Understanding Money Laundering and the Legal Ramifications – Part 2


Following on from our first article in the series, where we discussed what money laundering is, in this article, we will be focusing primarily on Anti-Money Laundering (AML) laws and legislation from across the world. AML legislation was a response to the growth of the financial industry, the lifting of international capital controls and the growing ease of conducting complex chains of financial transactions. A high-level United Nations panel has estimated annual money laundering flows at $1.6 trillion, accounting for 2.7% of global GDP in 2020.

Understanding Anti Money Laundering (AML)

AML regulations in the U.S. have expanded from the 1970 Bank Secrecy Act’s requirement that banks report cash deposits of more than $10,000 to a complex regulatory framework requiring financial institutions to conduct due diligence on customers and to seek out and report suspicious transactions. The European Union and other jurisdictions have adopted similar measures.

Know Your Customer

For banks, compliance starts with verifying the identity of new clients, a process sometimes called Know Your Customer (KYC). In addition to establishing the customer’s identity, banks are required to understand the nature of a client’s activity and verify deposited funds are from a legitimate source.

The KYC process also requires banks and brokers to screen new customers against lists of crime suspects, individuals and companies under economic sanctions, and “politically exposed persons”—foreign public officials, their family members and close associates.

As we discussed previously, money laundering can be divided into three steps:

  • Deposit of illicit funds into the financial system

  • Transactions designed to conceal the illicit origin of the funds, known as “layering”

  • Use of laundered funds to acquire real estate, financial instruments or commercial investments

The KYC process aims to stop such schemes at the first deposit window.


Customer Due Diligence

Customer due diligence is integral to the KYC process, for example by ensuring the information a potential customer provides is accurate and legitimate. But it is also a constant process extending to customers old and new, and their transactions.

Customer due diligence requires ongoing assessment of the risk of money laundering posed by each client and the use of that risk-based approach to conduct closer due diligence for those identified as higher non-compliance risks. That includes identifying customers as they are added to sanctions and other AML lists. According to the U.S. Treasury’s Financial Crimes Enforcement Network, the four core requirements of customer due diligence in the U.S. are:

  • Identifying and verifying the customer’s identity

  • 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 of customer relationships to develop customer risk profiles

  • Conducting ongoing monitoring to identify and report suspicious transactions and update customer information

Customer due diligence seeks to detect money laundering strategies including layering and structuring, also known as “smurfing”—the breaking up of large money laundering transactions into smaller ones to evade reporting limits and avoid scrutiny.

One rule in place to foil layering is the AML holding period, which requires deposits to remain in an account for a minimum of five trading days before they can be transferred elsewhere. Financial institutions are required to develop and implement a written AML compliance policy, which much be approved in writing by a member of senior management and overseen by a designated AML compliance officer. These programs must specify “risk-based procedures for conducting ongoing customer due diligence” and conduct “ongoing monitoring to identify and report suspicious transactions.”

Some AML requirements apply to individuals as well as financial institutions. Notably, U.S. residents are required to report receipts of more than $10,000 in cash to the Internal Revenue Service on IRS Form 8300. The requirement extends to multiple related payments within 24 hours or multiple related transactions within 12 months totaling more than $10,000.

History of Anti Money Laundering

Efforts to police illicit gains have a history stretching back centuries, while the term “money laundering” is only about 100 years old and in wide use for less than 50. The first major piece of U.S. AML legislation was the 1970 Bank Secrecy Act, passed in part to thwart organized crime. In addition to requiring banks to report cash deposits of more than $10,000, the legislation also required banks to identify individuals conducting transactions and to maintain records of transactions. The U.S. Supreme Court upheld the Bank Secrecy Act’s constitutionality in 1974, the same year “money laundering” entered wide use amid the Watergate scandal.

Additional legislation passed in the 1980s amid increased efforts to fight drug trafficking, in the 1990s to expand financial monitoring and in the 2000s to cut off funding for terrorist organizations.

Anti-money laundering assumed greater global prominence in 1989, when a group of countries and international organizations formed the Financial Action Task Force (FATF). Its mission is to devise international standards to prevent money laundering and promote their adoption. In October 2001, following the 9/11 terrorist attacks, FATF expanded its mandate to include combating terrorist financing.

Another important organization in the fight against money laundering is the International Monetary Fund (IMF). Like the FATF, the IMF has pressed its member countries to comply with international standards to thwart terrorist financing.


The United Nations included AML provisions in its 1998 Vienna Convention addressing drug trafficking, the 2001 Palermo Convention against international organized crime and the 2005 Merida Convention against corruption.

The Anti-Money Laundering Act of 2020, passed in early 2021, was the most sweeping overhaul of U.S. AML regulations since the Patriot Act of 2001. The 2021 legislation included the Corporate Transparency Act, which made it harder to use shell companies to evade anti-money laundering and economic sanctions measures.

The legislation also subjected cryptocurrency exchanges as well as arts and antiquities dealers to the same customer due diligence requirements as financial institutions.

Can Money Laundering Be Stopped?

Given estimated annual flows approaching 3% of global economic output, increasingly aggressive AML enforcement can at best aim to contain money laundering rather than stop it entirely. Money launderers never seem to run short of money or accomplices, though AML measures certainly make their lives harder.

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