Anti-money laundering: Overview, definition, and example
What is anti-money laundering?
Anti-money laundering (AML) refers to the laws, regulations, and practices designed to prevent criminals from disguising illegally obtained money as legitimate income. AML policies require financial institutions and other regulated entities to detect and report suspicious activities, such as large cash transactions or unusual account behavior, that could indicate money laundering.
For example, a bank might monitor transactions exceeding $10,000 or investigate unusual wire transfers as part of its AML compliance program.
Why is anti-money laundering important?
Anti-money laundering is important because it protects the financial system from being used to facilitate criminal activities, such as fraud, terrorism financing, or drug trafficking. AML measures ensure that businesses comply with legal requirements, reduce financial crime risks, and maintain trust in the financial sector.
For businesses, AML compliance minimizes regulatory and reputational risks while fostering transparency and accountability. For governments and law enforcement, AML policies are critical tools for detecting and combating financial crimes.
Understanding anti-money laundering through an example
Imagine a real estate company receives a payment for a luxury property from a buyer using multiple bank transfers from accounts in different countries. As part of its AML program, the company conducts due diligence to verify the source of funds and the buyer’s identity. If the funds appear suspicious, the company is required to file a report with the relevant authorities.
In another example, a financial institution notices that a customer regularly deposits large sums of cash just below the reporting threshold of $10,000. This "structuring" behavior is flagged as suspicious, and the institution submits a Suspicious Activity Report (SAR) to comply with AML regulations.
An example of an anti-money laundering clause
Here’s how an anti-money laundering clause might appear in an agreement:
“Each Party represents and warrants that it is in compliance with all applicable anti-money laundering laws and regulations, including the Bank Secrecy Act and the USA PATRIOT Act. The Parties agree to implement and maintain effective internal controls and procedures to detect and prevent money laundering activities in connection with this Agreement.”
Conclusion
Anti-money laundering measures are essential for preventing financial crimes, protecting businesses from regulatory and reputational risks, and ensuring the integrity of the global financial system. For businesses, implementing robust AML compliance programs demonstrates a commitment to ethical practices and regulatory adherence. Clear contractual clauses and proactive due diligence help safeguard against potential legal and financial liabilities associated with money laundering.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.