AML: Stopping Money Laundering in Its Tracks

Gradually, similar measures were adopted in legislative practices worldwide. Today, AML encompasses a comprehensive set of measures to combat corruption, tax evasion, fraudulent reporting, and the financing of terrorism (CFT — Combating the Financing of Terrorism). AML also targets market manipulators, traffickers of illegal goods, and drugs.

The nature of money laundering has evolved with the transformation of money itself. Digital assets and electronic cash have provided new opportunities for criminals. As a result, AML has become a critical task for the banking and financial sectors. In most jurisdictions, AML compliance is mandatory for lawful operations, including for cryptocurrency companies.  

In addition to traditional cryptocurrencies, non-fungible tokens (NFTs) are also widely used in money laundering schemes. Criminals cover their tracks by conducting a series of fake transactions between affiliated addresses, allowing the token seller to present the funds as "clean." Money is also frequently laundered using crypto mixers, which blend different users' funds to obscure their origin and the identity of the original owners. Although this practice does not explicitly violate regulations in many jurisdictions, the legality of using mixers remains a subject of debate.

In 1989, G7 countries established the Financial Action Task Force (FATF), an international intergovernmental organization dedicated to combating money laundering. FATF sets global standards and evaluates national systems for compliance with anti-money laundering (AML) measures. The organization developed 40 key recommendations that are followed by the financial and banking sectors across the world. By 2024, FATF had grown to include 55 member countries.

Other international organizations and task forces involved in fighting money laundering include the Global Coalition to Fight Financial Crime and the Global Forum on Transparency and Exchange of Information for Tax Purposes, among others.

Money laundering is estimated to account for up to 5% of global GDP today (according to the IMF). 

It is almost impossible to launder illegal funds without the involvement of banks and financial institutions. Therefore, AML procedures primarily focus on monitoring transactions to identify suspicious or unusual financial activities. Examples include running a cash-only business, holding funds in multiple accounts across different banks, frequently transferring funds to other jurisdictions, conducting repetitive or reciprocal transactions, purchasing options, or investing in securities through brokers affiliated with a company.

One of the most drastic AML measures is the freezing of a user's assets. This is made possible through customer identification processes, also known as KYC (Know Your Customer). KYC is a crucial indicator of a platform’s trustworthiness. Any platform that deals with fiat currencies must follow strict AML/KYC policies. If a platform supports card payments and bank transfers, it is required to verify every client to ensure they have no history of involvement in illegal activities. 

The primary reason crypto platforms must comply with AML/KYC regulations is the inherent anonymity of cryptocurrencies. Some users are understandably hesitant to provide personal information and give up their anonymity. However, it’s important to consider the downside: using a crypto platform that doesn’t require any identification may leave you with limited recourse if a dispute arises.

Different jurisdictions apply varying criteria to determine whether financial operations constitute money laundering. As a result, AML laws vary across countries. Let’s look at a few examples.

In the U.S., AML measures are generally divided into two parts: preventive measures and enforcement actions.

Whistleblowers can report money laundering activities to the Financial Crimes Enforcement Network (FinCEN). If the case involves securities or digital assets, reports can be made to the Securities and Exchange Commission (SEC).

Since 1970, the U.S. has implemented several laws under the Bank Secrecy Act (BSA). Financial institutions, credit card companies, insurance providers, securities brokers, and dealers are all required to report certain transactions to the U.S. Department of the Treasury.

Specifically, information must be reported on cash transactions that exceed a certain threshold. Initially, this threshold was set at $5,000, but due to the high cost of reporting, it was later raised to $10,000.

In addition, financial institutions are required to report transactions they consider "suspicious," meaning when the institution “knows or suspects that the funds are derived from illegal activity or intended to conceal such activity.” Suspicious behavior can also include attempts by clients to bypass the BSA by splitting large transactions into smaller amounts under $10,000.

The Corporate Transparency Act, enacted in 2020, also requires corporations, limited liability companies (LLCs), and similar entities to disclose their beneficial owners to FinCEN. These reports must include personal details and identification numbers of the owners, creating a centralized database for law enforcement to aid in investigating and preventing financial crimes.

Since 1990, the European Union has implemented five Anti-Money Laundering Directives (AMLDs). The most recent, the Fifth Anti-Money Laundering Directive (5AMLD), was adopted in 2018 to further align European AML regulations with U.S. standards and address loopholes in the EU’s rules on combating money laundering and terrorist financing (AML/CFT).

One of the key focuses of 5AMLD was the regulation of cryptocurrency exchanges. Under this directive, cryptocurrency exchanges are now classified as "obliged entities" and must comply with AML/CFT requirements, including submitting reports on suspicious activities.  

Legally, cryptocurrencies are viewed as a digital form of value that can be transferred, stored, and traded electronically. Financial Intelligence Units (FIUs) are now authorized to access the addresses and identities of virtual currency holders. Moreover, cryptocurrency exchange providers and wallet services must be registered with the appropriate regulatory authorities.

The European Commission has also drawn up a list of 22 countries with a high risk of money laundering and terrorist financing. This list includes Afghanistan, Iran, Iraq, North Korea, Syria, Uganda, Vanuatu, Yemen, Trinidad and Tobago, Pakistan, the Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Panama, and Zimbabwe. Transactions from these jurisdictions are considered high risk for money laundering.

Furthermore, 5AMLD lowered the threshold for customer identity verification in the prepaid card industry from €250 to €150. Customers depositing or transferring amounts over €150 must be identified by the prepaid card issuer.

Money laundering is defined more broadly in UK legislation than in many other jurisdictions, with various laws passed between 2000 and 2018.

Firstly, there is no specific list of serious crimes required to charge someone with money laundering, nor are there transaction size limits, unlike in the U.S., EU, and other regions.

In addition, the Criminal Finances Act of 2017 introduced the concept of “unexplained wealth” as a further tool in the fight against money laundering. Under this law, any individual owning an asset worth more than £50,000 can be required to prove that the purchase was made with legitimate income.

Secondly, in the UK, money laundering is not treated as a standalone crime. Any involvement in the proceeds of criminal activity—whether the criminal themselves possesses the illicit gains from their own wrongdoing—can lead to money laundering charges. This is logical, as proceeds from robbery, drug trafficking, underground gambling, and similar illegal activities inevitably need to be legitimized (laundered).

This approach also extends to tax evasion. Someone who evades taxes can also be charged with illegal enrichment, corresponding to the amount owed to the tax authorities.

Moreover, the UK considers money laundering not only in terms of gaining material benefits (money or valuables) but also in the acquisition of non-material assets of any kind.

Interestingly, using this logic, the first known "money launderer" in UK history could be considered the legendary outlaw Robin Hood. He stole from the rich and gave to the poor, and the "dirty" money would eventually re-enter legal circulation through taxes, levies, and payments—effectively being laundered. In return, Robin Hood gained non-material rewards in the form of public loyalty. His popularity even earned him favor with certain members of the nobility and clergy. According to one version of the legend, Robin Hood was eventually invited to serve in the court of King Richard the Lionheart. By today’s standards, this could be viewed as a form of corruption, which also falls under the scope of AML regulations.  

China’s anti-money laundering (AML) policies are generally in line with FATF standards. The key crimes addressed by AML laws include terrorist financing, drug trafficking, smuggling, financial fraud, and document forgery. A unique feature of China’s approach is that profits from tax evasion (including those channeled through non-residents) are classified as a separate criminal offense.

The main legal framework for AML in China is the 2007 Anti-Money Laundering Law, which was amended in 2020. It requires: 

• Financial institutions to conduct proper customer due diligence;
• Reporting of all suspicious transactions;
• Retention of transaction records, customer identification information, and reports of suspicious transactions for a specified period.

In addition, financial institutions must report large transactions to the China Anti-Money Laundering Monitoring and Analysis Center (CAMLMAC).

In 2024, Chinese authorities officially recognized virtual asset transactions as a method of money laundering and amended the law accordingly.

Under this new interpretation, transactions involving virtual assets (including those conducted through cryptocurrency exchanges) are now classified as actions that can conceal the origin and nature of illicit funds.

The penalties for violations are severe. Laundering sums over 5 million yuan (approximately $690,000) is considered a serious offense, with offenders facing up to 10 years in prison.

Furthermore, individuals and organizations that fail to meet AML requirements can be fined up to 500,000 yuan (approximately $70,000).

Criminal methods for laundering money are constantly evolving, and becoming more sophisticated. As a result, governments and international organizations often find themselves playing catch-up, continuously tightening AML regulations.

At the same time, there is no clear data on the cost-effectiveness of AML measures. The complex, lengthy, and costly procedures involved in managing financial transactions can hinder capital flows and slow business activity.

In this context, the improvement of AML mechanisms is increasingly associated with the use of artificial intelligence (AI). AI can greatly accelerate verification processes, streamline administration, and reduce the number of false positives in detecting suspicious activities. But don’t be surprised if corrupt officials resist such innovations.