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Importance of Compliant AML

Importance of Compliant AML-Focused Regulations in The Digital Space

Last Updated on February 29, 2024 by Ameer Hamza

Having the world at our fingertips makes the digital space so essential. Unlike before, we can access the knowledge and resources necessary to thrive in this digital age. With all the vast benefits of digitization, the crime of money laundering is one of its antitheses. AML stands for Anti-Money Laundering, a system designed to counter the crime of money laundering.

The rise of the digital space brought about innovative technologies like Decentralized Finance and Blockchain. However, exploring these technologies has allowed people to conceal financial crimes and sponsor illegal activities. That is why Anti-Money Laundering (AML) regulations are important in the digital space.

How does AML work?

Anti-Money Laundering refers to a web of laws and regulations aimed at uncovering efforts that disguises illicit funds as legitimate income. AML regulations were developed as a response to the speedy growth of the financial sector.

Money laundering involves three stages: placement, layering, and integration.

• Placement: is how and where illegally obtained funds are placed.

• Layering is the conversion of illicit funds into another form and creating of systems to disguise the funds’ origin.

• Integration is when illegal funds enter the economy in what appears to be regular legitimate transactions.

AML ensures interception of these stages so that laundered funds cannot be covered. Financial institutions maintain activities that implement legal requirements and compliance to monitor and report suspicious financial transactions actively.

Why it is important to have compliant AML-focused regulations in the digital space

In 2020, annual money laundering flows were estimated to be $1.6 trillion, accounting for 2.7% of the GDP. Although this number might seem small, in a larger framework, its impact goes beyond the financial sector.

On the flip side, the digital space is the platform that allows money launders to perform their illegal activities. Thus, the following are reasons why compliant AML-focused is vital in the digital space.

1. The high growth of the digital space:

When we began this decade, we saw an increase in developed digital solutions and applications. We now have digital assets and cross-border payments. The digital era will only keep growing as more innovators emerge. Having AML-focused regulations for the digital space is essential to match the growing pace of digitization.

2. The need to build trust and ethics in digital products:

There is no doubt that digitization has opened vast opportunities for individuals and economies alike. However, there is still distrust, especially concerning crypto assets. Victims of online fraud will be wary of new digital products. Furthermore, for the digital space to grow, people have to adopt it. When implemented and enforced AML-focused regulations exist, a sense of trust in the digital space can exist.

3. The digital space could solve the money laundering problem:

We now have innovative technologies at our fingertips. As technology is being used to foster money laundering, the same technology (e.g., Artificial Intelligence) can be used to counter it. Complaint AML-focused regulations in the digital space can drastically reduce costs, effectively target crime and increase good customer experience.

Conclusion

As much as we might be able to develop AML-focused regulations in the digital space, it is still essential that they are compliant. Without the required compliance, creating AML regulations might be unnecessary.

Lastly, while steps are already being taken to reduce the effects of money laundering, financial institutions still need to take adequate measures to address the issue.

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