What Is Anti Money Laundering (AML)?

Anti money laundering (AML) refers to the web of laws, regulations, and procedures aimed at uncovering efforts to disguise illicit funds as legitimate income. Money laundering seeks to conceal crimes ranging from small-time tax evasion and drug trafficking to public corruption and the financing of groups designated as terrorist organizations.

AML legislation was a response to the growth of the financial industry, the lifting of international capital controls and the growing ease of conducting complex chains of financial transactions.

A high-level United Nations panel has estimated annual money laundering flows at $1.6 trillion, accounting for 2.7% of global GDP in 2020.

Understanding Anti Money Laundering (AML)

AML regulations in the U.S. have expanded from the 1970 Bank Secrecy Act’s requirement that banks report cash deposits of more than $10,000 to a complex regulatory framework requiring financial institutions to conduct due diligence on customers and to seek out and report suspicious transactions. The European Union and other jurisdictions have adopted similar measures.

Know Your Customer

For banks, compliance starts with verifying the identity of new clients, a process sometimes called Know Your Customer (KYC). In addition to establishing the customer’s identity, banks are required to understand the nature of a client’s activity and verify deposited funds are from a legitimate source.

The KYC process also requires banks and brokers to screen new customers against lists of crime suspects, individuals and companies under economic sanctions, and “politically exposed persons”—foreign public officials, their family members and close associates.

Money laundering can be divided into three steps:

• Deposit of illicit funds into the financial system
• Transactions designed to conceal the illicit origin of the funds, known as “layering”
• Use of laundered funds to acquire real estate, financial instruments or commercial investments

The KYC process aims to stop such schemes at the first deposit window.

Customer Due Diligence

Customer due diligence is integral to the KYC process, for example by ensuring the information a potential customer provides is accurate and legitimate. But it is also a constant process extending to customers old and new, and their transactions.

Customer due diligence requires ongoing assessment of the risk of money laundering posed by each client and the use of that risk-based approach to conduct closer due diligence for those identified as higher non-compliance risks. That includes identifying customers as they are added to sanctions and other AML lists.

According to the U.S. Treasury’s Financial Crimes Enforcement Network, the four core requirements of customer due diligence in the U.S. are:

• Identifying and verifying the customer’s identity
• Identifying and verifying the identity of beneficial owners with a stake of 25% or more in a company opening an account
• Understanding the nature and purpose of customer relationships to develop customer risk profiles
• Conducting ongoing monitoring to identify and report suspicious transactions and update customer information 

Customer due diligence seeks to detect money laundering strategies including layering and structuring, also known as “smurfing”—the breaking up of large money laundering transactions into smaller ones to evade reporting limits and avoid scrutiny.

One rule in place to foil layering is the AML holding period, which requires deposits to remain in an account for a minimum of five trading days before they can be transferred elsewhere.

Financial institutions are required to develop and implement a written AML compliance policy, which much be approved in writing by a member of senior management and overseen by a designated AML compliance officer. These programs must specify “risk-based procedures for conducting ongoing customer due diligence” and conduct “ongoing monitoring to identify and report suspicious transactions.”

History of Anti Money Laundering

Efforts to police illicit gains have a history stretching back centuries, while the term “money laundering” is only about 100 years old and in wide use for less than 50.

The first major piece of U.S. AML legislation was the 1970 Bank Secrecy Act, passed in part to thwart organized crime. In addition to requiring banks to report cash deposits of more than $10,000, the legislation also required banks to identify individuals conducting transactions and to maintain records of transactions. The U.S. Supreme Court upheld the Bank Secrecy Act’s constitutionality in 1974, the same year “money laundering” entered wide use amid the Watergate scandal.

Additional legislation passed in the 1980s amid increased efforts to fight drug trafficking, in the 1990s to expand financial monitoring and in the 2000s to cut off funding for terrorist organizations.

Anti-money laundering assumed greater global prominence in 1989, when a group of countries and international organizations formed the Financial Action Task Force (FATF). Its mission is to devise international standards to prevent money laundering and promote their adoption. In October 2001, following the 9/11 terrorist attacks, FATF expanded its mandate to include combating terrorist financing.

Another important organization in the fight against money laundering is the International Monetary Fund (IMF). Like the FATF, the IMF has pressed its member countries to comply with international standards to thwart terrorist financing.

The United Nations included AML provisions in its 1998 Vienna Convention addressing drug trafficking, the 2001 Palermo Convention against international organized crime and the 2005 Merida Convention against corruption.

The Anti-Money Laundering Act of 2020, passed in early 2021, was the most sweeping overhaul of U.S. AML regulations since the Patriot Act of 2001. The 2021 legislation included the Corporate Transparency Act, which made it harder to use shell companies to evade anti-money laundering and economic sanctions measures.

The legislation also subjected cryptocurrency exchanges as well as arts and antiquities dealers to the same customer due diligence requirements as financial institutions.

What Is Attrition in Business?

The term attrition refers to a gradual but deliberate reduction in staff numbers that occurs as employees leave a company and are not replaced.

It is commonly used to describe the downsizing of a firm’s employee pool by human resources (HR) professionals. In this case, downsizing is voluntary, where employees either resign or retire and aren’t replaced by the company.

Understanding Attrition

Employee attrition refers to the deliberate downsizing of a company’s workforce. Downsizing happens when employees resign or retire. This type of reduction in staff is called a hiring freeze. It is one way a company can decrease labor costs without the disruption of layoffs.

There are a number of reasons why employee attrition takes place. They include:

• Unsatisfactory pay and/or benefits
• Lack of opportunity
• Poor workplace conditions
• Poor work-life balance
• Illness and death
• Retirement
• Relocation

Types of Attrition

Voluntary Attrition

Voluntary attrition occurs when employees leave a company of their own volition. Employees leaving voluntarily may indicate that there are problems at the company. Or, it may mean that people have personal reasons for departing that are unrelated to the business.

For example, some employees voluntarily leave when they get a new job elsewhere. They may be moving to a new area which makes the commute impossible. They might have decided to try a different career and therefore need a different type of job.

Voluntary attrition can also occur when employees retire. This is also referred to as natural attrition. Unless a company experiences an unusually high rate of early retirements, employees retiring shouldn’t be a cause for concern for management.

Involuntary Attrition

Involuntary attrition occurs when the business dismisses employees. This can happen because of an employee’s poor or disruptive performance. Dismissal might be tied to an employee’s misconduct.

Companies may have to eliminate an employee’s position. Or, they might have to lay off employees due to worrisome economic conditions.

Internal Attrition

Internal attrition refers to movement out of one department or division and into another. The employee isn’t leaving the company. They’re simply making a move within it.

For instance, internal attrition can occur when an employee gets promoted to a different management level. Or, they move laterally to a different section because a job there was more suitable.

Internal attrition can signal that a company offers good opportunities for career growth. On the other hand, if one department has a high internal attrition rate, it may be experiencing problems. The company should investigate and address them, if need be.

Demographic-Related Attrition

Demographic-related attrition results when people identified with certain demographic groups depart a company unexpectedly and quickly. These could be women, ethnic minorities, veterans, older employees, or those with disabilities.

Such an exodus could mean that employees have encountered some form of harassment or discrimination. That should be of concern to all companies because such behavior can undermine a positive workplace environment and successful business operations.

Action should be taken quickly to understand what caused such departures. Rectifying demographic-related attrition is a must because inclusion should be a top goal of every company. Plus, a company can put a halt to the loss of employees of great value and promise. Diversity training can help.

Customer Attrition

While not related to employee attrition, it’s important that a business also be aware of customer attrition.

Customer attrition happens when a company’s customer base begins to shrink. The rate of customer attrition is sometimes referred to as the churn rate. Customer attrition can mean that a company is in trouble and could suffer a loss of revenue.

Customer attrition can take place for a variety of reasons:

• Loyal customers switch their preference to products of another company
• Aging customers aren’t being replaced by younger ones
• Bad customer service
• Changes in product lines
• Failure to update product lines
• Poor product quality

Benefits of Attrition

Attrition has its positive aspects. By its simplest definition, it’s a natural diminishing of the workforce. This can be welcome when the economy is in bad shape or a recession looms and, if not for attrition, a company would face the prospect of having to lay off employees (when it doesn’t want to lose them).

Here are other times when attrition might help:

• If one company acquires another and must deal with redundancies.
• If a company redirects its vision toward a new goal and must restructure or reduce the workforce.
• When new employees are needed to refresh a workplace environment with new ideas and new energy.
• When a company seeks natural opportunities to better diversify a department or division.
• When employees with poor attitudes or performance should be removed to improve workplace culture, reduce costs, or make room for new hires who are a great fit.

The Attrition Rate

The attrition rate is the rate at which people leave a company during a particular period of time. It’s useful for a business to track attrition rates over time so it can see whether departures are increasing or decreasing. A change in the attrition rate can alert management to potential problems within the company that may be causing employee departures.

The formula for the attrition rate is:

Attrition rate = number of departures/average number of employees¹ x 100

Say that 25 employees left ABC Company last year. In addition, the company had an average of 250 employees for the year ((200 + 300)/2).

With those figures, you can now calculate the attrition rate:

Attrition rate = 25/250 x 100

Attrition rate = 0.1 x 100

Attrition rate = 10%

¹ To calculate the average number of employees, add the number that existed at the beginning of the time period to the number that existed at the end of the time period. Then, divide by two.

Why It’s Important to Measure Attrition

By measuring attrition rates, a company may pinpoint problems that are causing voluntary attrition. That’s important because the costs associated with losing valuable employees whom you’d like to retain can be staggering.

For example, the cost to hire and train a new employee when one employee voluntarily departs can be one-half to two times that employee’s annual salary.

Company profits can be affected negatively when knowledgeable, experienced employees leave and productivity suffers.

Loss of customers can go hand in hand with loss of valued employees. That can mean another hit to profits tied to former employees who understood company products and services, and how to sell them.

Attrition vs. Layoffs

Sometimes, employees choose to leave an existing job to take a new one or because they’re retiring. An attrition policy takes advantage of such voluntary departures to reduce overall staff.

Laying off employees doesn’t involve a voluntary action on the part of the employee. However, layoffs do result in attrition when a company doesn’t immediately hire as many new employees as it laid off.

Layoffs occur when a company is faced with a financial crisis and must cut its workforce to stay afloat.

Sometimes, due to changes in company structure or a merger, certain departments are trimmed or eliminated. Rather than relying on natural attrition associated with voluntary employee departures, this usually requires layoffs.

Attrition vs. Turnover

Turnover takes place in a company’s workforce when people leave their job and are replaced by new employees. In such instances, there is no attrition.

Employee turnover is generally counted within a one-year period. This loss of talent occurs in a company for many reasons. As with voluntary attrition, employees may retire, relocate, find a better job, or change their career.

Companies can study turnover to make needed changes. For instance, many employees leaving within a short period of time probably signals issues within a company that must be dealt with.

Just as with voluntary attrition, management can use turnover information to initiate changes that will make the company a more amenable place for new and existing employees.

The Bottom Line

Attrition refers to the gradual but deliberate reduction in staff that occurs as employees leave a company and aren’t replaced.

Employees may leave voluntarily or involuntarily. Or, they may simply move from one department to another. In that case, attrition occurs when the former department doesn’t replace the employee. Employees may also leave for reasons of discrimination.

Calculating and tracking attrition rates can be useful to companies. High attrition rates indicate more people are leaving. They can signal that some problem is causing these departures and must be dealt with to improve the working environment.

Of course, a certain level of attrition can be helpful because it can avoid the need for layoffs in difficult economic times.

What Are Accruals?

Accruals are revenues earned or expenses incurred that impact a company’s net income on the income statement, although cash related to the transaction has not yet changed hands. Accruals also affect the balance sheet, as they involve non-cash assets and liabilities.

For example, if a company has performed a service for a customer, but has not yet received payment, the revenue from that service would be recorded as an accrual in the company’s financial statements. This ensures that the company’s financial statements accurately reflect its true financial position, even if it has not yet received payment for all of the services it has provided.

Accrual accounts include, among many others, accounts payable, accounts receivable, accrued tax liabilities, and accrued interest earned or payable.

Understanding Accruals

An accrual is a record of revenue or expenses that have been earned or incurred, but have not yet been recorded in the company’s financial statements. This can include things like unpaid invoices for services provided, or expenses that have been incurred but not yet paid. Accruals are important because they help to ensure that a company’s financial statements accurately reflect its true financial position, even if it has not yet received payment for all of the services it has provided or paid all of its bills.

In accrual-based accounting, revenue is recognized when it is earned, regardless of when the payment is received. This means that if a company provides a service to a customer in December, but does not receive payment until January of the following year, the revenue from that service would be recorded in December, when it was earned. Similarly, expenses are recorded when they are incurred, regardless of when they are paid. For example, if a company incurs expenses in December for a service that will be received in January, the expenses would be recorded in December, when they were incurred.

The Accrual Method of Accounting

Accruals and deferrals are the basis of the accrual method of accounting, the preferred method by generally accepted accounting principles (GAAP). Using the accrual method, an accountant makes adjustments for revenue that has been earned but is not yet recorded in the general ledger and expenses that have been incurred but are also not yet recorded. The accruals are made via adjusting journal entries at the end of each accounting period, so the reported financial statements can be inclusive of these amounts.

The use of accrual accounts greatly improves the quality of information on financial statements. Before the use of accruals, accountants only recorded cash transactions. Unfortunately, cash transactions don’t give information about other important business activities, such as revenue based on credit extended to customers or a company’s future liabilities. By recording accruals, a company can measure what it owes in the short-term and also what cash revenue it expects to receive. It also allows a company to record assets that do not have a cash value, such as goodwill.

In double-entry bookkeeping, the offset to an accrued expense is an accrued liability account, which appears on the balance sheet. The offset to accrued revenue is an accrued asset account, which also appears on the balance sheet. Therefore, an adjusting journal entry for an accrual will impact both the balance sheet and the income statement.

Recording Accruals on the Income Statement and Balance Sheet

To record accruals on the balance sheet, the company will need to make journal entries to reflect the revenues and expenses that have been earned or incurred, but not yet recorded. For example, if the company has provided a service to a customer but has not yet received payment, it would make a journal entry to record the revenue from that service as an accrual. This would involve debiting the “accounts receivable” account and crediting the “revenue” account on the income statement.

On the other hand, if the company has incurred expenses but has not yet paid them, it would make a journal entry to record the expenses as an accrual. This would involve debiting the “expenses” account on the income statement and crediting the “accounts payable” account.

Examples of Accruals

Let’s look at an example of a revenue accrual for a utility company.

Accounts Payable

An example of an accrued expense for accounts payable f could be the cost of electricity that the utility company has used to power its operations, but has not yet paid for. In this case, the utility company would make a journal entry to record the cost of the electricity as an accrued expense. This would involve debiting the “expense” account and crediting the “accounts payable” account. The effect of this journal entry would be to increase the utility company’s expenses on the income statement, and to increase its accounts payable on the balance sheet.

Another example of an expense accrual involves employee bonuses that were earned in 2019, but will not be paid until 2020. The 2019 financial statements need to reflect the bonus expense earned by employees in 2019 as well as the bonus liability the company plans to pay out. Therefore, prior to issuing the 2019 financial statements, an adjusting journal entry records this accrual with a debit to an expense account and a credit to a liability account. Once the payment has been made in the new year, the liability account will be decreased through a debit, and the cash account will be reduced through a credit.

Accounts Receivable

The utility company generated electricity that customers received in December. However, the utility company does not bill the electric customers until the following month when the meters have been read. To have the proper revenue figure for the year on the utility’s financial statements, the company needs to complete an adjusting journal entry to report the revenue that was earned in December.

It will additionally be reflected in the receivables account as of December 31, because the utility company has fulfilled its obligations to its customers in earning the revenue at that point. The adjusting journal entry for December would include a debit to accounts receivable and a credit to a revenue account. The following month, when the cash is received, the company would record a credit to decrease accounts receivable and a debit to increase cash.

Accrued Interest

Another expense accrual occurs for interest. For example, a company with a bond will accrue interest expense on its monthly financial statements, although interest on bonds is typically paid semi-annually. The interest expense recorded in an adjusting journal entry will be the amount that has accrued as of the financial statement date. A corresponding interest liability will be recorded on the balance sheet.

The Bottom Line

Accruals impact a company’s bottom line, although cash has not yet exchanged hands. The accrual method of accounting is the preferred method according to GAAP, and involves making adjustments for revenue that has been earned but is not yet recorded, and expenses that have been incurred but are not yet recorded, by making adjusting journal entries at the end of the accounting period. Accruals are important because they help to ensure that a company’s financial statements accurately reflect its actual financial position.

What Is Accounts Receivable Financing?

Accounts receivable (AR) financing is a type of financing arrangement in which a company receives financing capital related to a portion of its accounts receivable. Accounts receivable financing agreements can be structured in multiple ways usually with the basis as either an asset sale or a loan.

Understanding Accounts Receivable Financing

Accounts receivable financing is an agreement that involves capital principal in relation to a company’s accounts receivables. Accounts receivable are assets equal to the outstanding balances of invoices billed to customers but not yet paid. Accounts receivables are reported on a company’s balance sheet as an asset, usually a current asset with invoice payment required within one year.

Accounts receivable are one type of liquid asset considered when identifying and calculating a company’s quick ratio which analyzes its most liquid assets:

Quick Ratio = (Cash Equivalents + Marketable Securities + Accounts Receivable Due within One Year) / Current Liabilities

As such, both internally and externally, accounts receivable are considered highly liquid assets which translate to theoretical value for lenders and financiers. Many companies may see accounts receivable as a burden since the assets are expected to be paid but require collections and can’t be converted to cash immediately. As such, the business of accounts receivable financing is rapidly evolving because of these liquidity and business issues. Moreover, external financiers have stepped in to meet this need.

The process of accounts receivable financing is often known as factoring and the companies that focus on it may be called factoring companies. The best factoring companies will usually focus substantially on the business of accounts receivable financing but factoring in general may be a product of any financier. Financiers may be willing to structure accounts receivable financing agreements in different ways with a variety of different potential provisions.​

Structuring

Accounts receivable financing is becoming more common with the development and integrations of new technologies that help to link business accounts receivable records to accounts receivable financing platforms. In general, accounts receivable financing may be slightly easier for a business to obtain than other types of capital financing. This can be especially true for small businesses that easily meet accounts receivable financing criteria or for large businesses that can easily integrate technology solutions.

Overall, there are a few broad types of accounts receivable financing structures.

Asset Sales

Accounts receivable financing is typically structured as an asset sale. In this type of agreement, a company sells accounts receivable to a financier. This method can be similar to selling off portions of loans often done by banks.

A business receives capital as a cash asset replacing the value of the accounts receivable on the balance sheet. A business may also need to take a write-off for any unfinanced balances which would vary depending on the principal to value ratio agreed on in the deal.

Depending on the terms, a financier may pay up to 90% of the value of outstanding invoices. This type of financing may also be done by linking accounts receivable records with an accounts receivable financier. Most factoring company platforms are compatible with popular small business bookkeeping systems such as Quickbooks. Linking through technology helps to create convenience for a business, allowing them to potentially sell individual invoices as they are booked, receiving immediate capital from a factoring platform.

With asset sales, the financier takes over the accounts receivable invoices and takes responsibility for collections. In some cases, the financier may also provide cash debits retroactively if invoices are fully collected.

Most factoring companies will not be looking to buy defaulted receivables, rather focusing on short-term receivables. Overall, buying the assets from a company transfers the default risk associated with the accounts receivables to the financing company, which factoring companies seek to minimize.

In asset sale structuring, factoring companies make money on the principal to value spread. Factoring companies also charge fees which make factoring more profitable to the financier.

BlueVine is one of the leading factoring companies in the accounts receivable financing business. They offer several financing options related to accounts receivable including asset sales. The company can connect to multiple accounting software programs including QuickBooks, Xero, and Freshbooks. For asset sales, they pay approximately 90% of a receivables value and will pay the rest minus fees once an invoice has been paid in full. 

Loans

Accounts receivable financing can also be structured as a loan agreement. Loans can be structured in various ways based on the financier. One of the biggest advantages of a loan is that accounts receivable are not sold. A company just gets an advance based on accounts receivable balances. Loans may be unsecured or secured with invoices as collateral. With an accounts receivable loan, a business must repay.

Companies like Fundbox, offer accounts receivable loans and lines of credit based on accounts receivable balances. If approved, Fundbox can advance 100% of an accounts receivable balance. A business must then repay the balance over time, usually with some interest and fees.

Accounts receivable lending companies also benefit from the advantage of system linking. Linking to a companies accounts receivable records through systems such as QuickBooks, Xero, and Freshbooks, can allow for immediate advances against individual invoices or management of line of credit limits overall.

Underwriting

Factoring companies take several elements into consideration when determining whether to onboard a company onto its factoring platform. Furthermore, the terms of each deal and how much is offered in relation to accounts receivable balances will vary.

Accounts receivables owed by large companies or corporations may be more valuable than invoices owed by small companies or individuals. Similarly, newer invoices are usually preferred over older invoices. Typically, the age of receivables will heavily influence the terms of a financing agreement with shorter term receivables leading to better terms and longer term or delinquent receivables potentially leading to lower financing amounts and lower principal to value ratios.

Advantages and Disadvantages

Accounts receivable financing allows companies to get instant access to cash without jumping through hoops or dealing with long waits associated with getting a business loan. When a company uses its accounts receivables for asset sales it does not have to worry about repayment schedules. When a company sells its accounts receivables it also does not have to worry about accounts receivable collections. When a company receives a factoring loan, it may be able to obtain 100% of the value immediately.

Although accounts receivable financing offers a number of diverse advantages, it also can carry a negative connotation. In particular, accounts receivable financing can cost more than financing through traditional lenders, especially for companies perceived to have poor credit. Businesses may lose money from the spread paid for accounts receivables in an asset sale. With a loan structure, the interest expense may be high or may be much more than discounts or default write-offs would amount to.