6 Steps To Detecting Money Laundering

Money laundering is a criminal activity that attempts to hide illegal sources of income. Criminals obtain money from illegal activities such as drug trafficking and gambling and look for ways to convert it to legal income. Financial institutions are the most vulnerable to money-laundering risk, as criminals often look to convert the funds using complex bank transactions or business transfers. Banks use anti-money-laundering analytics to detect illegal activity. This article discusses what money laundering is and how to detect it.

Criminals worldwide launder trillions of dollars every year; this has a significant adverse impact on global GDP. While investigative authorities are responsible for apprehending money launderers, financial institutions should also take steps to protect themselves from money-laundering risk.

Money Laundering Works Through The Following Three Steps:

  • The first step is moving money obtained via an illegal source to a financial system. Criminals often select banks to launder their money and evade investigation. At the start, only a part of the money to be laundered is transferred.
  • The next process is passing the money through complex transactions; this is called “layering”. Criminals continue to transfer the money to a bank account from multiple sources and in a number of forms. Such “layering” is to make it impossible to trace the illegal source of income.
  • Once they are sure the illegal source of the money cannot be tracked, they can use the money freely without fearing the authorities.

6 Steps To Detecting Money-laundering Activity

Anyone in the banking industry is aware of the importance of anti-money-laundering (AML) analytics and measures. The six steps to detecting money-laundering activity are as follows:

  • Establish a strong AML policy within your financial institution. Appoint someone who can supervise its implementation. Outsourcing your AML processes to a reliable third party would reduce your training and recruitment costs.
  • Install an AML surveillance system to identify risks. This could include installing an AML analytics system. Companies that offer AML services already have access to high-end analytics to enhance productivity.
  • Conduct due diligence on a client before entering into a contract. Do not be satisfied with just the large amount of money being deposited unexpectedly.
  • Take time to get to know the real beneficiaries of a deal and research the sources of large funds or investment. With the use of advanced analytics and expert opinion, ascertain the nature of the investment or funding. In addition, determine the relationship between the beneficiary and the investor/funder.
  • Make cash handling and accounting processes rigid so as to make it impossible to launder money from your institution; for example, introduce a no-cash policy for transactions of more than a particular amount.
  • Raise red flags on suspicious transactions and forward them to investigative authorities. A financial institution should also comply with AML regulations set by the government for better surveillance.