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Part of the Series Guide to Financial Crime and FraudTypes of Corporate Financial Crime and Fraud
Individual Financial Crime and Fraud
Detection of and Liability For Financial Crime and Fraud
Financial Crime and Fraud Examples
Control and Regulation
Anti-money laundering is an international web of laws, regulations, and procedures aimed at uncovering money that has been disguised as legitimate income. For centuries, governments and law enforcement agencies have tried to fight crime by following the money. In modern times, that comes down to anti-money laundering (AML) laws and activities.
Money laundering is the concealment of the origins of money gained from crimes, including tax evasion, human trafficking, drug trafficking, and public corruption. It also includes money being illegally routed to terrorist organizations.
Anti-money laundering regulations have had an impact on governments, financial institutions, and even individuals around the world.
Regulatory compliance at financial institutions starts with a process often called Know Your Customer (KYC). KYC determines the identity of new customers and whether their funds originated from a legitimate source.
Money laundering can be divided into three steps:
The KYC process aims to stop money laundering at the first step—when a customer attempts to deposit money.
A study from Verafin, a financial crime risk management company, estimates that $3.1 trillion in illicit money flowed through the global financial system in 2023.
Financial institutions screen new customers against lists of parties that pose a higher-than-average risk of money laundering: criminal suspects and convicts, individuals and companies under economic sanctions, and politically exposed people, encompassing foreign public officials, their family members, and close associates.
Throughout the account’s lifetime, financial institutions must conduct customer due diligence (CDD)—the practice of maintaining accurate and up-to-date records of transactions and customer information for regulatory compliance and potential investigations.
Certain customers may be added over time to sanctions and other AML watchlists, warranting checks for regulatory risks and compliance issues on an ongoing basis.
According to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), the four core requirements of CDD in the United States are:
CDD may try to uncover and counter money laundering patterns such as layering and structuring, also known as “smurfing”—breaking up large transactions into smaller ones to dodge reporting limits.
For example, financial institutions have instituted AML holding periods that force deposits to remain in an account for a minimum of days before they can be transferred elsewhere.
If patterns and anomalies indicate money laundering activities, suspicious transactions in U.S. jurisdictions must be reported in Suspicious Activity Reports (SARs) to relevant financial agencies for further investigation.
AML regulations in the U.S. expanded after the Bank Secrecy Act (BSA) was passed in 1970. For the first time, financial institutions were required to report cash deposits of more than $10,000, collect identifiable information of financial account owners, and maintain records of transactions.
Additional legislation was passed in the 1980s amid increased efforts to fight drug trafficking, in the 1990s to enhance financial surveillance, and in the 2000s to cut off funding for terrorist organizations.
Banks, brokers, and dealers now follow a complex regulatory framework of conducting due diligence on customers and tracking and reporting suspicious transactions. A written AML compliance policy must be implemented and approved in writing by a member of senior management and overseen by an AML compliance officer.
The Anti-Money Laundering Act of 2020—the most sweeping overhaul of U.S. AML regulations since the Patriot Act passed after the 9/11 terrorist attacks in 2001—subjected cryptocurrency exchanges, arts and antiquities dealers, and private companies to the same CDD requirements as financial institutions.
The Corporate Transparency Act, a clause of the Anti-Money Laundering Act, eliminated loopholes for shell companies to evade anti-money laundering measures and economic sanctions.
FinCEN, a U.S. Department of the Treasury bureau, issues guidance and regulations that interpret and implement the BSA and other AML laws. FinCEN’s guidance and regulations provide detailed instructions for financial institutions on how to comply with AML requirements.
In addition to these federal laws, many states have their own AML statutes and regulations. These state laws often mirror the federal requirements but may include additional provisions.
The European Union (EU) and other jurisdictions adopted similar anti-money laundering measures to the U.S. anti-money laundering legislation. Enforcement assumed greater global prominence in 1989 when a group of countries and nongovernmental organizations (NGOs) formed the Financial Action Task Force (FATF).
The FATF is an intergovernmental body that devises and promotes the adoption of international standards to prevent money laundering. In October 2001, following the 9/11 terrorist attacks, FATF’s mandate grew to combat terrorist financing.
Those standards—the FATF’s 40 Recommendations—provide a framework for AML and Combating the Financing of Terrorism (CFT) regulations and policies in more than 190 jurisdictions worldwide, covering CDD, transaction monitoring, reporting of suspicious activity, and international cooperation.
Other important international organizations in the fight against money laundering include the International Monetary Fund (IMF) and the United Nations (U.N.), and programs include the Council of the European Union’s Anti-Money Laundering Directive (AMLD) and the Basel Committee on Banking Supervision’s Customer Due Diligence (CDD) for Banks.
The IMF has pressed member countries to comply with international norms thwarting terrorist financing. The U.N. added AML provisions to address money laundering associated with drug trafficking in the 1998 Vienna Convention, with international organized crime in the 2001 Palermo Convention, and with political corruption in the 2005 Meridian Convention.
The Council of the European Union’s AMLD, a directive that sets out AML/CFT requirements for all EU member states, has been amended several times to reflect the changing risks of money laundering and terrorist financing. The Basel Committee on Banking Supervision’s CDD for Banks provides detailed recommendations for banks on how to identify and verify the identity of their customers.
Cryptocurrency has drawn increasing attention among AML professionals and regulatory bodies. Virtual coins provide anonymity to users, presenting criminals with a convenient way to store and move money.
According to cryptocurrency and blockchain analytics firm Chainalysis, addresses connected to illicit activity sent nearly $39.6 billion worth of cryptocurrency in 2022, up 141% from 2021. This figure dropped to $24.2 billion in 2023, but it was still a significant amount of money (it was only about 0.78% of all illicit funds).
The decentralized nature of cryptocurrency markets makes it challenging to implement and enforce AML regulations. Traditional AML frameworks designed for centralized financial institutions were not adequate in the past for the decentralized cryptocurrency ecosystem, but regulators have made significant progress in addressing the weaknesses that were present.
Blockchain analysis and monitoring tools enable financial institutions and law enforcement to identify and investigate suspicious cryptocurrency transactions. Crypto forensic services like Chainalysis, Elliptic, and TRM Labs have the technology to flag crypto wallets, exchanges, and transactions tied to designated terrorist organizations, sanctions lists, political groups, government actors, and organized crime such as hacking, ransomware, scams, and contraband trafficking on darknet markets.
In the U.S., cryptocurrencies are largely an unregulated market, and few regulations explicitly target the asset class by name. Instead, AML enforcement actions, such as those against crypto exchanges Binance and FTX, have been prosecuted under existing laws and statutes, such as the Bank Secrecy Act and the Foreign Corrupt Practices Act (FCPA).
Only under the Anti-Money Laundering Act of 2020 did U.S. companies become legally required to comply with financial screening regulations that apply to fiat currencies and tangible assets. Businesses that exchange or transmit virtual currencies now qualify as regulated entities and must register with FinCEN, adhere to AML and CFT laws, and report suspicious customer information to financial regulators.
More formal rules on intervening in virtual currency money laundering are expected to be introduced in the U.S. and abroad. Recent steps include an Internal Revenue Service (IRS) proposal and several European bills for financial platforms to report digital asset payments and transactions to national and transnational regulatory bodies, law enforcement agencies, and industry stakeholders.
On the global stage, the Financial Action Task Force (FATF) Travel Rule, an international AML framework that would require collecting and sharing beneficiary information for cross-border cryptocurrency flows, is being closely watched and gaining traction among regulatory bodies worldwide.
Several countries have implemented or are implementing the FATF Travel Rule in their civil and criminal codes to increase the transparency and accountability of cryptocurrency transactions.
Some AML requirements apply to individuals. By law, U.S. residents must report receipts of multiple related payments totaling more than $10,000 to the Internal Revenue Service (IRS) on IRS Form 8300.
Anti-money laundering (AML) refers to legally recognized rules, national and international, that are designed to thwart hiding criminal profits inside the financial system.
Customer due diligence (CDD) refers to practices that financial institutions implement to detect and report AML violations.
Know Your Customer (KYC), also known as Know Your Client, is a component of CDD that involves screening and verifying prospective banking clients.
Financial institutions are required by law to gather information on customers, track deposits and outflows, and report any suspicious activity.
The three stages are placement (depositing), layering (obscuring through many transactions), and integration or extraction (using for large purchases or withdrawing).
Governments have evolved their approach to money laundering deterrence by establishing and revising regulatory controls that elicit proactive participation from financial institutions. Anti-money laundering is crucial for safeguarding the financial system from crimes.
Article SourcesTypes of Corporate Financial Crime and Fraud
Individual Financial Crime and Fraud
Detection of and Liability For Financial Crime and Fraud
Financial Crime and Fraud Examples
Control and Regulation
