What Is Anti-Money Laundering?

Anti-money laundering (AML) refers to an international network of laws, regulations, and processes designed to prevent illicit funds from entering the financial system. But to fully understand how AML works, we first need to be clear on what money laundering means.

Money laundering is the act of disguising “dirty money” from illegal sources as legitimate. This act allows the dirty money to be used freely.

Due to the illicit nature of laundered funds, money laundering is associated with criminal activities, as well as corruption and fraud. For example, major criminal syndicates launder their money to conceal links to crimes like human trafficking or drug trafficking. Money laundering is also often associated with terrorist financing, with terrorist organizations like ISIS having used such practices to enable them to access funds. This is why AML policies often include Counter Financing of Terrorism (CFT) measures. Ultimately, AML is about making it more difficult for criminals to operate, which is why there are legal obligations to follow AML laws in jurisdictions around the world.

This article offers simple yet comprehensive explanations of AML and money laundering as well as how Sumsub can help in compliance with AML regulations worldwide. 

What is AML?

The aim of AML is to combat money laundering by preventing illicit funds from being disguised as legitimate.

As such, AML regulations aim to expose money laundering and prevent dirty money from entering the financial system. This is to help fight and reduce crime, as well as terrorist financing, the breaching of sanctions, and proliferation financing.

Applicable laws vary around the world, but many businesses and financial institutions at higher risk of being used for money laundering and other financial crimes are generally legally bound to report money laundering and use AML compliance programs. These may be implemented through training, Customer Due Diligence (CDD), monitoring, and reporting. 

AML laws are essential in combating financial crimes. Moral obligations aside, non-compliance with AML regulations is a major risk and can lead to hefty fines and legal penalties. For example, in 2024, TD Bank was fined $3 billion for inadequate guards against money laundering linked to drug cartels and other criminals. Non-compliance is now becoming even riskier as AML regimes tighten around the world while reports of money laundering are on the rise.

Suggested read: 3 Stages of Money Laundering: Placement, Layering, Integration

How AML works

To understand how AML works, we first need to logically understand how money laundering works. Money laundering is a term often referenced in the media, with writers using it to drive plots forward in shows like Ozark and Breaking Bad, but how does it actually work?

There are many different types of money laundering, such as trade-based money laundering, crypto money laundering, and drug trafficking money laundering. As regulations tighten, criminals are constantly adapting their methods and making use of new technologies to skirt regulations. This means it is important for businesses to stay informed to avoid non-compliance and the associated criminal charges or fines.

While there are many different types of money laundering depending on the aim of the launderers, money laundering generally consists of three stages: placement, layering, and integration.

Jurisdictions around the world have introduced AML laws to prevent, identify, and combat money laundering. Regulatory bodies are then tasked with ensuring compliance. AML laws place an obligation on required businesses to do their part in complying with these laws and helping to combat money laundering. Failure to comply can thus carry heavy penalties, ranging from fines to lengthy custodial sentences. 

Companies implement AML procedures to detect money laundering, including:

Customer Due Diligence (CDD) — This is the process of collecting and verifying information about a customer during onboarding. This includes the customer’s name, address, and other personal data. Businesses must carry out CDD when establishing a business relationship.

Know Your Customer (KYC) — This also relates to customer verification and is often confused with CDD. CDD, however, involves a specific list of procedures set by law. Required KYC checks may vary from jurisdiction to jurisdiction. 

Enhanced Due Diligence (EDD) — Businesses may need to perform more in-depth verification for higher-risk situations. 

Ongoing monitoring — Regular AML checks to ensure continued regulatory compliance, including verifying customer information and detecting suspicious activities.  

AML audits — An in-depth review of AML procedures to ensure compliance with relevant regulatory bodies and identify shortcomings.  

Transaction monitoring — Monitoring customer transactions to identify potential fraudulent activities. 

History of AML

It is hard to say with any certainty when AML practices began. However, as long as there have been laws on making money and paying taxes, some people have tried to hide the true nature of their funds. 

For example, wealthy Ancient Athenians may have concealed their true wealth to reduce their tax burden. Meanwhile, the Tang Dynasty fei chien system allowed traders to avoid taxation by carrying apparently worthless tokens instead of valuable coins. Arresting Tang Dynasty merchants on the Silk Road for trying to avoid paying taxes could be considered an example of ancient AML.

More recently, however, the US Bank Secrecy Act of 1970 was an early step in AML regulations as we know them today. The later founding of the Financial Action Task Force (FATF) in 1989 then signalled a major step in international cooperation to combat money laundering and financial crimes.

Today, countries all around the world have AML laws, while international organizations like the IMF indicate the importance of AML as a global effort. 

Who uses AML?

Governments create AML laws that are regulated by regulatory bodies and upheld by law enforcement. Failure to comply with these laws thus carries all sorts of risks, such as criminal charges, civil suits, and negative publicity. Exact AML obligations vary from jurisdiction to jurisdiction, but generally those at higher risk of money laundering must follow stricter procedures to prevent and combat money laundering.  

Industries especially at risk of money laundering include:

• Banking 
• Crypto 
• Ecommerce

There is also a notable risk of money laundering in the public sector, as well as in the arts and sports. While AML in banking and AML in finance are crucial, AML compliance is important in all high-risk fields.

Why is AML compliance important?

AML compliance is a legal requirement in many jurisdictions and as such it prevents fines, preserves shareholder worth, protects brand reputation, and can reduce costs. However, AML compliance is not just important for protecting companies from negative consequences. With a conservative estimate of 2-5% of global GDP laundered each year ($800 billion to $2 trillion), money laundering conceals funds made from activities that can have disastrous human impacts.

For example, money laundering is often associated with criminal activities like smuggling, human trafficking, drug trafficking, fraud, and embezzlement. This allows a profit to be made from activities that are not only illegal, but often lead to human harm. As such, AML compliance is an important step in both reducing the benefits of such activities and uncovering crimes. Money laundering is also often linked to the breaching of sanctions and terrorism.

AML compliance is required under AML/CFT regulations for regulated entities at high risk of money laundering, including financial institutions, credit institutions, insurance companies, e-money institutions, payment institutions, virtual assets service providers (VASPs), gambling service providers, and art dealers.

In summary, AML compliance is important from both a company-centric and altruistic focus. International regulations, however, can change rapidly, leading to complexity and a considerable time investment to ensure compliance. This is why Sumsub helps simplify processes for clients, helping them avoid falling foul of regulations, saving them time and potentially money through AML programs.

What is an AML program?

AML programs consist of policies and procedures that organizations implement to prevent money laundering and the financing of terrorism in accordance with relevant laws and regulations. AML programs thus involve steps like KYC, CDD, risk assessment, staff training, monitoring, and reporting to comply with national and international regulations.

As technologies are advancing with machine learning and AI, many AML processes may now be automated, helping to more effectively combat financial crimes. Sumsub uses advanced technologies including deep learning and neural networks to allow for automation in its compliance solution to ensure swift, effective, and user-friendly processes.

Suggested read: 6 Key Steps to a Successful Anti-Money Laundering (AML) Program

Key AML acts

As the map below shows, there are many different regulatory bodies around the world responsible for anti-money laundering acts. There may be overlaps between them, but it is important to stay compliant with a country’s respective anti-money laundering regulations if operating in the country. Companies should not assume that just because they adhere to anti-money laundering policy in Australia they are also compliant in India. 

FATF Recommendations, however, form the basis of global AML/CFT standards, which are widely adopted by national governments.

The United Nations Convention against Transnational Organized Crime (UNTOC) also  includes provisions on money laundering and mandates that countries adopt laws criminalizing money laundering and the financing of terrorism.

AML, CDD, and KYC

Customer Due Diligence (CDD) and Know Your Customer (KYC) are key parts of AML programs. But how do they relate?

In essence, AML is a general term that refers to laws, rules, and procedures that prevent money laundering. Meanwhile, CDD refers to an obligation as part of KYC verification screening, ensuring that people are who they say they are. CDD involves financial institutions monitoring transactions and reporting suspicious activity, marking the first step in tracking criminal financial activity. 

This means that while KYC relates to verifying a customer’s identity, CDD refers to risk assessment and monitoring. AML, meanwhile, covers measures to prevent money laundering and other financial crimes. 

Suggested Read: KYC and AML Guide – Key Differences and Best Practices

How to comply with AML regulations  

Since money laundering is so widespread and global money laundering fines are surging, it’s important to have a robust AML program in place to ensure compliance. 

A good understanding of how money laundering works helps to manage the flow between agencies and law enforcement. It is also important to be up to date about AML regulations, which can quickly change and vary from jurisdiction to jurisdiction, especially with the rise of decentralized finance (DeFi) platforms and the ongoing need for sanctions compliance. 

AML compliance not only helps companies maintain their reputations and prevent potential fines and penalties, but it also helps combat criminal activities that may make the world a more dangerous and corrupt place.

Suggested Read: Anti-Money Laundering (AML) Policy 2024 – Step-by-Step Guide

• What is an example of anti-money laundering?

  If a known money launderer tries to open a bank account and the bank checks this person’s identity, the money launderer could then be flagged. The bank could then act accordingly, with reporting suspicious cases to authorities being an example of AML.

• What does the anti-money laundering law mean in the US?

  US AML laws under the Bank Secrecy Act and the Patriot Act require financial institutions to implement policies to identify and prevent money laundering. This includes CDD, transaction monitoring, and reporting suspicious activities.

• What does AML mean in the financial market?

  AML in the financial market refers to anti-money laundering. AML generally refers to regulations and other practices designed to stop financial institutions from being used to launder illicit funds or finance terrorism.

• What happens if a company does not comply with AML?

  Consequences for non-compliance vary from jurisdiction to jurisdiction and case to case. However, non-compliance with AML may lead to criminal charges, fines, and reputational damage.