# Understanding Anti-Money Laundering (AML): Key Processes and Global Impact

## What Is Anti-Money Laundering (AML)?

Anti-money laundering (AML) efforts, encompassing global laws, regulations, and procedures, are essential for detecting and preventing the transformation of illicit funds into legitimate income. By utilizing AML initiatives, authorities across the globe tackle financial crimes like tax evasion and [public corruption](https://www.investopedia.com/terms/c/corruption.asp) Modern AML practices, including Know Your Customer (KYC) and Customer Due Diligence (CDD), empower institutions to monitor and report suspicious activities.  

### Key Takeaways

*   Anti-money laundering (AML) regulations exist to prevent the concealment of criminal profits within the financial system.
*   Financial institutions use Know Your Customer (KYC) and Customer Due Diligence (CDD) processes to identify and mitigate potential money laundering activities.
*   Money laundering involves three main stages: placement (depositing), layering (obscuring origins through various transactions), and integration or extraction (using the funds for large purchases or withdrawals).
*   The Anti-Money Laundering Act of 2020 expanded AML regulations to cover cryptocurrency exchanges and other non-traditional financial sectors.
*   International bodies like the Financial Action Task Force (FATF) work to standardize and enforce AML and Combating the Financing of Terrorism (CFT) regulations globally.

![Anti-Money Laundering (AML)](https://www.investopedia.com/thmb/4Z0ZtqoKtbMnJ5Ei1lmv19JEDnU=/1080x0/filters:no_upscale():max_bytes(150000):strip_icc()/AML-7a3c35887ed946d1ba9cb56fae105db5.jpg)

*— Julie Bang / Investopedia*

## Understanding Know Your Customer (KYC) Processes

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:

*   Depositing illicit funds into a financial system
*   "Layering," or making a series of transactions, usually repetitive and voluminous, to obfuscate the illicit origin of the funds
*   "Cleaning" and "washing" the funds by using them to buy real estate, stocks, commercial investments, and other legitimate assets

The KYC process aims to stop money laundering at the first step—when a customer attempts to deposit money.

> **Fast Fact**
>
> 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](https://www.investopedia.com/articles/economics/10/economic-sanctions.asp), and politically exposed people, encompassing foreign public officials, their family members, and close associates.

## How Customer Due Diligence (CDD) Strengthens AML Efforts

Financial institutions conduct customer due diligence (CDD) throughout the account's lifetime, keeping accurate records for compliance and 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.

As per FinCEN, the U.S. Treasury's [Financial Crimes Enforcement Network](https://www.investopedia.com/terms/f/fincen.asp), CDD has four core requirements in the U.S.:

*   Identifying and verifying the customer’s personally identifiable information (PII)
*   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 and compiling risk profiles of customer relationships
*   Monitoring suspicious transactions and updating customer information

CDD aims to detect patterns like layering and [smurfing](https://www.investopedia.com/terms/s/smurf.asp), where large transactions are broken into smaller ones to avoid detection.

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](https://www.investopedia.com/terms/s/suspicious-activity-report.asp) (SARs) to relevant financial agencies for further investigation.

## The Evolution of Anti-Money Laundering in the U.S.

U.S. AML regulations expanded after the 1970 [Bank Secrecy Act](https://www.investopedia.com/terms/b/bank_secrecy_act.asp). Financial institutions had to report cash deposits over $10,000, collect account owner information, and keep transaction records.

More laws were enacted in the 1980s to combat drug trafficking, in the 1990s to improve surveillance, and in the 2000s to stop terrorist funding.

Banks, brokers, and dealers must now conduct due diligence and report suspicious transactions as part of a complex framework. 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.

### Recent Expansions in U.S. AML Regulations

The [Anti-Money Laundering Act of 2020](https://www.fincen.gov/anti-money-laundering-act-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](https://www.investopedia.com/corporate-transparency-act-8413903), 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.

## Global Perspectives on Anti-Money Laundering

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](https://www.investopedia.com/terms/f/financial-action-task-force-fatf.asp) (FATF).

The FATF is an intergovernmental body promoting international standards against money laundering. After the 9/11 attacks, it expanded to combat terrorism 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.

## Navigating Anti-Money Laundering Challenges with Cryptocurrency

Cryptocurrency catches the eye of AML experts and regulators due to its anonymity, which criminals can exploit to 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 cryptocurrencies complicates AML regulation implementation and enforcement. 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](https://www.investopedia.com/terms/b/bitcoin-wallet.asp), 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.

### Inside the U.S.

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](https://www.investopedia.com/terms/f/foreign-corrupt-practices-act.asp) (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.

### Outside the U.S.

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](https://www.investopedia.com/terms/f/financial-action-task-force-fatf.asp) (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.  

> **Important**
>
> 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.

## What Is Considered Anti-Money Laundering?

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.

## What Is an Example of Anti-Money Laundering?

Financial institutions are required by law to gather information on customers, track deposits and outflows, and report any suspicious activity.  

## What Are the 3 Stages of Money Laundering?

The three stages are placement (depositing), layering (obscuring through many transactions), and integration or extraction (using for large purchases or withdrawing).  

## The Bottom Line

Governments worldwide have advanced their tactics against money laundering with stringent regulations and proactive measures involving financial institutions. Key tools such as Know Your Customer (KYC) protocols and Customer Due Diligence (CDD) ensure that banks and financial entities monitor, detect, and report suspicious activity effectively. This global network of laws helps prevent illegal money from being disguised as legitimate funds, thereby protecting financial systems from various forms of criminal exploitation, including terrorism financing. Actionable frameworks like the U.S. Anti-Money Laundering Act of 2020 and international guidelines from bodies like the Financial Action Task Force play significant roles in combating these illicit activities.

> **Article Sources**
>
> 1.  Swift. “[What Does KYC Mean?](https://www.swift.com/your-needs/financial-crime-cyber-security/know-your-customer-kyc/meaning-kyc)”
>     
> 2.  United Nations, Office on Drugs and Crime. “[Money Laundering](https://www.unodc.org/unodc/en/money-laundering/overview.html).”
>     
> 3.  Nasdaq Verafin. "[2024 Global Financial Crime Report](https://verafin.com/nasdaq-verafin-global-financial-crime-report/)."
>     
> 4.  Swift. “[The KYC Process Explained](https://www.swift.com/your-needs/financial-crime-cyber-security/know-your-customer-kyc/kyc-process).”
>     
> 5.  Federal Financial Institutions Examination Council, Bank Secrecy Act/Anti-Money Laundering Infobase. “[Politically Exposed Persons](https://bsaaml.ffiec.gov/manual/RisksAssociatedWithMoneyLaunderingAndTerroristFinancing/20).”
>     
> 6.  Financial Industry Regulatory Authority. “[Frequently Asked Questions (FAQ) Regarding Anti-Money Laundering (AML)](https://www.finra.org/rules-guidance/key-topics/aml/faq).”
>     
> 7.  U.S. Treasury Financial Crimes Enforcement Network. “[Information on Complying with the Customer Due Diligence (CDD) Final Rule](https://www.fincen.gov/resources/statutes-and-regulations/cdd-final-rule).”
>     
> 8.  Cornell Law School Legal Information Institute. "[12 CFR § 229.13 - Exceptions](https://www.law.cornell.edu/cfr/text/12/229.13)."
>     
> 9.  U.S. Treasury Financial Crimes Enforcement Network. “[History of Anti-Money Laundering Laws](https://www.fincen.gov/history-anti-money-laundering-laws).”
>     
> 10.  U.S. Treasury Financial Crimes Enforcement Network. “[BSA Timeline](https://www.fincen.gov/resources/statutes-and-regulations/bank-secrecy-act/bsa-timeline).”
>      
> 11.  U.S. Office of the Comptroller of the Currency. “[Bank Secrecy Act (BSA): BSA & Related Regulations](https://www.occ.treas.gov/topics/supervision-and-examination/bsa/index-bsa.html).”
>      
> 12.  U.S. Treasury Financial Crimes Enforcement Network. “[FinCEN Informs Financial Institutions of Efforts Related to Trade in Antiquities and Art](https://www.fincen.gov/sites/default/files/2021-03/FinCEN%20Notice%20on%20Antiquities%20and%20Art_508C.pdf),” Pages 1–2.
>      
> 13.  JD Supra. “[FinCEN Crypto & Ransomware Guidance: Will 2022 Bring More Changes?](https://www.jdsupra.com/legalnews/fincen-crypto-ransomware-guidance-will-2556933/)”
>      
> 14.  International Monetary Fund. “[The IMF and the Fight Against Money Laundering and Terrorism Financing](https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/31/Fight-Against-Money-Laundering-the-Financing-of-Terrorism).”
>      
> 15.  Chainalysis. "[2024 Crypto Crime Trends: Illicit Activity Down as Scamming and Stolen Funds Fall, But Ransomware and Darknet Markets See Growth](https://www.chainalysis.com/blog/2024-crypto-crime-report-introduction/)."
>      
> 16.  Chainalysis. “[Crypto Money Laundering: Four Exchange Deposit Addresses Received Over $1 Billion in Illicit Funds in 2022](https://www.chainalysis.com/blog/crypto-money-laundering-2022/).”
>      
> 17.  Atlantic Council. “[Cryptocurrency Regulation Tracker](https://www.atlanticcouncil.org/programs/geoeconomics-center/cryptoregulationtracker/).”
>      
> 18.  Internal Revenue Service. "[Treasury and IRS Issue Proposed Regulations on Reporting by Brokers for Sales or Exchanges of Digital Assets; New Steps Designed to End Confusion, Help Taxpayers, Aid High-Income Compliance Work](https://www.irs.gov/newsroom/treasury-and-irs-issue-proposed-regulations-on-reporting-by-brokers-for-sales-or-exchanges-of-digital-assets-new-steps-designed-to-end-confusion-help-taxpayers-aid-high-income-compliance-work)."
>      
> 19.  European Parliament News. "[New EU Rules to Combat Money-Laundering Adopted](https://www.europarl.europa.eu/news/en/press-room/20240419IPR20586/new-eu-rules-to-combat-money-laundering-adopted)."
>      
> 20.  European Council. “[Anti-Money Laundering: Council Adopts Rules Which Will Make Crypto-Asset Transfers Traceable](https://www.consilium.europa.eu/en/press/press-releases/2023/05/16/anti-money-laundering-council-adopts-rules-which-will-make-crypto-asset-transfers-traceable/).”
>      
> 21.  Financial Action Task Force. “[Virtual Assets: Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers](https://www.fatf-gafi.org/en/publications/Fatfrecommendations/targeted-update-virtual-assets-vasps-2023.html).”
>      
> 22.  Internal Revenue Service. “[Form 8300: Report of Cash Payments Over $10,000 Received in a Trade or Business](https://www.irs.gov/pub/irs-pdf/f8300.pdf).”
>      
> 23.  Internal Revenue Service. “[Cash Payment Report Helps Government Combat Money Laundering](https://www.irs.gov/newsroom/cash-payment-report-helps-government-combat-money-laundering).”