Anti-Money Laundering: What it is and why it matters

By Categories: AML/CTFPublished On: 28 February 2024

Related Learning: AML/CTF comprehensive course | AML/CTF regulation in Australia

Thanks to digitisation, the ability to move money across borders, transact with international businesses and trade currency has never been easier. But while the convenience of a globally connected financial system offers numerous benefits, it also poses significant risks. Criminals can (and do) exploit this intricate network to move illicit funds across borders and evade capture. Which is why it has never been more important for Australia’s financial services businesses to have strong anti-money laundering and counter-terrorism funding protections in place.

What is anti-money laundering?

Defined as a financial crime, money laundering is an activity whereby money obtained via criminal means is cleaned or “laundered” by working it into a legitimate financial system, such as a bank or business. Anti-money laundering (AML) refers to activities undertaken to prevent money laundering from occurring within an organisation.

Money laundering typically follows three steps:

  1. Placement – the cash is introduced into the financial system
  2. Layering – complex series of financial transactions and other activities are used to camouflage the source of the cash
  3. Integration – the now clean money is re-acquired by the organisation.

Money laundering has evolved significantly from the days of Al Capone, when the phrase was first used to describe how the gangster employed laundromats as fronts for his illegal activities. In today’s digital world, money launderers have become increasingly sophisticated, utilising technological advancements and the globalisation of commerce to their advantage.

Different types of digital money laundering

Here are some examples of how money is laundered through digital channels.

  • Digital transaction layering: Criminals exploit the speed, anonymity and global reach of digital transactions to obscure illicit funds through mechanisms such as multiple accounts, complex financial structures, currency conversion and rapid movements across jurisdictions.
  • Cryptocurrency and currency mixing: Currency exchanges have always been popular with money launderers, who disguise illegal funds amid trades and purchases of foreign currency. The decentralised nature of cryptocurrency, use of complex algorithms, and intricate cryptographic techniques make it even more challenging for financial institutions, regulators, and law enforcement agencies to combat digital currency mixing. Money launderers may take it further by leveraging cryptocurrency tumblers or mixers to blend multiple transactions with other funds or currencies.
  • E-commerce: The practice of purchasing luxury goods with dirty money and on-selling them to clean the funds is amplified by online marketplaces. These platforms offer criminals anonymity, speed and vast reach.
  • Gig economy: Freelancing has exploded in recent years, and criminals are taking advantage by posting fake gig worker accounts, who are then engaged to complete a job, and then these are paid for using illegal funds.

Why is anti-money laundering important?

Money laundering is the fuel that powers criminal networks, because it allows crimes to go undetected. Money laundering supports the drug trade, human trafficking, terrorism and even enables countries to evade international sanctions.

It also results in reduced revenue for governments, because the proceeds of crime are not taxed, and can result in anti-competitive outcomes for legitimate businesses.

To prevent money laundering, governments rely on businesses to take action to ensure they are not participating in money laundering, whether intentionally or otherwise. In Australia, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) sets out these rules and regulations. Penalties for non-compliance with the AML/CTF Act can be substantial, including penalties of up to AU$22 million.

There are also reputational reasons for employing strong AML practices. For example, protocols that address money laundering can prevent fraud, protect brand reputation and shareholder value, and help to identify other compliance risks within the business.

How does AML relate to financial services?

Certain businesses are at the forefront of AML/CTF because the services they provide are at high risk of being utilised for money laundering or terrorism funding. These services are known as ‘designated services’ and include a range of business activities in the financial services, remittance and gambling sectors. Entities that provide these services are ‘reporting entities’ and they have specific obligations under Australia’s AML/CTF Act.

How to comply with the AML/CTF Act

Financial services businesses are required to implement an AML/CTF program. AML/CTF programs are vital in identifying, disrupting and preventing money laundering and terrorism financing. The program must show how the business addresses the money laundering and terrorism financing risks the business or organisation may reasonably face. As part of the AML/CTF obligations, a business must develop and document the policies, procedures and controls used to identify, mitigate and manage those risks.

There is no ‘one-size-fits-all’ AML/CTF program. Each reporting entity is different and has its own unique set of money laundering/terrorism financing risks. AML/CTF programs must take into account the likely level of risk of the business or organisation being used for money laundering and terrorism financing, based on its size, nature and complexity, including:

  • The businesses’ customers
  • The services provided
  • How the services are delivered
  • The other jurisdictions that the business deals with.

Part A of an AML/CTF program must include the processes and procedures the business employs to identify, mitigate and manage money laundering and terrorism financing risks.

Part B is focused on the procedures for customer identification and verification. These are known as ‘know your customer’ (KYC) procedures. Reporting entities must also lodge annual compliance reports with the regulatory agency.

The Australian Transaction Reports and Analysis Centre (AUSTRAC) is the Australian Government agency responsible for ensuring compliance with the AML/CTF Act. AUSTRAC does not provide program templates, but does provide guidance to help businesses comply with their obligations.

You should give all your relevant employees regular AML/CTF risk awareness training, including board members, directors, operational staff, contractors and consultants who are involved in providing designated services to your customers, in line with your ML/TF risk assessment – AUSTRAC Employee AML/CTF risk awareness training.

Who in your organisation needs to know about AML/CTF?

All reporting entities, regardless of their size, are required to appoint an AML/CTF compliance officer to manage the organisation’s compliance with their obligations. As well as having a thorough understanding of the AML/CTF Act and how it applies to the organisation, this person must have access to all areas of the business and the power to deal with any problems relating to the AML/CTF obligations.

Reporting entities are also required to provide an AML/CTF risk awareness training program for their employees. While AUSTRAC only requires that training be undertaken by employees who work in roles where there is a risk of money laundering occurring, it is a good idea to roll out this training annually to all staff, regardless of their current role within the organisation. Money laundering is an ever-evolving challenge and all individuals who work for financial services businesses should understand the risks to the business of money laundering and how to identify potential instances of money laundering.

How we can help?

Our AML/CTF Course is a comprehensive course to understand the AML/CTF in Australia. It provides comprehensive coverage of AUSTRAC, ML/TF risk management, customer due diligence, reporting and record keeping requirements under the AML/CTF Act or the FTR Act.

Our AML/CTF regulation in Australia is a module in our General Corporate Compliance Suite  – suitable for whole of organisation to meet AML/CTF risk obligations.