AML Basics
What is AML & how does the anti-money laundering system work?
We explain the fundamentals of AML - from common money laundering schemes to the global regulatory framework based on FATF standards, European Union legislation and national supervision.
FUNDAMENTALS
What is AML?
Anti-Money Laundering, or AML, is a set of laws, regulations and procedures designed to prevent illegally obtained funds from being disguised as legitimate income.
The AML system is intended to detect and reduce both money laundering and terrorist financing. Its main objective is to prevent funds generated through drug trafficking, corruption, tax fraud and other criminal activities from entering the legitimate economy.
AML regulations operate at international, European Union and national levels. FATF sets the global standards, the European Union establishes a common legal framework, while in Poland the system is based on the Act on Counteracting Money Laundering and Terrorist Financing. The General Inspector of Financial Information (GIIF) - plays the central role in the national system.
THE CRIMINAL MECHANISM
The 3 stages of money laundering
Money laundering is usually described as a process consisting of three consecutive stages. In practice, these stages may overlap, but understanding how they work is the starting point for effective risk detection.
01.
Placement
Introducing illegally obtained funds into the financial system or legitimate economy - through cash deposits, purchases of financial instruments, investments in assets or the use of businesses that handle large amounts of cash.
02.
Layering
Obscuring the audit trail through complex chains of transactions - transfers between accounts, companies and jurisdictions, asset exchanges and changes in the form of funds designed to make their original source more difficult to establish.
03.
Integration
Reintroducing laundered funds into the legitimate economy - through investments in property, luxury goods, companies, loans or commercial activity that gives the assets the appearance of a lawful origin.
The AML system is designed to disrupt this process at every stage - making placement more difficult, detecting suspicious activity during layering and limiting the reintegration of illicit funds into the legitimate economy.
COMMON SCHEMES
How do criminals launder money?
Money laundering methods evolve alongside technology, financial services and new business models. Below are several of the most common schemes, although in practice the list is much longer and continues to grow.
Structuring (smurfing)
A large amount is divided into numerous smaller deposits or transactions, often carried out by different people through different accounts, to avoid raising suspicion and make it harder to identify the operations as part of a single scheme.
Shell companies
Funds are transferred through companies that conduct no genuine business activity or exist mainly “on paper”. Complex ownership structures may be used to conceal the ultimate beneficial owner and the source of the assets.
Trade-based money laundering
Goods are invoiced at inflated or understated prices, misdescribed or billed multiple times. This allows value to be transferred under the appearance of legitimate commercial transactions.
Gambling and casinos
Criminals purchase chips or fund player accounts, carry out only a small number of transactions and then withdraw the remaining funds as supposed winnings or as a refund of funds originating from legitimate gambling activity.
Cryptocurrencies and mixers
Transfers between wallets, asset exchanges, decentralised platforms and mixing services may be used to move funds quickly and make it more difficult to establish their source and actual owner.
Identifying such schemes requires more than transaction analysis. It also requires reliable knowledge of the client - their business activities, ultimate beneficial owners and connections. CheckLists FinAP by FinObserve provides the information needed for this analysis by combining data from multiple sources and identifying relevant risk factors.
REGULATORY ARCHITECTURE
How does the AML system work?
The anti-money laundering system operates across several interconnected levels - from global standards and EU legislation to national regulations and the specific obligations imposed on market participants.
INTERNATIONAL
Global level
FATF (Financial Action Task Force) - sets global standards through its 40 Recommendations. They are not directly binding law, but they form the basis of AML systems developed by countries around the world. FATF also evaluates their effectiveness, and jurisdictions with serious deficiencies may be placed under increased monitoring or added to the list of high-risk jurisdictions.
EUROPEAN UNION
Regional level
The European Union translates FATF standards into common and binding rules. The European AML system is based on directives, regulations and cooperation between national supervisory authorities and financial intelligence units. Its objective is to harmonise rules across Member States and reduce gaps that could be exploited between jurisdictions. At the same time, MONEYVAL (a Council of Europe body) - evaluates the AML systems of European countries, including those outside the European Union.
POLAND
National level
At national level, the Polish AML system consists of several institutions with different but complementary roles:
-
The Sejm - adopts the Act on Counteracting Money Laundering and Terrorist Financing and subsequent amendments. The legislation defines the categories of obliged entities, the scope of their responsibilities, supervision rules and sanctions for non-compliance.
-
The Ministry of Finance - participates in shaping national regulations, prepares implementing legislation and coordinates the operation of the AML system within the government administration.
-
GIIF (the General Inspector of Financial Information) - is the central authority within the Polish AML system. It receives and analyses information submitted by obliged entities, cooperates with prosecutors, law enforcement agencies and foreign financial intelligence units, and carries out inspections and other actions provided for by law.
-
Sectoral supervisory authorities - including the Polish Financial Supervision Authority, the National Bank of Poland, the National Revenue Administration and relevant professional bodies. Each performs supervisory and control functions within its area of competence and in relation to specific categories of obliged entities.
INSTITUTIONS
Institutional level
This is where legal requirements become everyday practice. Obliged entities - including banks, law firms, accounting firms, currency exchange offices, real estate agents and businesses providing certain services involving virtual assets - must implement appropriate AML procedures.
These obligations include identifying and verifying clients, establishing the ultimate beneficial owner, assessing risk, checking PEP and sanctions status, conducting ongoing monitoring of the business relationship and submitting the required information to GIIF.
Who must comply with AML?
Find out which businesses and institutions qualify as obliged entities, what duties the AML Act imposes on them, and how KYC, CDD, identification of the ultimate beneficial owner, PEP and sanctions screening, and client risk assessment work in practice.
How do obliged entities implement AML in practice?
Regulations define the obligations. Carrying them out every day — for every client, using current data and maintaining complete documentation and an audit trail - requires appropriate processes and tools.
This is why obliged entities increasingly use solutions that organise data, standardise the verification process and guide users through its individual stages.
One such solution is CheckLists FinAP by FinObserve - a tool supporting the identification and analysis of clients, both individuals and legal entities, for AML, KYC and KYB purposes.
