What Is an AML Check and How Does It Work?
Explore the critical procedures financial institutions use for AML checks, ensuring compliance and combating illicit finance.
An Anti-Money Laundering (AML) check involves procedures and regulations to prevent illegal income generation. Financial institutions and regulated entities perform these checks to verify customer identities and monitor transactions. Their goal is to prevent financial crimes like money laundering and terrorism financing, maintaining the financial system’s integrity.
Core Components of an AML Check
A central element of an AML check involves “Know Your Customer” (KYC) principles for verifying a customer’s identity. This process begins with collecting personal information to establish a customer profile. Data gathered includes an individual’s full legal name, date of birth, residential address, and government-issued identification numbers.
This information confirms customer identity and is cross-referenced against databases to ensure no association with illicit activities. For business entities, the process identifies beneficial owners—the individuals who ultimately own or control the business. This helps institutions see through complex ownership structures that might obscure illicit financial flows.
Customer Due Diligence (CDD) involves understanding the purpose and nature of the business relationship. This includes assessing customer risk based on factors like geographic location, occupation, and anticipated transaction types. The information gathered during KYC and CDD forms the foundational data for monitoring future transactions. This builds a comprehensive understanding of the customer before financial activities commence.
How AML Checks are Performed and Their Implications
After initial customer information is gathered and verified, financial institutions engage in ongoing monitoring for unusual or suspicious financial patterns. This includes screening customers against watchlists, such as government sanctions lists or lists of politically exposed persons (PEPs). Automated systems continuously analyze transaction data for anomalies indicating money laundering or other illicit activities.
Automated systems often flag transactions deviating from a customer’s typical behavior, such as unusually large cash deposits or frequent international transfers to high-risk jurisdictions. Trained professionals then review these automated alerts, investigating flagged activities to determine if further action is warranted. This combination of technology and human oversight helps identify potential risks that might otherwise go unnoticed.
The outcomes of AML checks vary depending on the findings. Successful verification allows for account opening or transaction approval. If a check raises flags, it can lead to requests for additional information, such as the source of funds for a large transaction. This might result in delays in processing transactions or opening accounts. In severe cases of suspected illicit financial activity, institutions must file a Suspicious Activity Report (SAR) with relevant authorities, formally notifying law enforcement of potential financial crime.