What is Anti-Money Laundering (AML)?
What is anti-money laundering? What role does the LEI system play in anti-money laundering? How can LEI codes help companies identify and monitor their customers? Below you will get the answers to how the LEI system is involved in the fight against money laundering.
What is AML?
Briefly explained, anti-money laundering, aka AML, are the laws, regulations, and procedures contained in the Money Laundering Act. They exist to prevent money laundering and the financing of terrorism.
Money laundering involves concealing where money earned through illegal activity comes from. This is what we refer to as making "black money" legal, and this is what happens when you bring in illegal money to be circulated and used in society.
Anti-money laundering directives: the Money Laundering Act
The Danish Money Laundering Act comes from several EU directives that are continuously being drafted. Currently, there are six different directives. They are called Anti Money Laundering, AML, 1-6. Financial companies, lawyers, accountants, landlords, etc., are subject to the law. This means that these companies are required to identify and monitor their customers, and to report it to the authorities if they have suspicions of money laundering or terrorist financing.
AML compliance is therefore very important for these companies because they must meet all the requirements that are set. Many companies use AML specialists to ensure they meet anti-money laundering requirements. The requirements are there to reduce the risk in the companies that are most frequently used for money laundering or terrorist financing. In this way, banks and other financial institutions can monitor their customers and quickly report if any suspicious activity occurs. Companies that do not comply with anti-money laundering measures may be fined, forced to close their operations, or even risk prison sentences for those responsible.
The AML requirements imply, among other things, that financial companies must be able to identify their customers and collect information about them. They must monitor their customers' transfers and transactions. They must immediately file a report if they discover suspicious activities or transactions. There is a particular focus on being able to identify the actual owners of a company.
How can the LEI system be used in anti-money laundering?
Companies and other legal entities that trade in securities or carry out other financial transactions are required by law to have an LEI code. In the context of AML, the LEI system can help identify the owner of the business for the transaction in question. The global identification code provides a unique answer to who is who, and who owns who in the financial markets. The ownership structure of all companies that have an LEI code can be found in the global database at GLEIF. It is an open system that creates transparency and helps financial institutions with anti-money laundering, as it is easy to find information about the structure of the companies, and thus the real owners.
LEI codes are therefore part of customer due diligence (CDD), which is used to describe the process that financial institutions use to obtain and evaluate relevant information about their customers and potential customers. Customer due diligence is a big part of achieving Know Your Customer (KYC) standards, and it is an important part of anti-money laundering. Here, for example, information is obtained about the customer's identity, which activities the customer is involved in, as well as the customer's risk profile.
The global LEI system
Because the LEI system is based on a global standard, ISO 17442, it is easy to identify companies across national borders. It is the same standard and the same format for all countries. This means that you can find the information in the same database regardless of which country you operate in. This creates a manageable process, which helps to increase transparency in the financial markets.
The LEI system thus plays a major role in the banks' work in particular to meet the requirements about anti-money laundering. GLEIF is constantly working to optimize the system and find new, better solutions in the fight against money laundering. If you want to read more about GLEIF's work in this area, you can do so on GLEIF's website.