What is anti-money

laundering, and why

should you care?

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W
here there is crime, there is
often dirty money. And when
money is dirty, it is hard
to spend.

Criminal organizations invest a lot of time,

energy and resources into cleaning their
ill‑gotten gains. That’s what money laundering
means, and it’s a big business:

• When scammers and fraudsters steal

money from consumers, they need
to hide the fact that the money was
acquired criminally.

• When international terrorist

organizations get funding, that money
will pass through an intermediary
process so that the funder is not directly
tied to the terrorist group.

• When gangs make money from the sale

of illegal drugs or trafficking people into
modern slavery, they need a system to
obscure the source of that income.

The United Nations estimates that global

money laundering each year equates to
between 2% and 5% of the entire world’s Gross
Domestic Product (GDP). On the conservative
end of that range, that’s $1 trillion in illegally
obtained funds. Every year.

In this guide, Featurespace TK describes

how financial institutions (FIs) and other
organizations are contributing to the fight
against this particular set of economic crimes.
The United
First, we will start with a basic question: What Nations estimates
does anti-money laundering (AML) mean for
financial institutions? Then, we will explore
that global money
the tactics and tools that financial institutions laundering each
and other organizations use in their AML and
countering the financing of terrorism (CFT or year equates to
CTF) activities. between 2% and
5% of the entire
world’s GDP.

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What is anti-money laundering?

AML is the combination of policies, send or receive transactions on behalf of

procedures and regulations designed their customers.
to identify criminal funds and patterns,
to disrupt illegal financial flows, Compliance can be complex. That’s why
prevent the funding or pay-off of global banks and financial institutions devote
economic crime, and ultimately lead entire departments to anti-money
law enforcement to identify crimes and laundering. In recent years, those teams
stop criminals. To achieve this, financial have begun to work closely with fraud
institutions have to see through the teams because both have the overlapping
disguises organized criminal groups goal of fighting financial crimes, and we
employ in their transactions, as these are beginning to see many seasoned
groups attempt to integrate this dirty fraud professionals join AML teams as
money into the global economy. internal funding focuses on compliance
and transaction monitoring in the
In most countries, AML and CFT laws financial crime space.
exist to compel financial institutions
to detect and report certain kinds of For today’s financial institutions, the
transactions, meaning AML has more detection and reporting of suspicious
than a regulatory component. AML also activity is a challenge of scale. Even
describes the internal processes that small banks must monitor thousands
a financial institution uses to detect upon thousands of transactions each
and report the suspected laundering of day, and monitoring those payments for
money. Indeed, those institutions must instances of suspected money laundering
comply with the AML regulations in the would be impossible without automated
jurisdictions where they operate – this transaction monitoring.
includes anywhere in the world they may

Therefore, it’s important to think of AML as having several facets:

• Regulations.

• The internal processes designed to comply with those regulations.

• The teams that are responsible for detecting and reporting money
laundering through transaction monitoring.

• The software that supports those teams.

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Why is anti-money
laundering important?

At the most basic level, money laundering As a result of anti-money laundering’s moral
underpins all crime, from banking fraud to drug and societal imperative, there is the matter
trafficking to the financing of terrorist networks of regulatory compliance. Governments take
around the world. Whether it’s an individual money laundering seriously, and they put the
consumer being tricked into a get rich quick onus on banks and other FIs sitting at the
scheme, or a large organization falling victim heart of the international financial system
to business email compromise and paying to identify incidents. Governments pursue
fraudulent invoices, money laundering is the strong penalties for FIs systematically failing
process of attempting to wash these illegally to comply with AML/CFT laws. As an example,
obtained funds into the banking system. The Australia’s Commonwealth Bank paid a hefty
laundered money is further used to fund large fine in 2018 – 700 million AUD – for failing to
organized crime or terrorist organizations report thousands of suspicious transactions in
worldwide. Successful money laundering by a timely manner.
these criminals continues the cycle of heinous
crimes such as human and drug trafficking, and At the time, this was the biggest corporate
illegal arms dealing to further their ‘profits’. settlement in the country’s history. And the
Fighting money laundering means making sure government’s case against the bank was not
that crime doesn’t pay. that it failed to identify and report suspicious
transactions, but that it failed to meet
Practically speaking, as the International reporting deadlines which would have enabled
Monetary Fund notes, money laundering investigative agencies to use this intelligence
means resources that could go toward uses in a timely fashion.
that are productive and beneficial for society
instead get diverted toward activities that This is why financial institutions must be so
“have a corrosive, corrupting effect on society diligent in their approach suspicious activity
and the economic system as a whole.” monitoring and reporting. The costs of not
doing so can be enormous for the institutions
That’s more than $1 trillion every year that and continue to grow as global powers crack
could go to public goods like education, down on money laundering and the crime
infrastructure or affordable housing — but it finances.
instead get tied up in criminal activities.

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What is the Anti-Money Laundering
Act and other key regulations?

Recently, the United States Financial Crimes • In the summer of 2021, the European
Enforcement Network (FinCEN) passed Commission proposed a package of
The Anti-Money Laundering Act of 2020, legislation to bolster the EU’s rules for
which expanded protections and rewards for anti-money laundering and fighting the
AML whistleblowers. financing of terrorism.

In addition, the act helped to reinforce the • Turkey has likewise bolstered its Law on
Bank Secrecy Act (BSA) and the capabilities the Prevention of Laundering Proceeds
of FinCEN. More to the point, the recent call of Crime No. 5549 to expand the
for responses on proposed modernizations scope of AML compliance, putting new
of these acts is a clear sign that American law responsibilities on legal professionals
enforcement officials have given new priority and crypto asset service providers.
to fighting money laundering. • In 2020, the Australian Government
passed the Anti-Money Laundering
Many other countries have similarly elevated and Counter-Terrorism Financing and
the priority of AML enforcement: Other Legislation Amendment Bill 2020,
of which the changes to cross-border
• In the UK, the Money Laundering movements of money come into force on
Regulations of 2017 and Money 18 June 2022.
Laundering Regulations of 2019 have
put more responsibility on financial
institutions to track and report
certain transactions.

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Which organizations are bound
by AML regulation?

A large part of the economy is covered under the scope of AML laws. It’s not just banks
and financial services that must be compliant. Casinos, insurance providers, even precious
metals dealers shoulder some regulatory responsibility in fighting money laundering and
economic crime.

AML in banking and finance AML in fintech and neobanks

Banks and financial institutions initiate Fintechs, including newly licensed e-money
and receive millions of transactions every institutions (EMI), Payment Service Providers
day, and they are on the front lines of (PSPs), merchant acquirers, and new neobanks
preventing financial crimes. They share are still liable within many AML frameworks.
many of the AML obligations for detecting For these smaller institutions, many without
and reporting suspicious activity. This can an existing AML department or system,
include monitoring customer activity and the challenge is to quickly and efficiently
reporting customers to authorities when implement AML transaction monitoring to
necessary. This is not limited to the first minimize risk without disrupting business
or last institution in a transaction flow, as usual.
correspondent banks within a flow bear
very similar regulatory overhead. This poses AML in business
major challenges, as transaction information Domestic and foreign businesses can be
needed to perform effective AML can be subject to AML reporting requirements
truncated, incomplete or compromised within because money launderers have the ability to
long correspondent banking flows, or when simply create shell companies for concealing
processing cross-border transaction between or obscuring the movements of money
multiple payment systems. from authorities. Many regulators are now

It’s not just banks and

financial services that
must be compliant.
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mandating financial institutions in relation to
initiating or accepting transactions on behalf
of shell corporations, meaning for genuine
organizations there is an onus on them to
provide complete and accurate information in
their payment instructions to their corporate
banking provider to facilitate AML transaction
monitoring (AML TM) and ensure smooth
business operations.

AML in other sectors

Most regulators will impose AML obligations
on a variety of other sectors in which money
laundering could take place. This includes:

• Casinos, where ill-gotten funds could

be laundered through bets or even the
purchase of casino tokens.

• Mortgage brokers, where illegal cash

could be used to purchase real estate
assets and cash-only transactions
present a vulnerability to criminals.

• Jewelers and precious metal brokers,

where illicit income could be laundered
through the purchase of diamonds or
gold, which are both easy to transport
across borders, change ownership and
are much easier to carry given same
monetary value than suitcases of
bank notes.

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How does anti-money
laundering work?

Anti-money laundering effort work by transactions over AUD 10,000, make it

untangling the complex layers of financial harder for someone to disguise large
transactions someone can make to obscure sums of money.
the origins or the ownership of money.
Anti-money laundering involves the use of • An organization’s internal processes
software, processes, expertise and laws to align with those regulations and also
reveal whether a source of funds is illicit outline what AML teams need to do to
or illegal. find the source of laundered money.
• AML teams monitor, detect and report
The various facets of AML come together to any suspected instances of money
combat financial crime: laundering.
• Regulations, such as the US’s reporting • The team’s software supports that work
requirement for any transaction of by knowing what patterns to look for
$10,000 or more, or Australia’s additional in transactions.
information requirements for cash

What is the AML process?

The AML process mirrors the various stages of • Layering. With the money in the system,
money laundering. Money launderers rely on the money launderer must make a series
complex, overlapping layers of transactions to of transactions to decouple funds from
obscure the origins of their money. The AML their source. This could involve the
process peels those layers back one by one to purchase of foreign money orders or the
reveal the money’s origins. purchase of assets like real estate.

It’s important to understand the three stages • Integration. This is the final stage, when
of money laundering to see how the AML the laundered money comes out of the
processes works: wash and goes back into legitimate
financial accounts. With the sale of a
• Placement. This is the first stage of real estate purchase, for example, the
money laundering, in which a criminal organization’s money now has a new,
places ill-gotten proceeds into a seemingly legitimate source.
legitimate financial instrument. This
could be done through the payment of an The AML process covers these three stages. It
invoice or putting money into an offshore flags instances of placement, it investigates
banking account, for example. the layering of potentially ill-gotten funds,

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and it analyzes whether a trail of legitimately stage. Artificial Intelligence (AI) and machine
integrated funds has an illicit origin. A financial learning can now be deployed to support the
institution manages detection, investigation correct divination for a transaction holistically
and risk management at each stage, and can across all three stages and support more
draw different conclusions depending on the effective and efficient decision making.

How do financial institutions

ensure AML compliance?

Any organization responsible for AML Its applications span the various sectors
compliance must create a compliance program. responsible for AML:
This creates a formal basis upon which you
can build compliance norms (e.g. transaction • In retail and transaction banking, our
monitoring, or policies for reporting). When solutions can surface unknown threats
thinking of the various facets of AML, selecting with artificial intelligence that remains
the right technology partner to support this explainable to any regulators or auditors.
program is crucial.
• In the payments sectors, ARIC™
Risk Hub helps companies instantly
Featurespace anti-money detect anomalous behavior because
laundering solution Adaptive Behavioral Analytics allows
Featurespace’s software, ARIC™ Risk Hub, has it to constantly learn about normal
been built to give organizations a holistic view customer behavior.
of financial crimes risk. Powered by Adaptive
Behavioral Analytics, ARIC™ Risk Hub keeps • In insurance, ARIC™ Risk Hub pulls
the costs of compliance down and reduces the insightful data points from customers,
number of false positives. brokers, agents and carriers to create
dynamic behavior profiles. It’s within
that context that our solutions spot
illicit behavior.

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Machine Learning in AML
for a Global Bank

A few years ago, HSBC recognized inefficiencies in the transaction monitoring capabilities of its
insurance business. Insurance products with investment value can be exploited by criminals and
incumbent transaction monitoring solutions don’t traditionally cater for this sector.

HSBC reached out to Featurespace for help. Our team began a cloud-based implementation of
ARIC™ Risk Hub that eventually became the first AML application in the entire HSBC organization
that used both rules-based and machine learning models to monitor transactions and generate
alerts automatically.

That implementation allowed HSBC to prioritize alerts so its AML teams could commit resources
strategically and efficiently, not lose their time aggregating and collating alert information.

Further, the continuous learning that ARIC™ Risk Hub brings to HSBC’s AML stack means new
rules can be added and existing rules optimized as needed at no additional cost.

To learn more, have a look at our HSBC video case study.

Find out how we can help you

Our team has worked with numerous leading banks and financial
institutions to bolster their AML capabilities. To see how we could do
the same for you, request a demo of our ARIC™ Risk Hub.

[email protected]
www.featurespace.com
UK +44 (0)1223 345940
US +1 (404) 649 0108

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 “AIM Evaluation: Fraud and AML Machine
Learning Platform Vendors.”, AITE, 2019

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