What is anti-money laundering?
Anti-money laundering (AML) refers to laws, regulations, and procedures intended to combat financial crime. AML measures prevent criminals from disguising funds obtained through illicit activities as legitimate income. Examples of illicit activity include corruption, terrorism financing, and drug or human trafficking.
Anti-money laundering non-compliance is a big deal. It exposes financial service providers to an increased risk of regulatory penalties, reputational damage, and loss of competitive advantage.
One of the first AML concepts and frameworks originated in the United States with the introduction of the Bank Secrecy Act (BSA) in 1970. International AML frameworks have since evolved, notably with the formation of the Financial Action Task Force (FATF) in 1989. The European Union subsequently developed its own framework with the First Anti-Money Laundering Directive (1AMLD) in 1991, which has evolved in the years since.
Key components of anti-money laundering
To combat money laundering and the financing of terrorism, financial service providers are required to impose measures such as Know Your Customer (KYC) procedures — which include Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), and Customer Identification Programs (CIP). They’re also required to monitor transactions and report suspicious activities to financial-crime watchdogs and law-enforcement agencies.
By screening customer data and verifying user identities, these risk-management controls help to prevent individuals or entities involved in suspicious or illegal activities from laundering funds.
Know Your Customer (KYC)
KYC is a procedure used by financial and non-financial service providers to ensure they have sufficient, accurate, and verifiable information and documentation about new clients’ identities and risk profiles.
Simply put, KYC ensures that customers are who they say they are, and that their funds’ sources are legitimate.
KYC prevents service providers from engaging with individuals or entities associated with financial fraud, corruption, money laundering, and terrorist financing. These procedures are relevant to almost all entities that deal with financial transactions — including banks, asset management firms, broker-dealers, and fintech startups.
There are generally three components of KYC:
Customer Identification Program (CIP)
Customer Due Diligence (CDD)
Enhanced Due Diligence (EDD)
Across the KYC process, service providers collect information from government-issued IDs, biometrics, and other proofs.
Customer Due Diligence (CDD)
A core part of KYC, CDD is a process intended to verify customers’ identities and minimize risks associated with money laundering, financial fraud, and terrorist financing. It’s a continuous process throughout a customer’s entire lifecycle and a critical part of AML compliance.
The CDD procedure involves collecting personal or business information, such as names, addresses, and a date of birth/entity registration, as well as authentic identification documents to assess customers’ risk profiles. This data is used to perform background checks and ensure customers aren’t involved in illegal or suspicious activities.
Transaction monitoring
Transaction monitoring is the process of tracking and analyzing customer transactions to detect suspicious activities that may indicate money laundering and/or fraud. This is an essential component of an AML compliance framework and usually covers various types of transfers, such as cash, wire, and credit-card payments.
Common red flags include:
Unusual payment patterns (such as substantial cash deposits or large cash transactions)
Rapid movement of funds between accounts
Transactions involving sanctioned entities or high-risk jurisdictions
Regulatory reporting
Regulatory reporting is a process in which financial institutions and businesses submit mandatory reports to regulatory authorities to demonstrate compliance with AML, counter-terrorist financing (CTF), or other financial crime prevention measures and regulations. Depending on the jurisdiction and the requirements of the respective oversight authority (e.g., FATF, FinCEN, FINRA, FINTRAC, etc.), financial institutions must adhere to different reporting guidelines, timelines, and formats.
Examples of key regulatory reports include:
Suspicious Activity Reports (SARs) and Suspicious Transaction Reports (STRs), which flag potentially suspicious behavior.
Currency Transaction Reports (CTRs), which track large cash deposits and withdrawals.
Cross-Border Reports, which monitor international fund transfers involving multiple jurisdictions.
By providing authorities with critical transaction information, these reports ensure transparency and minimize financial risks.
On the other hand, non-compliance with regulatory reporting obligations can lead to fines, legal consequences, and reputational damage.
Anti-money laundering regulations around the world
The scale of illicit financial activities such as money laundering calls for a multi-layered regulatory framework and stringent compliance measures on both national and international levels.
Globally, the establishment of the Financial Action Task Force (FATF) in 1989 by the G7 set the stage for a more collaborative and joint approach toward tackling financial crime. The FATF sets global standards and monitors country-level compliance with those standards, promoting a more cooperative approach to financial-crime prevention.
In the 2000s, the International Monetary Fund (IMF) joined efforts to tackle financial crime by focusing specifically on the abuse of offshore financial centers. The IMF’s blueprints aren’t legally binding for individual jurisdictions and member countries, but they serve as guidance for strengthening financial oversight and improving enforcement measures.
On a national level, oversight authorities across most developed and developing markets have transposed or adapted global AML recommendation frameworks, while some have implemented their own compliance procedures to combat money laundering, fraud, and terrorist financing.
Anti-money laundering in Europe
European countries’ joint campaign against money laundering started in 1991 with the introduction of the First Anti-Money Laundering Directive (1AMLD). Inspired by the FATF’s set of 40 Recommendations, it laid the foundation for uniform standards across member states.
Today, the EU is home to some of the world’s most comprehensive AML regulations, with the latest being the Sixth Anti-Money Laundering Directive (6AMLD). Some EU member states, such as France, the Netherlands, Germany, and Spain, also have individual regulatory agencies and directives tackling money laundering and terrorist financing.
Supervision and enforcement are coordinated by EU-level bodies such as the European Banking Authority (EBA) and the newly established EU Anti-Money Laundering Authority (AMLA), which is expected to become operational in 2026.
The UK has implemented some of the EU directives via domestic law but has also introduced its own regulations. The Financial Conduct Authority (FCA) is the country’s leading post-Brexit authority in enforcing AML/CFT frameworks and conducting regular compliance assessments.
Anti-money laundering in the US
The US pioneered anti-money laundering regulations with the Bank Secrecy Act in the 1970s. The legislation introduced requirements for recordkeeping and reporting by individuals, banks, and financial institutions. It aimed to identify the source, volume, and movement of currency and other monetary instruments into, within, and out of the United States.
Complementary AML laws and regulations that apply to financial-service providers in the US include the USA PATRIOT Act, the CDD Rule, and the Anti-Money Laundering Act of 2020. The latter represents a significant recent overhaul of the US AML framework.
Compliance with the BSA is supervised by the Financial Crimes Enforcement Network (FinCEN). AML compliance is also overseen by authorities such as the Office of the Comptroller of the Currency (OCC), which supervises national banks, and the Securities and Exchange Commission (SEC), which monitors AML compliance among broker-dealers and other participants in the securities markets.
What is an example of anti-money laundering?
Common red flags that can trigger anti-money laundering mechanisms may include:
Clients trying to hide information or avoiding personal contact.
Sudden and drastic changes in typical behavior.
Unusual or unclear sources of funds.
Money transfers to high-risk jurisdictions (e.g., states known for weak AML regulations or high levels of corruption).
Unclear beneficial ownership or excessively complex corporate structures.
An example of a potential trigger of an AML mechanism, known as “structuring,” is when a customer regularly deposits cash in large sums but just below the threshold set by the local oversight authority (e.g., €9,999).
Another example is when an existing client (or their family members and associates) is included on politically exposed person (PEP) or sanctions lists. Exposure like this can come at short notice, requiring financial-service providers to have a real-time plan for addressing them.
Anti-money laundering FAQs
What's the difference between AML and KYC?
Anti-money laundering (AML) is a broad framework of various mechanisms and procedures intended to help institutions prevent money laundering and other financial crimes — and stay compliant with regulations.
Know Your Customer (KYC), as a risk-based approach to customer identity verification and risk assessment, is one of its components.
What are the minimum requirements for an AML compliance program?
An effective AML compliance program should consist of several key components, such as:
Risk-based procedures for identifying and assessing potential risks of money laundering.
Know Your Customer (KYC) and Customer Due Diligence (CDD) processes to verify customer identities.
Transaction monitoring to detect suspicious activities.
Suspicious Activity Reporting (SAR) to notify regulators about unusual transactions.
Employee training to keep staff aware and up to date.
Independent audits to assess effectiveness.
Depending on the jurisdiction, AML compliance programs might face certain requirements, such as written approval by a senior manager, independent testing and implementation, or oversight by a designated compliance officer.
Are there any consequences for AML non-compliance?
Financial-services providers that aren’t compliant with anti-money laundering regulations could face severe consequences. These include regulatory penalties and fines, legal action, public scrutiny and loss of customer trust, reputational damage, diminished competitive advantage, and a potential loss of business.
