Anti-money laundering (or AML) compliance entails a careful adherence to rules and regulations aimed at combating illicit financial activities. In the US, AML compliance is upheld by the US Treasury’s Financial Crimes Enforcement Network (FinCen) and governed by the Bank Secrecy Act (or BSA). AML compliance is also referred to as BSA/AML compliance.
All companies that partner with banks and build products to move money are subject to anti-money laundering (AML) regulations since banks are required to ensure AML compliance for business customers they underwrite.
At its simplest, money laundering refers to the “cleaning” of money obtained illegally using legitimate financial institutions. As an example, someone involved in criminal activity might clean stolen money by depositing small amounts into multiple bank accounts, transferring this money to other accounts, and then withdrawing the money, thus distancing the funds from their illicit origins. Ostensibly a source for the phrase “money laundering,” Al Capone famously opened laundromats as a front to account for and process money he obtained through criminal activity during prohibition.
There are traditionally three stages in money laundering (placement, layering, and integration) and AML compliance aims to deter this process within the first two stages. Returning to the example of someone cleaning stolen money through bank deposits and withdrawals, placement would entail opening bank accounts and layering would occur when the bad actor mixed their money with legitimate funds through small bank transfers. Finally, integration would involve the purchase of a house or car with the clean money, thus re-entering previously dirty funds into the economy.
AML compliance programs aim to catch laundering before integration (after which detection is more difficult) with onboarding detections like KYC (or “know your customer,” which involves identity verification and cross-checks), transaction monitoring, and ongoing diligence (including oversights, reviews, and audits).
Why is AML compliance important?
According to the UN Office on Drugs and Crime, between $800 billion and $2 trillion US dollars are laundered annually worldwide. In addition to disrupting economies, these funds fuel activities with large and dangerous social impacts including drug trafficking, terrorism, human trafficking, cyber attacks, smuggling, nuclear proliferation, and a host of other criminal and fraudulent activities.
In fact, money laundering is the nexus where many illegal operations converge; regardless of the type of crime, attaining money is very often the end goal. (Note: money laundering doesn’t have to involve legal tender, since digital currencies, goods, and services can also entail crime.) Because money laundering is central to illicit activity, financial institutions are uniquely positioned to prevent and report on significant crimes, in part using AML compliance.
Businesses can be subject to heavy fines and sanctions or even lose a license for failures in AML compliance. In 2021, for example, FinCEN issued $1.6B in fines to 55 companies and banks for money laundering. And this type of criminal activity isn’t going away any time soon. With surging ransomware attacks threatening businesses of all sizes, AML compliance will continue to be essential in protecting financial systems used to facilitate payments.
What makes AML compliance challenging?
AML compliance can be difficult for businesses to establish and uphold for a number of reasons:
- Setting up a rigorous compliance program is complex, time-consuming, and unlikely to be a core business competency
- Regulations at the state, federal, and international level consistently evolve
- AML compliance needs to be set up right, properly maintained, and regularly updated—and the risks of failure are significant
- Businesses often rely on multiple tools and systems to ensure compliance, causing inefficiency and increasing risk if one system fails
- While some automations exist, AML compliance ultimately relies on some level of human oversight (ie. valuable company resources)
And until now, no single system integrated anti-money laundering technology and payment operations. Compliance from Modern Treasury was designed to address the complexities of AML compliance and fraud prevention—it’s quick to launch, easy to use, and protects businesses from costly compliance violations so they can get to market faster. Compliance is now available to customers via early access release—learn more:
Compliance refers to the regulations, laws, and guidelines governing businesses and financial institutions.
- 1What is SOC 2?
- 2What is Section 314(b)?
- 3Financial Crimes Enforcement Network (FinCEN)
- 4Customer Due Diligence
- 5Customer Identification Program
- 6What is Section 314(a)?
- 7Suspicious Activity Report
- 8Politically Exposed Person
- 9Specially Designated Nationals
- 10What is a Currency Transaction Report?
- 11What is OFAC?
- 12What is the Bank Secrecy Act (BSA)?
- 13What is PCI DSS Certification?
- 14What is AML Compliance?
- 15Office of the Comptroller of the Currency (OCC)
- 16What is the Electronic Fund Transfer Act?
- 17Personal Identifiable Information (PII)
- 18Compliance Risk Management
- 19What is Know Your Customer (KYC)?
- 20Know Your Business (KYB)
Subscribe to Journal updates
Discover product features and get primers on the payments industry.