Anti-money laundering
What is Anti-money laundering?
Anti-money laundering, or AML, comprises laws, governance, and controls intended to prevent, detect, investigate, and report misuse of the financial system.
Automated risk scores support, but do not replace, documented judgment. Models require governance, validation, threshold review, and controls for false positives and bias. Confidential reporting obligations also mean a customer-facing platform must not reveal that a suspicious-activity report has been considered or filed where law prohibits disclosure.
Management information should report alert age, investigation quality, filing timeliness, data gaps, model changes, and remediation, not merely the number of alerts closed. Independent testing should examine whether controls work in practice across products, branches, delegates, customer groups, and relevant cross-border payment channels.
Risk and purpose
Money laundering can place, layer, or integrate criminal proceeds, but typologies evolve and can involve fraud, corruption, sanctions evasion, trafficking, tax crime, or terrorist financing. Firms use a risk-based program suited to customers, products, channels, geographies, transactions, and legal obligations rather than relying on one universal checklist.
Core controls
Programs commonly include governance, risk assessment, customer diligence, beneficial-owner identification, sanctions screening, transaction monitoring, suspicious-activity escalation, reporting, record retention, training, independent testing, and regulatory response. Specific obligations vary by entity and jurisdiction. Outsourcing technology or review does not necessarily transfer the regulated firm's accountability.
Monitoring and investigation
Rules and models flag activity for review based on amounts, patterns, counterparties, behavior, and customer profile. An alert is not proof of crime. Investigators gather context, document decisions, escalate appropriately, and file required reports through confidential processes. Thresholds must balance detection with large false-positive workloads that can conceal genuinely important cases.
Investment-management relevance
Risks arise through subscriptions, redemptions, third-party payments, complex entities, private assets, cross-border transfers, intermediaries, and unusual urgency. Fund structures and omnibus accounts can obscure underlying parties. Controls should cover distributors, transfer agents, administrators, custodians, and delegates with clear information, reliance, escalation, and audit rights.
Practical governance
Assign accountable leadership, maintain current risk assessments and procedures, validate systems, test samples, monitor backlogs, protect sensitive data, and remediate findings. Preserve reasons for clearance as well as escalation. Avoid tipping off customers where prohibited. Technology supports expert review but cannot determine legal suspicion or proportional response without governed human judgment.
Also known as: AML
Sources and further reading
- Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements, Financial Crimes Enforcement Network
- Know Your Customer, FINRA