Quick Learn: Fraud vs. Anti-Money Laundering (AML)

A question was posed to me by someone interested in Anti-Financial Crime (AFC):

Can you summarize the difference between Fraud and AML since both are looking for suspicious activities and bad actors?

There are many subtle similarities and differences between Fraud and AML; however, I think the Actor, Transaction, Commercial Impact/Regulatory aspects provide a high-level understanding.

Actors

In general, it comes down to the nature of the relationship the “bad” actors have with the financial institution:

  • Fraud: The “bad” actors in Fraudulent transactions don’t want to have a relationship with the financial entity; they want to extract the money and go.
  • AML: The “bad” actors in Money Laundering transactions do want to have a relationship with the financial institution; they want to legitimize the activity through their relationship.

Transactions

At a high level, the pattern of transactional behavior provides a general indication:

  • Fraud: Fraudulent transactions are typically one-time events. Think of a stolen credit card, Fraudsters want to commit the act and get away.
  • AML: Money-laundering transactions are less one-dimensional. A single large cash deposit may be the stereotype, but smaller incremental cash deposits is a more common scenario.

Commercial Impact / Regulatory

Fraud and Money-laundering impact financial institutions in very different ways.

  • Fraud: Fraudulent transactions hit the financial institution directly in the wallet. They are not at the direction of the customer and/or involve false money/checks/documents. If a fraudulent transaction goes through it has virtually no regulatory significance, but the financial institution will bear the cost of the fraud.
  • AML: In contrast money-laundering does not directly, but rather indirectly, impact the financial institution. The customer is knowingly conducting the transactions utilizing the institution’s banking services; however, the potential resulting fines, consent orders, or other regulatory punishments resulting from allowing money laundering can be costly and even put the institution out of business.

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