AML/CFT Regulation
AML/CFT - Why Is It Important?
Money laundering and the financing of terrorism
can damage national financial systems. Illegitimate
financial holdings, assets, and enterprises are unreliable sources of investment capital for sustainable
economic development. Among other effects,
money laundering destabilizes national economies
by increasing the demand for cash, increasing the
volatility of interest and exchange rates, and even
contributing to higher inflation.
Developing and transition economies strive to
become reputable members of the global payments
network to increase their ability to access capital
flows, and consequently work to conform to international codes to combat abuse of this system.
Countries with weak enforcement of AML/CFT
controls could damage their reputations in international financial markets, and thus may not attract
international flows such as foreign direct investment and/or donor funding.
Countries therefore have a public policy interest in making sure that their AML/CFT regime is comprehensive and appropriately includes financial service providers working with low-income clients. Likewise, these institutions have an interest in protecting themselves from the adverse effects of being involved, or even the perception of being involved, in money laundering and the financing of terrorism.
What Is the Difference between Money Laundering and Financing of Terrorism?
Money laundering is the process of disguising the
illegal origin of criminal proceeds without disclosing their source.4 Illicit proceeds are derived from
diverse criminal activities, including illegal arms
sales, smuggling, organized crime, corruption,
embezzlement, drug trafficking, and human trafficking. Financing of terrorism is fundraising for,
or financial support of, organizations or persons
involved in terrorism.
As figure 1 shows, money laundering legitimizes illicit proceeds through various methods,
while financing of terrorism uses legitimate or
illegitimate funds to facilitate an act of terror.
Both activities employ similar techniques:
- Placement: the initial posting of funds or
assets into the financial system
- Layering: the relocation or alteration
of funds or assets in order to disguise the illicit
source or intent
- Integration: the conversion of illicit funds,
or legitimate funds intended for illicit activity,
to seemingly legitimate assets
Figure 1 Money Laundering and the Financing of Terrorism
What Institutions Are Covered by AML/CFT Regulations?
FATF covers any institution involved in financial transactions, including financial service providers working with low-income clients. In many countries, financial institutions that serve low-income clients are established as non-profit organizations. FATF Special Recommendation VIII on Terrorist Financing explicitly addresses the exposure of non-profit organizations to terrorist financing, and requires countries to develop regulation to prevent these organizations from becoming conduits for money laundering or the financing of terrorism.