutions

Money laundering is the process of “cleaning” funds coming from illicit activities to make their origin seem legal. From the first records of money laundering back in 2000 BCE to the modern day, these practices and techniques have evolved significantly. Fortunately, so have the methods designed to counteract them.

Fourthline Forrester TEI thumbnailBy The Fourthline Team
Image - The evolution of аnti-money laundering (AML) measures

Key takeaways:

- Anti-money laundering (AML) legislation is becoming more stringent to respond to ever-evolving financial crime techniques. At the same time, organizations often fail to comply, facing fines of hundreds of millions of Euros, reputational damage, or even the risk of going out of business

- Our AML screening solution is easy to integrate and, thanks to its exceptional automated efficiency, it helps you mitigate risks and remain compliant throughout the entire lifecycle of your clients 

- Banks and institutions using Fourthline’s compliance solutions benefit from 99.98% fraud detection accuracy, 40% higher conversion rates, and up to 50% lower compliance costs

- Don't take our word for it. Experience it yourself - screen up to 20,000 individuals from your own database in our free demo 

Anti-money laundering (AML) measures are crucial. With regulations getting stricter and fines growing bigger, non-compliant organizations face serious risks including financial, reputational, operational, and more. 

However, thanks to technology, financial service providers are equipped with highly precise, reliable, and cost-efficient AML screening solutions capable of neutralizing the ever-evolving threat of money launderers. But technology is just a part of the solution. 

AML screening isn’t a destination but a journey through a continuously changing landscape with new hurdles at every turn. And without a trusted partner by your side, you risk marching into the eye of a storm. 

History of anti-money laundering (AML) regulations across the world

Many ancient empires tried penalizing money laundering with laws, confiscation, and taxation. But, as Al Capone reportedly said, “They can't collect legal taxes from illegal money.”

Over the course of the 20th century, money-laundering schemes became more sophisticated, with a profound economic, financial, societal, and political impact. To combat this, regulatory bodies started working on local and global anti-money laundering legislation.

AML policies in Europe

Today, the EU is leading the way in fighting financial crime, having imposed some of the strictest regulations. Aside from the overarching union-level legislations, some EU member states also have individual regulatory agencies and directives tackling money laundering and terrorist financing. Prominent examples include France, the Netherlands, Germany, and Spain.

European countries’ joint campaign against money laundering started in 1991 with the introduction of the First Anti-Money Laundering Directive (1AMLD).

1AMLD

Imposed by the European Council of Ministers with a 3-year deadline for national implementation, the 1AMLD was the first example of a multilateral approach to tackling money laundering. 

It was inspired by the Financial Action Task Force’s (FATF) set of 40 Recommendations. 1AMLD required institutions to perform initial and ongoing Know Your Customer (KYC) and Customer Due Diligence (CDD) checks and keep records for at least 5 years. It also highlighted the need for monitoring and reporting suspicious transactions.

While the directive marked a major step in regulatory efforts, it focused mainly on banks.

2AMLD

The 2nd Anti-Money Laundering Directive from 2001 broadened the coverage to include illicit activities like corruption. It expanded its scope to also cover exchanges, investment firms, and payment processors. The 2AMLD stressed the need for national authorities to process suspicious transaction reports, designating authorities for tracing, freezing, and seizing confiscated property, and more.

3AMLD

The 3AMLD came as a response to the 9/11 attacks and the increased terrorism threat. It imposed enhanced due diligence mechanisms and introduced the idea of penalizing entities that weren’t compliant with AML regulations. The coverage expanded to include casinos, politically exposed persons (PEPs), and professionals like lawyers, notaries, accountants, and real estate agents.

4AMLD

The 4th directive from 2015 introduced the idea of the risk-based AML approach in an attempt to address money laundering on a case-by-case basis. Furthermore, it adopted a more complete definition of PEPs, broadened the application coverage to include gambling service providers, and introduced the concept of “high-risk” third countries that required attention.

The 4AMLD also introduced national Ultimate Beneficial Ownership (UBO) registers - repositories of beneficial owners with at least 25% share, including senior management.

5AMLD

Introduced in 2020, the 5AMLD added a new focus on sources of finance, including pre-paid cards and cryptocurrencies. It further strengthened the focus on PEPs by requiring EU member states to submit lists of those holding prominent positions since they were deemed more prone to corruption. The directive also introduced a mandate to make UBO registers public.

6AMLD

Coming into force in 2021, the latest directive focuses mainly on harmonizing the European AML framework and ensuring consistent understanding and application across member states. It promotes international cooperation and information sharing between jurisdictions to enable cross-border prosecution.

6AMLD introduces a set of predicate offences (including cyber, tax, and environmental crime) and strengthens the penalties for money laundering to a minimum of four years imprisonment. It also extends criminal liability to legal companies and persons representing and controlling legal entities.

Global AML policies

The establishment of the FATF in 1989 by the G7 set the stage for global AML standards. In 2000, the International Monetary Fund (IMF) joined international efforts to tackle financial crime by focusing specifically on the abuse of offshore financial centres.

However, the pioneer in tackling financial crime was the US. The Bank Secrecy Act (BSA), which came into force in 1970, inspired the formation of the FATF. The legislation introduced requirements for recordkeeping and reporting by private individuals, banks, and financial institutions. Furthermore, it aimed to identify the source and volume of currency coming in and out of the US. 

The latest AML laws to have passed Congress include the FinCEN CDD Rule (2018) and the Anti-Money Laundering Act of 2020 (AMLA).

Money laundering challenges in 2023

Despite all the progress on the regulatory front, financial crime continues to increase. The UN’s Office on Drugs and Crime estimates that money laundering costs between 2% and 5% of global GDP annually. This translates to between USD 2.1 and 5.25 trillion, based on IMF’s 2023 GDP forecast.

In Europe, France and Germany combined process over €100 billion in dirty money, roughly half of the amount laundered in the United States.

Non-compliance consequences

The inability to prevent financial crime bears massive consequences for financial institutions, including:

- Non-compliance penalties: In 2022, AML fines globally surged 50% to reach $5 billion. In some jurisdictions, individuals involved in money laundering may be imprisoned for up to 10 years, while organizations can be fined up to €100 million, or 10% of the net annual turnover. However, these penalties are dwarfed by the cases of Dutch banks ING and ABN Amro, which were fined €775 million and €480 million, respectively, due to shortcomings in their money laundering controls

- Reputational risk: Financial institutions that fail to prevent financial crime can expect brand damage that can be costly and challenging to recover from. For example, in addition to the $2 billion fine for hiding the inefficiency of its AML solutions, Denmark’s Danske Bank lost thousands of customers and spent years repairing its brand image from the largest money laundering scandal in Europe

Increasing compliance costs

At the same time, compliance costs are on the rise. Europe’s largest banks are found to spend around €14.25 million per year on AML-related expenses. According to research by LexisNexis, European institutions bear the highest compliance costs and the highest compliance cost increase by far. 

The bottom line: Financial service providers have the challenging task of striking the right balance. On the one hand, over-adjusting their AML compliance mechanisms risks frustrating existing customers and making it hard to onboard new ones. On the other hand, they need to navigate the increasingly complex regulatory landscape as EU oversight authorities continue to crack down on financial crime. 

On top of that, there’s the new Anti-Money Laundering Authority (AMLA), which will become operational by 2025. In addition to new and stricter regulations, it will call for a holistic approach towards AML compliance where innovative technology and human expertise take risk controls to the next level. 

Using technology to tackle financial crime and comply with AML regulations

Nowadays, industry leaders consider machine learning and artificial intelligence (AI) to be the backbone of successful AML compliance, as McKinsey & Company notes. Technology is perceived as a life belt in a world of ever-evolving regulations and more aggressive fraud practices. However, not all AML technology is created equal.

The bar for AML screening technology is continuously rising. Today, the industry’s best solutions are capable of: 

- Doing the legwork to streamline internal AML screening processes, reducing manual processes and the time-to-market

- Generating conclusive outcomes instead of a list of probabilities to drastically reduce the room for error and cut the time wasted on dealing with false positives

- Combining the latest technology advancements with a team of experienced analysts to perform manual checks and ensure organizations are compliant and protected at all times

- Covering the entire customer lifecycle, including at the time of onboarding and ongoing monitoring, while also responding to the company’s individual requirements (based on size, region, and risk appetite)

- Maximizing conversions without sacrificing fraud prevention accuracy

- Removing barriers for cross-border market expansion

- Cutting compliance costs and optimizing ROI

- Ensuring flexibility and easy integration that enhances the company’s existing compliance environment

How Fourthline’s AML screening solution helps banks and financial service providers tackle financial crime

Witnessing the evolution of the AML landscape first-hand, our team of financial industry veterans has built an AML screening solution that helps European banks, investment firms, and financial service providers mitigate risks and comply with the latest regulations.

The Total Economic Impact Of Fourthline is a commissioned study conducted by Forrester Consulting on behalf of Fourthline. It examines the gains that organizations may realize by deploying our compliance solutions, which include our AML screening features.

The quantifiable benefits include:

- 390% ROI and $21.03 million NPV

- Payback period of <6 months

- $13.3 million worth of improved organizational efficiency

- $10.4 million worth of improved conversions driving incremental account openings

- $2.7 million worth of reduced fraud exposure

Among the unquantifiable benefits are: 

- Improved regulatory compliance

- Faster time-to-market

- Scalability

- Minimal implementation efforts

- Reduced employee training costs

The main enablers for the tangible and intangible benefits of our AML include:

AML screening throughout the entire customer lifecycle

There are 3 key moments of a customer’s lifecycle at which banks have to perform AML screening:

1. At the time of onboarding

2. In case of changes in a client’s risk profile

3. After updates in sanction lists

While the frequency of the first 2 cases is lower, sanctions lists are updated daily. So, to remain compliant, institutions have to perform AML screening every 24 hours.

To guarantee maximum flexibility, Fourthline offers a modular approach to AML screening. We can manage either the entire AML screening cycle, from onboarding to daily monitoring, or just run a one-off search. 

Screenings against lists

To remain compliant and avoid reputational damage, fines, and other losses, financial institutions must evaluate the risk their prospects and clients pose by screening against a range of lists. 

Fourthline’s AML screening solution performs a multitude of checks, including:

- Watchlist check: Our AML screening solution compares client information against sanctions lists and PEP watchlists from trusted database providers like Refinitiv and LexisNexis. The checks are based on an extensive list of 7 data points - something rare in the industry. Through comprehensive adverse media screening, we also uncover hidden red flags

- Open-Source Intelligence (OSINT) investigation: Our experienced analysts can also assist by diving deeper into the hits to grant our business partners an extra layer of accuracy

- Fraud check: Our algorithms investigate for potential matches between the client’s data and our internal Fraud Database, built over the past 5 years. Cross-referencing allows our partners to proactively mitigate risks and maintain trust with their clients

- Sensitivity check: Our partners can use their own custom lists of individuals they want or don’t want to engage with. These preferences are reflected during the cross-referencing process to ensure objective and customized screening 

Based on this extensive approach, our solution guarantees a 99.98% fraud detection accuracy. 

Conclusive outcomes - No longer a game of probabilities

A study by the University of Cambridge and the University of Texas at Austin found that criminals, terrorists, tax evaders, and those on sanctions lists can easily circumvent banks’ defences and take advantage of their services. The number-one reason is banks’ failure to distinguish between low and extremely high-risk individuals.

This is a byproduct of financial service providers getting used to dealing with uncertainty when onboarding customers and verifying if they are politically exposed or on a sanction list. This is because AML screening solutions typically provide only a probability score. For example, there is a 60% probability that the John Smith you are onboarding is the same John Smith who is on the sanctions list. As a result, risk departments have to second-guess what a likelihood of 60% means and make a decision themselves.

This is an error-prone process that also requires significant time. Furthermore, if it turns out they are wrong, the consequences can be huge.

As recent examples show, banks serving individuals on sanctions lists can get fines worth hundreds of millions and even face the risk of losing their license to operate

Explains Michiel Visser, Product Owner at Fourthline.

Our AML screening solution reduces the uncertainty by providing a definitive answer - the John Smith you are onboarding is/isn’t the same as the sanctioned John Smith. That way, banks can rest assured that they aren’t serving individuals with unacceptable levels of risk. 

On top of that, it ensures that financial service providers act based on definitive information, reducing the number of false positives, removing guesswork, and saving time.

A symbiosis between technology and the human touch

According to the “AML Leaders Survey 2022” by Deloitte Netherlands, the biggest disadvantage of the current anti-money laundering approach is overreporting. The consultancy calls for better detection of potential money laundering signals via smarter analytics so experienced analysts are free to handle high-risk cases.

Built on a rule-out logic, our AML screening solution does the heavy lifting so analysts can focus their attention where it’s most needed. First, machine learning algorithms analyze a vast amount of data (both proprietary and from our partners, Refinitiv and LexisNexis) and automatically rule out around 75% of the potential hits (as per data from 2022). Next, it highlights the cases that require manual investigation, generating a comprehensive report with extensive evidence and a multi-data-point-based risk score. So, instead of dealing with high-volume, low-value alerts, our business partners can expect to receive risk scoring with pinpoint accuracy.  

That way, analysts don’t have to waste time on meaningless alerts or analyzing false positives. The reduced manual intervention leads to significantly lower operational costs and increased efficiency.

For example, it takes milliseconds for our machine learning algorithms to do the initial screen and another 1 to 2 minutes on average for our analysts to handle the cases needing manual AML screening. Our business partners claim to save at least 15 to 20 minutes per case, with verification completed in under 5 minutes for 90% of the cases. 

A client-oriented solution with flexible integration

In addition to AML screening, our partners can also take advantage of solutions for lifecycle compliance in Europe and beyond through a single API.

The integration is simple and can be aligned to your individual processes, whether you are a traditional bank, a neobank, or a neobroker.

For example, once you have defined your risk settings, the system automatically rejects an individual that exceeds the agreed limit (e.g., 15 hits per case). You will receive a customized evidence-rich Client Due Diligence (CDD) report of the confirmed hits and their risk score based on your risk appetite. Your analysts can then dive into the specifics of each hit, knowing that we have already laid the groundwork to rule out the false positives.

Furthermore, we have also developed a sophisticated Case Review and Auditing Portal optimized for our business partners' analysts. The powerful tool streamlines agents’ review processes, significantly enhancing the efficiency of case reviews. Its user-friendly interface allows agents to quickly assess screening results and conduct in-depth investigations when needed.

Looking ahead: Embracing the future of AML

To adequately respond to the growing threats, the AML regulatory landscape is evolving by the day, with legislation becoming stricter and non-compliance fines growing bigger. 

Enterprises should find a trusted partner with a battle-tested AML screening solution to take compliance needs off their shoulders. 

See the power of our solution first-hand by screening a data set of up to 20,000 individuals for free in our demo. Click below to get started.