Anti-Money Laundering (AML): what accountants and CPAs need to know

To help understand the importance of Anti-Money Laundering (AML) measures, here’s a real-world (yet fictitious) example of what money laundering might look like: in businesses like restaurants or laundromats, where cash transactions are predominant, criminals may inflate daily deposits to mix illegitimate funds with legitimate ones. A restaurant might bring in $2,000 in profits but reflect $4,000 in the books and deposit $4,000 in the bank. This mixing of legitimate and illegitimate money gets dirty funds into the financial system. 

 By mixing legitimate and illegal funds and putting them through a legal business, the illegal funds enter the financial system – in this case, with no one the wiser. 

Anti-Money Laundering regulations aren’t just the responsibility of accountants and CPAs.  

In the United States, AML is also the responsibility of the following financial professionals and entities: 

• Banks 
• Credit unions 
• Brokers  
• Money service businesses (MSBs) 
• Realtors 
• Lawyers 
• Accountants 

KYC stands for ‘know your customer’ (or know your client). It’s a crucial and mandatory process that accounting firms must go through to identify or verify the identity of a client.  

Part of KYC involves investigating the validity of a client’s identity or background, such as double-checking the kind of work a business is involved in and comparing this with predicted transactions.  

While KYC is an important step firms must take when bringing on a new prospective client, firms must also carry out regular KYC checks for clients already on the books. 

Enhanced due diligence (EDD) is a type of customer due diligence (CDD), a process accounting firms use to ensure clients are not involved in illegal financial activity. 

EDD relates to the checks and best practices accounting firms need to complete in situations of high risk. Examples of high-risk scenarios include, but are not restricted to: 

• Instances when customers cannot be physically present 
• Customers linked to higher-risk countries or business sectors 
• Customers with unjustifiably complex beneficial ownership structures  
• Evidence of unusual transactions (e.g. with no obvious economic or lawful purpose) 
• Customers who are politically exposed persons (PEPs) 

In North America, Anti-Money Laundering (AML) is managed and upheld by several organizations and governing bodies.  

These include: 

• The Bank Secrecy Act (BSA), which mandates that financial institutions support US government bodies in AML activities  
• The Financial Action Task Force (FATF), which is responsible for establishing global standards to counter money laundering and terrorist financing 
• The Office of Foreign Assets Control (OFAC), a division of the US Treasury Department that can apply economic sanctions to those representing a national security risk 

The Financial Action Task Force (FATF) is an intergovernmental organization dedicated to countering money laundering and terrorist financing.   

As part of a mission to establish global AML standards, the FATF has introduced 40 international Anti Money Laundering and Counter-Terrorist Financing guidelines. These standards have been embraced and implemented by over 200 nations. 

In Mexico, the Law for the Prevention and Identification of Transactions with Illicit Funds (LFPIORPI) has been established to tackle money laundering.   

As part of its ongoing mission, the LFPIORPI works to ensure financial institutions and other monitored entities fulfil AML obligations, including: 

• Implementing and sustaining an AML program 
• Reporting dubious transactions 
• Retaining records of defined transactions. 

This law also supports the seizure of assets linked to money laundering. 

In Canada, there are several organizations and entities responsible for AML and its enforcement.  

• The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) – the principal law that oversees AML and mandates compliance in Canada 
• Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) – the body entrusted with the implementation and enforcement of the PCMLTFA 
• Canadian Anti-Fraud Centre (CAFC) – home of the national anti-fraud hotline, the CAFC also helps investigate money laundering and prosecute perpetrators 
• Office of the Superintendent of Financial Institutions (OSFI) – Canada’s main overseer of federally regulated financial institutions (e.g. banks) 

In the UK, there are a few key legal frameworks that help uphold AML. 

• The Proceeds of Crime Act (POCA) – the foundation of the UK’s Anti-Money Laundering structure, POCA aims to prevent money laundering and the proliferation of illegal funds 
• The Money Laundering Regulations 2017 – fortifies oversight within the private sector, ensuring enterprises establish a written AML risk assessment 
• The Money Laundering Regulations 2019 – a legal framework which strengthened the UK’s AML approach (e.g. improving customer due diligence processes)