Money laundering is the process of making illegally gained money appear legal through legitimate transactions. Anti-money laundering (AML) controls try to prevent, detect, and report money laundering activities through Know Your Customer procedures, transaction monitoring, and reporting suspicious transactions over certain thresholds. Maintaining an effective AML program is challenging and requires regularly updating customer due diligence processes and transaction monitoring algorithms to address changing money laundering tactics.

1. INSIGHTS
Understanding AML
Converting criminal income into assets that makes it
difficult to trace the underlying crime is easier if we all
turn a blind eye to it. The methods are always changing
but so should the remedial tactics to deal with it.
Why does it matter ?
How much do you
really know about Money laundering is the process of legitimising ill-gotten gains by transacting using the funds
through legitimate institutions. Naturally, the easier is it to launder money, the easier it is to
your customers? profit from activities such as drug dealing, illicit arms trading, human trafficking, etc.
Laundering methods are varied and can range in sophistication, but fundamentally involve
passing money through legitimate transactions in the financial system. In order to combat this,
financial institutions have an obligation to understand the sources of funds being funnelled
through transactions, particularly those involving larger amounts of money.
How does AML work?
Anti-money laundering (AML) is a set of controls that exists for financial institutions and
regulated markets in order to deter laundering activities using prevention, detection and
reporting mechanisms.
Typical examples of controls and activities include:
 Understanding who your customer is (known as KYC – know your customer). At the
point of account origination, institutions have to positively identify new account holders
and gather appropriate identifying information (e.g. passports, identity cards. etc.).
During the life of the relationship, the institution needs to monitor the customer to
ensure that they (and transactional counterparties) don’t appear on any sanctions lists
and that the customer transacts in accordance with expected transactional behaviour.
 Understanding how your customer is likely to behave (also part of KYC). Based on
aspects of customer segmentation, and monitoring the specific customer’s transactional
behaviour over time, the institution can build a profile of likely customer behaviour. Any
transactions outside this profile can then be investigated as potentially inappropriate.
 Proactive transaction monitoring for transactions which are irregular (i.e. outside the
There are five pieces of customer’s profile of likely transactions). These could include transactions outside of
primary legislation geographies typical of the account holder, patterns of transactions which may indicate
illicit behaviour, etc.
governing AML
activities in the UK:  Running investigations in response to alerts raised as part of the transaction
monitoring process. Investigations are typically manual, labour intensive and require
- The Money sourcing of additional information and ultimately making a decision in respect of whether
Laundering to disclose a transaction to the relevant authorities.
Regulations 2007  Reporting on transactions above a certain threshold. Irrespective of expected
- Terrorism Act 2000 behaviours, there are some regulators which require purely threshold based transaction
- Anti-terrorism Crime reporting to a regulatory authority. The thresholds vary from country to country and
and Security Act industry to industry. Relative to an intelligence driven risk based approach, this is
2001 essentially a blunt instrument.
- Proceeds of Crime
Act 2002
- Serious Organised
Crime and Police Act
2005
Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT
www.bsgdelivers.com // @bsguk
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2. INSIGHTS
Understanding AML
The on-going challenge
There are significant process and reporting obligations placed on financial institutions by the
regulations governing anti-money laundering activities. The US PATRIOT act for example, has
introduced the notion of Enhanced Due Diligence (EDD) which builds on previous KYC
obligations, especially in respect of understanding provenance and reliability of information.
Although the most recent piece of UK legislation was enacted in 2007, there is on-going
pressure from regulators for even more controls. We have observed how challenging it can be
for banks to mature and continually maintain their compliance capabilities within the
following areas:
 Refining KYC processes that enforce adequate Customer Due Diligence. As is the
case in any criminal endeavour, there is an ongoing resource battle between the baddies
and the goodies. This requires institutions to regularly consider whether the process
architecture ensures optimal capability to identify and management potential money
laundering. Where institutions have global presence, this is complicated by local process
variations and jurisdiction-specific regulatory requirements.
 Implementing effective monitoring mechanisms. By necessity, transaction monitoring
is automated, based on analytics of pattern behaviour. Over time, institutions need to
constantly update the algorithms identifying potential nefarious behaviour so that new
ruses can be effectively curtailed.
 Ensuring adequate data availability to support monitoring. Investigations are only as
successful as the information available to support them. Institutions need access to
internal, industry wide and publically accessible data to support informed decision
making. Case management tools need to allow investigators to collate, assess and analyse
information efficiently.
Does it present any opportunities?
Implementing, or improving upon, an AML regime takes time and money. At BSG, we like to
consider whether there can be a positive business case for compliance initiatives (i.e. over-
and-above simply being compliant).
 Cross sell existing products/services to specific customers. By building a more
complete profile of customers, an organisation is able to proactively offer extra products
or services that are specifically targeted to individual customers. Ideally this enables the
institution to maximise profit within the customer base and avoids the customer being
offered inappropriate products.
 Reposition & re-package products/services across the customer base. AML profiling
technology can provide analytical insight into behavioural trends across the entire
customer base. This enables an organisation to identify potential product opportunities,
supporting their efforts in targeting specific customer segments.
 Streamlined processes and reduced cost. Consolidating process and data for the
purposes of AML profiling (and other compliance functions) often reveals duplicate and
inconsistent data driven by multiple processes capturing and using the same data from
different sources. This provides an opportunity to rationalise processes and reduce
At BSG we are passionate overheads.
about design and delivery of  Build new inter-bank relationships with mutual reward. A well implemented and
change which makes a responsive AML regime and record can be used to demonstrate credibility and build trust
difference for our customers with new counterparty institutions. This is often observed when smaller institutions are
and their customers. looking to build new relationships across different geographies.
A collection of BSG (UK) BA practitioner www.bsgdelivers.com // @bsguk
insight can be found at +44 20 7390 8674
http://bit.ly/bsgukinsight info@bsguk.co.uk
Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT