Money Laundering Regulations Explained

Money laundering regulations is the term given to the legislation and policy that’s put in place to prevent and deter money laundering. As different financial authorities are operating in different continents, these regulations vary slightly, according to where you are in the world.

The Financial Action Task Force (FATF) is global, so in the UK, we adhere to their definition of AML compliance. The UK also follows the guidelines set out by the Financial Conduct Authority (FCA), and abides by the EU’s Anti-Money Laundering Directives, even though it is no longer a member state.

Explore our all-in-one AML solution now to discover more about how we can help your business cooperate with money laundering regulations.

EU Money Laundering Directives

The EU Money Laundering Directives are instructions intended to minimise money laundering and financial crime, regularly issued and updated by the European Union. The most recent changes to these regulations come with the 5th and 6th Money Laundering Directives. 

5AMLD came into effect in 2020, and includes the following updates:

• There’s a new focus on cryptocurrencies like Bitcoin; under 5AMLD, these will be regulated for AML compliance for the first time. That means cryptocurrency exchanges will have compliance obligations, and a duty to report suspicious activity, just like financial institutions.

• Regulation has also been extended to cover high-value goods – for example, AML checks are now required on the transaction of any art sale over €10,000.

• Enhanced Due Diligence is now compulsory if a member state (or firm within it) is doing business with any high-risk third countries.

• The limit on anonymous prepaid cards has been reduced from €250 to €150, in an attempt to counter the funding of terrorism. As well as this, prepaid cards issued outside the EU will no longer be permitted.

Implemented in June 2021, 6AMLD includes:

• A more synchronised definition of money laundering offences across the board with member states.

• Harsher consequences for those convicted of money laundering offences – all member states will instate a maximum prison sentence of 4 years, as well as steeper fines and more restrictive sanctions.

• The addition of ‘aiding and abetting’ to key money laundering offences – likely means that “enablers” (or individuals who are only involved in the crime peripherally) will face tougher punishments too.

7AMLD and its possible implications

While the regulations outlined by the 5th and 6th AMLDs have now been interpreted and implemented, in 2024 the EU is to outline further changes with 7ALMD. Set to be included in the directive are tighter demands for such requirements as Customer Due Diligence (CDD) and beneficial ownership identification among other changes that will become imperative for EU-operating institutions to follow. 

Your company’s compliance obligations

If your company is one of many covered by Money Laundering Regulations, then you must adhere to your compliance obligations on a day-to-day basis. Such obligations include Customer Due Diligence measures, as well as internal controls that will help your business comply with AML regulations effortlessly. 

Customer Due Diligence 

Carrying out proper customer due diligence measures is essential in order to verify that a customer is exactly who they say they are. Used to authenticate a customer’s identity through obtaining such sources as a passport, driving licence or utility bill, doing a CDD check is also crucial to track a client’s transactions and monitor them for suspicious activity.

CDDs are crucial to carry out before working with a prospective customer, for, if your business comes under AML regulations, you are first required by law to verify the identity of the client. Not only a legal requirement, CDDs allow you to keep regular tabs on your customers and assess their risk on an ongoing basis, making your business more efficient in the process.

PEP checks

Standing for Politically Exposed Persons, such clients are labelled high-risk thanks to the potential for them to be financially exploited due to their social influence and access to funds among other reasons. Such makes them more of a target for corrupt organisations looking to bribe through financial incentives, to receive favours and other perks in return. 

PEP checks are therefore important for businesses to carry out. In fact, as of 2017 and the creation of Regulation 18, companies are required to carry out a money laundering risk assessment. Part of this assessment includes evaluating how often your organisation serves PEPs. Carrying out thorough, regular checks protects your company from getting embroiled with criminal clients. 

General monitoring 

Including CDDs and PEP checks, general monitoring for all clients should be carried out across your organisation. Such monitoring can be as simple as reporting financial discrepancies and being communicative with authorities when it comes to requests for information. When taking on a new customer, you are required to take part in transaction monitoring, even after a thorough CDD check. 

Carrying out such monitoring is truly effortless with SmartSearch thanks to our unique AML digital compliance platform which allows you to follow a long-term CDD plan. Our monitoring includes checks to assess whether your client has become associated with a PEP since signing on with you, as well as in-depth details regarding the transactions that they’re carrying out. 

Enhanced due diligence and high-risk factors

If, while carrying out a CDD check, you discover that your client’s risk profile has changed, you might have to undertake Enhanced Due Diligence (EDD), which is essentially a more in-depth form of customer profiling. New MLR regulations include updated high-risk factors to consider when deciding on whether to carry out an Enhanced Due Diligence check. Such high-risk activities include:

• A customer being or becoming a close associate of a PEP. 

• A customer having regular transactions with a high-risk third country.

• A customer who is the beneficiary of a life insurance policy.

• A customer engaging in transactions involving the trade of arms, cultural artefacts, items of archaeological or historical significance, precious metals, tobacco, crude oil, ivory and other restricted or protected items. 

• A customer who exhibits erratic financial behaviour and regularly evades scrutinous information requests. 

Which sectors do money laundering regulations apply to?

In the UK, money laundering regulations apply to several different business sectors, including businesses which offer financial services, accountants, solicitors and estate agents.

If money laundering regulations apply to your firm, you’re legally obliged to register with a supervisory authority, so that your AML compliance can be monitored. There are three main supervisory authorities in the UK: HMRC, the FCA and the Gambling Commission.

Most financial organisations are supervised by the FCA, but according to GOV.UK, HMRC acts as the supervisory authority for the following business sectors:

• High-value dealers (e.g. art dealers).

• Estate agents.

• Money service businesses that aren’t monitored by the FCA.

• Telecommunications, digital and IT payment services that aren’t monitored by the FCA.

• Bill payment service providers that aren’t monitored by the FCA.

Registering your business with a supervisory body is fairly straightforward. You can find a full breakdown of how and who to contact over on GOV.UK.

Applying a Risk-Based Approach

In the formal recommendations made by the FATF, it’s suggested that every financial organisation applies a risk-based approach to their compliance. A successful risk-based approach will involve the following steps:

• Carrying out a thorough analysis of your business, in order to identify the areas which are most vulnerable to money laundering.

• Thoroughly assessing your clients and customers – including everything from adverse media checks to sanctions screening, enhanced due diligence and ongoing monitoring.

• Implement standardised processes to minimise and monitor risk within your company – appoint an MLRO to spearhead anti-money laundering efforts.

• Regularly review your risk assessment methods, to ensure that they’re up to date with money laundering regulations, and appropriate to the level of risk your customers pose.

Cryptoasset businesses and money laundering regulations

To legally comply with money laundering regulations, cryptoasset businesses, which are companies that regularly exchange cryptoassets or work closely with related services, need to be registered with the FCA. The Financial Conduct Authority is the anti-money laundering supervisory body of UK cryptoasset businesses. 

This registration process is measured and thorough, requiring the applying party to be prepared to understand and interpret the regulatory requirements. The process also involves the company having to demonstrate their existing MLR structures and its process of customer risk assessments, with evidence of a Money Laundering Reporting Officer (MLRO) also having to be provided. 

Suspicious Activity Reports

A Suspicious Activity Report, or SAR, is a submission you make to the National Crime Agency or NCA. According to the NCA, these reports ‘alert law enforcement to potential instances of money laundering or terrorist financing.’

The NCA states also that you should submit a SAR if you ‘know, or suspect or have reasonable grounds for knowing or suspecting, that a person is engaged in, or attempting, money laundering or terrorist financing.’ You can ask your MLRO to submit a SAR on your behalf, or you can submit one yourself via the SAR online system. 

SmartSearch Can Help

Money laundering regulations are updated periodically, in line with the evolving ways that financial crime is carried out. This can make maintaining your firm’s compliance more of a challenge, as each time a new directive or legislation is passed, your company’s AML regime needs to be updated to reflect this.

SmartSearch can assist you with AML compliance, every step of the way. We’re experts in money laundering regulations, so we can ensure that your firm’s AML measures are up to scratch. Our accessible platform carries out a wide variety of automated checks, to assess your customer base thoroughly whilst remaining discreet.