What is AML
Anti-Money Laundering (AML) refers to a set of laws, regulations, and procedures designed to prevent money laundering, a type of financial crime that involves concealing or disguising the existence and source of proceeds derived from criminal activity to make them appear legitimate. The primary goal of AML is to deter and detect money laundering activities, which involve concealing the origins of illegally obtained money, typically by passing it through a complex sequence of banking transfers or commercial transactions. AML practices have evolved significantly since the 1980s, influenced by the increasing globalization of financial markets and the rise of digital currencies.
The term gained prominence with the implementation of the Bank Secrecy Act (BSA) of 1970 in the United States, which established the requirement for financial institutions to report suspicious activities. Over the years, various international organizations, including the Financial Action Task Force (FATF), have developed guidelines and standards to enhance AML efforts across jurisdictions, emphasizing the importance of cooperation among nations to combat financial crime.
How does AML work?
AML frameworks operate through a combination of regulatory compliance, risk assessment, and proactive monitoring. Financial institutions and virtual asset service providers (VASPs), such as centralized exchanges (CEXs), are legally obligated to implement Know-Your-Customer (KYC) policies to verify their customers' identity. This information helps financial institutions and VASPs assess the risk associated with each customer and determine the level of scrutiny required for their transactions.
Transaction monitoring systems analyze customer activities in real time, flagging any transactions that deviate from established patterns or exceed predetermined thresholds. When suspicious activities are identified, institutions are obligated to file SARs with relevant authorities, detailing the nature of the suspicion and providing any supporting documentation. This collaborative approach between financial institutions and regulatory bodies is essential for detecting and disrupting money laundering schemes.
