Know Your Customer (KYC): KYC is a foundational part of AML that requires banks and financial institutions to identify and verify the identity of their clients. This includes collecting personal information, such as:

Full name

Date of birth

Residential address

Proof of identity (e.g., passport, driver's license)

KYC also includes enhanced due diligence for high-risk customers, such as politically exposed persons (PEPs) and clients from jurisdictions with weak AML regulations.

Customer Due Diligence (CDD): CDD refers to the risk-based approach used by financial institutions to assess and monitor the potential risks posed by their customers. This involves:

Gathering information about the customer’s business activities.

Monitoring customer transactions for unusual activity.

Conducting ongoing reviews to detect changes in the customer’s risk profile.

Transaction Monitoring: Financial institutions must continuously monitor customer transactions to detect suspicious activities that could indicate money laundering. Automated systems are often used to flag unusual transactions, such as:

Large cash deposits or withdrawals

Transfers to high-risk countries

Structured transactions designed to avoid reporting thresholds

Suspicious Activity Reporting (SAR): When a financial institution detects a suspicious transaction or activity, it is required to file a Suspicious Activity Report (SAR) with regulatory authorities. This report helps law enforcement investigate and combat money laundering and other financial crimes.

Risk-Based Approach (RBA): Banks and financial institutions are expected to adopt a risk-based approach to AML compliance. This means allocating more resources to higher-risk areas, such as transactions involving certain industries, countries, or customer types, while applying less intensive measures to lower-risk customers.

AML Compliance Programs: Financial institutions are required to implement comprehensive AML compliance programs that include:

Internal policies and procedures to detect and prevent money laundering.

Regular training for employees to recognize and report suspicious activities.

Independent audits to assess the effectiveness of the AML program.

Appointing a compliance officer to oversee AML efforts.

Sanctions Compliance: Financial institutions must comply with international sanctions regimes, such as those imposed by the United Nations, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), and the European Union. These sanctions prohibit dealing with specific countries, entities, and individuals linked to money laundering, terrorism, or other criminal activities.

Regulatory Bodies and Legislation: Different countries have their own AML regulatory frameworks, with some notable global standards being set by organizations like the Financial Action Task Force (FATF). In the U.S., AML regulations are primarily governed by the Bank Secrecy Act (BSA) and USA PATRIOT Act, while the European Union’s AML Directives are critical for European institutions.