AML
What is AML?
AML stands for “anti-money laundering.” The term refers to the practices that financial institutions—like banks and payment services—use to make sure their customers’ money does not come from illegal activity. Financial regulators require institutions to have robust AML, as part of their efforts to fight financial crime.
You generally will only encounter AML practices directly when going through a KYC check. The rest of the time, banks and payment services are constantly monitoring your transactions for suspicious activity in the background.
What is money laundering?
Money laundering is the process of disguising money that results from illegal activity, making it appear to be legitimate. There are a wide variety of techniques, but they all follow the same general outline: introducing the money into the financial system in a way that avoids raising suspicion (called “placement”), followed by moving the money around in a complex series of transactions to make it difficult to trace the origin (called “layering”).
Money laundering is a crime itself, separate from the crime that produced the money. People and organizations charged with crimes are often also charged with laundering the resulting money. It’s possible to be convicted of money laundering without being convicted of the underlying crime that generated the money.
Why is AML important?
AML practices are meant to deter large-scale criminal activity, by making it difficult for criminals to use the financial system to handle the proceeds of crime. The idea is that making it hard or risky to spend large amounts of illegally-gotten funds will reduce the financial incentives for criminal activity, and hopefully reduce criminal activity altogether.
AML makes the financial system inhospitable to criminals by making it more likely that they’ll be caught by authorities, or possibly by refusing them service altogether.
What are AML practices?
AML practices vary in different countries and organizations, but they generally involve detecting suspicious activity that might be considered placement or layering, and reporting suspicious activity to authorities. An example of such suspicious activity is a client receiving a payment far larger than any they’ve received before, or receiving payments from many different accounts that they’ve never transacted with before.
If a client’s activity raises suspicion, an institution like a bank might report them to authorities, or stop providing services.
Privacy concerns
Financial regulators generally take the position that their interest in detecting and preventing financial crime takes precedence over individual privacy. Carrying out effective AML requires financial institutions, like banks and payment services, to collect and retain a lot of information about people and their financial activity. People generally have little control over what data the institutions collect (i.e. they often can’t opt out of data collection), how that data is used, who has access to it, or how long it’s kept.
This reduced privacy is unavoidable in the current financial system; any bank or payment service must have an AML program in order to be allowed to operate, and to do business with other financial institutions.
