Compliance With International AML Laws
Globalisation has been accompanied by the emergence of a complex web of anti-money laundering (AML) laws, intended to prevent cross-border flows of illicit money. These laws can, however, pose risks for legitimate cross-border investors if not fully understood. Here, we attempt to summarise the international AML landscape.
Financial Action Task Force (FATF)
Most AML rules originate from the FATF, a global watchdog composed of 37 member states. The FATF sets standards to promote the effective implementation of measures for combating money laundering and terrorist financing at national level, and these are in the form of 40 recommendations.
While the FATF has no legal authority as such, it works to identify vulnerabilities in countries’ AML rules and brings political pressure to bear on those that have gaps in their legal and regulatory frameworks.
The FATF recommendations seek to provide a consistent set of worldwide AML rules. However, it is up to each jurisdiction to decide how to implement them. International investors will therefore need to familiarize themselves with numerous laws and the processes and practices of various financial regulators and enforcement bodies.
In the United States, for example, the main piece of AML legislation is the Bank Secrecy Act, which underwent a significant overhaul in 2001 in the wake of 9/11. These laws are enforced by the Financial Crimes Enforcement Network (FinCEN), a division of the Treasury Department.
In the European Union, member states are required to implement the Anti-Money Laundering Directives. These provide for a degree of harmonization in the EU with regards to AML law, although, again, no member states will have transposed them identically. Further, the policing of the EU’s financial system is conducted at member state level by national financial regulators, rather than by a single EU entity.
Penalties for breaching AML laws also vary between jurisdictions. But they tend to be severe, ranging from substantial fines to imprisonment.
Know Your Customer, Due Diligence And Beneficial Ownership
Day to day, it is the financial institutions and corporate and financial services providers that must apply AML rules, and this normally starts with performing “due diligence” on potential clients. An important aspect of this is the “Know Your Customer” (KYC) process, under which those seeking to open a bank account or form a company must be able to prove their identity and show that their sources of funding are legitimate. The KYC process also enables financial institutions to judge whether potential clients are “high-risk” and worth taking on. KYC procedures also differ from one jurisdiction to another in terms of documentation requirements.
Increasingly, rules are being implemented that require companies and trusts to provide details about their beneficial owners. This information is normally entered into special registers accessible only by certain regulators and law enforcement bodies. In some places, though, public access is permitted. For instance, the 5th EU AML Directive requires public access to ownership registries.
Notably, companies in the US have to provide beneficial ownership information to FinCEN under the Corporate Transparency Act 2020 but this will not be made public.