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Anti-money laundering (AML) is the effort to stop the illegal practice of money laundering, in which a criminal lies about the source of his funds. Under anti-money laundering guidelines, financial institutions are required to take steps to verify the origins of large sums of money that pass through their organization and also must report suspicious activity. These regulations became particularly important in the United States after the passage of the Patriot Act in 2001, though several countries have anti-money laundering guidelines in place. The Financial Action Task Force on Money Laundering (FATF) creates policies that help its members, including more than 30 countries, combat money laundering.
The governments of various countries place an emphasis on anti-money laundering regulation because, in most cases, laundered money is illegally obtained. For example, some criminals make their money through activities that are illegal in most areas, including drug dealing, prostitution and gambling. In addition, many people launder money to get out of paying income taxes. It was terrorism that prompted the U.S. government to enact the Patriot Act. This regulation gives government officials the freedom to look into suspicious activities so they have a chance of stopping those who fund terrorists.
Financial institutions are required to abide by anti-money laundering regulations. They have to verify the identity of customers and routinely monitor transactions that are made. One of the main anti-money laundering tools that most banks use is a currency transaction report (CTR), which is a form that has to be filed for every money withdrawal, deposit and account transfer over a certain amount. In the U.S. as of 2011, that amount was $10,000, though the amount can vary by country and some countries do not require this form at all. The typical CTR includes tax information, the customer's personal information and whether the bank employee finds the transaction to be suspicious.
Most banks use anti-money laundering software to help them comply with regulations. The majority of CTRs are filed electronically through such software, but another type of software specializes in properly identifying customers in accordance with the customer identification program implemented by the U.S. Bank Secrecy Act. Such software adheres to "know your customer" (KYC) rules, which involve checking the customer's account history to get an accurate picture of each customer's identity and transaction habits. A third type of software focuses solely on monitoring transactions to look for suspicious patterns that may indicate money laundering. This type of software automatically creates suspicious activity reports (SAR) when money laundering or other illegal deeds are suspected, resulting in the account being investigated.
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