How to Prevent Money Laundering for Businesses in 2024

The process of how money laundering works is straightforward with not too many complications and is easily understood by businesses. However, detecting and preventing money laundering remains a huge problem today among businesses in regulated industries. Top organizations today still fall victim despite having huge resources. This emphasizes the fact that without the right strategy, preventing money laundering can be difficult. Therefore, it is important that businesses understand how to prevent money laundering by adopting the right strategy and approach. 

This article discusses 10 steps on how to prevent money laundering and key takeaways for businesses today.

What is Money Laundering?

Money laundering is the process of “washing” money obtained through illegal means into “clean” or legal assets. The process is often carried out by criminals who obtain money from illegal activities such as drug trafficking, human trafficking, corruption, illegal gambling, and more. 

On obtaining such money, the criminal seeks to introduce it to the financial system, however, a sudden injection (e.g. payment to a bank account) will raise too many questions. Instead, they try to “wash” it first so it can appear legal and not raise investigations. According to the UN, 2-5% of global GDP is laundered annually. 

How does Money Laundering Work?

Money laundering typically follows three stages: 

a. Placement:

Placement is the first stage of money laundering, where a criminal looks to introduce illegal or “dirty” money into the financial system. It is usually achieved through cash deposits below the AML threshold, wire transfers, payment through shell companies, or other arrangements that will not raise suspicions.

b. Layering

In layering, the criminal moves the illegal money around the financial system to create a legitimate trail and complex layers of transactions that eradicate suspicions. Examples involve paying for certain prearranged services, moving cash between bank accounts, investing in shell companies, etc.

c. Integration

In this final stage, the criminal reintroduces the illegal money into the legitimate economy through asset purchases or investments in business ventures. At this stage, the money laundering process is complete, making it difficult for authorities to determine whether the assets have been obtained illegally or not. 

Read more on the 3 stages of Money Laundering

10 Steps to Combating Money Laundering for Businesses in 2024

Today, governments all over the world have rolled out policies and legislation to combat money laundering. These laws are to be obeyed by financial institutions and generally involve them laying out structures to identify and verify customers and monitor suspicious activities. 

Some of the steps institutions may take in line with laid-out regulations to combat money laundering include: 

1. Develop Effective AML Compliance Policies

Developing an AML compliance policy is the first and arguably the most key step in combating money laundering and its associated impact on your business. The policy should be developed in line with the specific money laundering risk associated with your industry and the frequent risks your business faces. 

Factors to consider include the type of business, nature of the customer, customer demographics, and geographical regions of operation. The overall policy should address these factors and must generally include: 

a. Customer Identification and Verification Procedures

This aspect of the policy refers to the procedures of verifying the identity of new customers before onboarding. It needs to be designed and overseen by compliance specialists with sufficient experience.    

b. Ongoing/ Transaction Monitoring

After onboarding, steps should also be outlined for monitoring the customer activities and transactions for suspicious patterns. This includes sudden large deposits and other unusual patterns. 

c. Suspicious Activity Reporting 

Anti Money Laundering (AML) regulations require that a business reports suspicious activities to a specified authority. This enables the right authorities to take action immediately and cut short any money laundering activities in play.

2. Train Internal Staff 

An organization’s compliance strength is largely dependent on how compliant its staff are. Staff should have deep expertise in financial crime, money laundering, and compliance, however, they should also be upskilled frequently. This is to remind them of the need for compliance and also update their skills to stay on par with the latest money laundering trends and regulatory compliance requirements.

3. Conduct Customer Due Diligence

In learning how to prevent money laundering for your business, having the right policies alone is not enough. You need to proceed to conduct customer due diligence equivalent to the requirements for the type of business relationship or account you’re looking to establish for a customer. 

Know Your Customer (KYC) helps you investigate the customer's background and analyze the risks associated with conducting business with them. It typically involves collecting and verifying customer information, including: 

• Name
• Address
• Date of birth
• Source of funds
• Associates and partners
• AML screening
• Verifying business information (for business relationships)

Failing to conduct proper due diligence may leave your organization exposed to money laundering risks.

4. Monitor, Detect, and Report Suspicious Customer Activities

One of the major goals for conducting customer due diligence is to understand your customers to be able to effectively monitor them for suspicious activities. Different tiers of customers usually stick to the same transaction patterns, and going out of it consistently could be an indication of money laundering. Suspicious activities should be reported to the regulating authorities within the stipulated timeframe. 

Examples of suspicious customer activities include:

• Large cash withdrawals of deposits
• Unusual transaction patterns
• Depositing large amounts of cash in small increments over a period of time
• Transacting with high-risk individuals 
• Transacting from high-risk regions
• Unusual and unexplainable transactions with different business entities
• Opening accounts with insufficient or wrong information 

Good practices when reporting suspicious customer activities include: 

• Be clear and concise in your report. Include date, time, names, and relevant locations
• Provide relevant documentation and evidence associated with the transaction report
• Answer questions asked by the authority

5. Leverage the Right AML Compliance Technology

Steps one to three are a lot of work and will be filled with numerous errors when done manually. This is why successfully combating money laundering today is largely dependent on adopting the right AML compliance technology. Criminals are developing newer and more sophisticated technologies to perpetuate their crimes, and businesses can only keep up with equivalent or even better technology.

The right AML compliance stack incorporates Artificial Intelligence (AI) and Machine Learning (ML) technology to automate the customer due diligence and monitoring process from start to finish. It also gives better accuracy and allows compliance professionals to focus on more complex risks. 

With Smile ID compliance solutions, businesses can easily automate their KYC due diligence and AML checks for compliance. Book a free demo today to learn more.

6. Adopt a Risk-Based Approach

Adopting a risk-based approach involves assessing and understanding your business's unique risks and implementing relevant control measures to limit their impact. This makes your compliance process more efficient and effective against pending risks. 

7. Conduct Regular Audit

A policy, no matter how solid, requires frequent reviews and reassessments. This ensures that it remains up to standard with recent money laundering trends and AML regulations. Audits also help identify loopholes in your existing systems, which can then be addressed. Preferably, this audit should be conducted by external auditors. 

8. Provide Adequate Resources

The anti-money laundering compliance and finance team should have the right resources to effectively combat money laundering and financial crimes. Without the right resources, conducting proper customer due diligence and risk assessment will be difficult. Resource mostly revolves around having enough competent compliance professionals as staff and providing them with the right toolkit/ software.

9. Stay Updated with Money Laundering Trends

This step is all about keeping in touch with the latest money laundering strategies to stay on par with criminal strategies. Criminals are developing new strategies to bypass existing systems daily and staying updated will help your business fight new methods effectively as they come. 

10. Choose the Right AML Partner

The AML partner you choose could make or break your ability to prevent money laundering today. Consider key factors like their offerings, understanding of the jurisdiction your business operates in, accuracy, and more. 

For example, Smile ID is the best AML compliance partner for businesses operating in Africa. This is because our solutions are tailored to address specific African needs. With access to government databases across key markets in Africa, businesses can identify and verify customers and also run AML checks for adequate risk assessment.  Other solutions like biometric authentication and fraud prevention checks can also be adopted for a more robust money laundering prevention strategy. 

Final Thoughts

Ultimately, it is important that businesses adopt the right policies and implement proper steps to prevent money laundering. We’ve discussed the key steps to take on how to prevent money laundering and the role technology plays. 

Smile ID offers a suite of compliance solutions that make implementing AML policies much easier. Businesses can conduct KYC due diligence and AML checks and compile the right data for suspicious activity reporting. This improves customer onboarding rates and makes it easier for the institution to comply with AML regulations and protect itself from money laundering and other financial crimes.

Have more questions, or are you ready to get started? Book a free demo with our experts today.