Are you subject to anti-money laundering (AML) regulations? If so, you you’ll 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 clients by providing them with the assurance that their financial transactions are secure.
What Is Money Laundering?
Money laundering is a complex financial crime that involves disguising the origins of illicitly obtained money, typically by funneling it through a series of transactions to make it appear legitimate. This crime poses a significant threat to financial systems globally, facilitating activities such as drug trafficking, corruption, and terrorism.
Here’s how background checks and identity verification fit into the AML screening process and how they’re helpful tools in the fight against money laundering.
Keep reading to learn more!
How Does Money Laundering Work
Money laundering generally unfolds in three stages:
- Placement: This is the initial phase where illicit funds are introduced into the financial system. For example, a criminal might deposit cash into a bank account or purchase valuable assets like real estate or luxury goods to integrate the money into the economy.
- Layering: In this stage, the goal is to obscure the origins of the money through a series of complex transactions. This can involve transferring funds between different accounts, making international wire transfers, or using shell companies. For instance, a criminal might move money through a series of fake business transactions to hide its true origin.
- Integration: The final stage involves making the laundered money appear legitimate. The funds are reintroduced into the economy and used for legal activities. For example, the money might be invested in legitimate businesses or used to purchase high-value assets.
Money Laundering Examples
Again, money laundering is a serious and pervasive financial crime that threatens the integrity of financial systems worldwide. As we covered above, money laundering involves the process of making illicitly gained funds appear legitimate through a series of complex transactions designed to obscure their criminal origins. This practice not only facilitates other forms of criminal activity, but also undermines the stability and security of financial institutions.
Here are some notable global money laundering examples that highlight the diverse methods and far-reaching impact of money laundering activities.
In 2016, the Panama Papers leak revealed how the Panamanian law firm Mossack Fonseca helped clients establish offshore entities to evade taxes and launder money. The leak of 11.5 million files highlighted the use of shell companies and complex transactions to conceal illicit funds.
The HSBC Money Laundering Scandal
In 2012, HSBC was fined $1.9 billion for failing to maintain an adequate anti-money laundering (AML) control system. The bank was found to have facilitated transactions for drug cartels and other illicit entities by not adhering to proper AML protocols.
Danske Bank, Denmark’s largest bank, was implicated in a massive money laundering scandal between 2007 – 2018 involving €200 billion of suspicious transactions. The bank’s failure to monitor and report these transactions demonstrated the critical importance of robust AML practices.
The New York Department of Financial Services issued a $30 million penalty on Robinhood’s crypto division for failing to meet basic AML compliance requirements on August 1, 2022.
These incidents serve as a reminder of the importance of investing in comprehensive background screening including:
- Criminal Record Checks;
- Identity Verification;
- Credit Checks;
- PEP Checks;
- Global Sanctions and Watchlist Checks; and
- Adverse Media Screening.
How Background Checks Help Prevent Money Laundering
Background checking pays a key role in protecting institutions and individuals from crime. When banks and other institutions comply with AML legislation, it helps ensure that money that’s been used in a crime can’t be legitimized through their company.
Background checks help organizations conduct enhanced due diligence. By analyzing an individual’s history, including criminal history, financial behaviour, and associations, you can identify potential risks. For example, if a person has a history of financial crimes or connections to known criminal organizations, this information can be used to prevent further transactions or implement additional safeguards in your business.
Background Checks for Risk Assessment
Effective background checks and identity verification are essential for assessing the risk associated with clients or potential employees. By scrutinizing an individual’s background using financial industry-specific checks such as credit checks, PEP checks, global sanctions and watchlist checks, and adverse media screening, you can identify red flags such as previous criminal history or connections to illicit organizations. More specifically, verifying the identity of a new client against global sanctions lists can reveal whether they’ve been involved in criminal activities.
Know Your Customer (KYC) Compliance
KYC regulations require businesses to verify the identity of their customers to prevent money laundering and other financial crimes. This process involves collecting and validating personal information, such as government-issued IDs and proof of address. Our Certn ID advanced digital identity verification system uses biometrics to ensure that the person you’re dealing with is who they claim to be.
Continuous Monitoring
Modern background check services and identity verification solutions offer ongoing monitoring of individuals and entities. This can include monitoring for changes in financial status, involvement in high-risk activities, or updates in legal status. Continuous monitoring helps businesses stay vigilant and respond promptly to any emerging risks. Furthermore, integrating background checks with cybersecurity monitoring systems and compliance software can help you detect and prevent suspicious activities.
Background Checks to Mitigate Risk
Money laundering is a pervasive and sophisticated crime that undermines the integrity of financial systems worldwide. By implementing rigorous background checks and advanced identity verification processes, your business can mitigate the risk of being used as a conduit for money laundering. These measures not only help in complying with legal and regulatory requirements but also play a crucial role in protecting the financial system from exploitation.
By partnering with an experienced background screening company like Certn, you can maintain the integrity of your business operations, but you also get expertise and tools needed to navigate anti-money laundering efforts.
Request a free demo to talk about our financial services industry-specific checks and packages.
