When Is AML Screening Required and Who Is Obligated?

Anti-Money Laundering (AML) screening prevents illicit funds from entering legitimate financial systems. It involves checking customer identities and transactions against various data sources to identify financial crime risks. Its purpose is to combat these crimes and safeguard the integrity of the financial infrastructure, protecting institutions and the public from unlawful activities.

Entities Obligated to Conduct AML Screening

Various types of businesses and organizations are legally mandated to perform AML screening due to their role in the financial ecosystem and susceptibility to money laundering. The Bank Secrecy Act (BSA) is the primary federal law governing these obligations in the United States, requiring financial institutions to assist government agencies in detecting and preventing money laundering.

Financial institutions like banks and credit unions are at the forefront of AML compliance. They handle a vast volume of transactions, making them a common target for money laundering schemes. Money service businesses, which include currency exchangers and money transmitters, also face stringent AML requirements given the nature of their services. Broker-dealers in the securities industry must conduct screenings to prevent investment accounts from illicit financial activities.

Casinos and other gambling institutions are also subject to AML screening, particularly due to large cash transactions within their operations. Certain other businesses, like those in real estate, may also fall under AML obligations when specific conditions are met. These entities are high-risk because their services can move or conceal large sums of money, requiring strict screening protocols to identify suspicious activity.

Situations Requiring Initial AML Screening

Initial AML screening is triggered by specific events, primarily when a new relationship is established or significant transactions occur. The process begins with establishing a Customer Identification Program (CIP), which is part of the broader Know Your Customer (KYC) framework.

Customer Due Diligence (CDD) is a foundational requirement when establishing a new customer relationship, such as opening an account. This involves verifying the customer’s identity by collecting reliable information like name, address, date of birth, and a government-issued identification number. Beyond identity verification, CDD also requires understanding the nature and purpose of the business relationship to develop a customer risk profile. For legal entity customers, identifying the beneficial owners—individuals who directly or indirectly own 25% or more of the equity interest or hold significant responsibility to control the entity—is also mandatory.

Enhanced Due Diligence (EDD) is triggered in situations presenting a higher risk of money laundering or terrorist financing. This applies to customers identified as politically exposed persons (PEPs), who hold prominent public positions and may be susceptible to corruption. Customers from high-risk jurisdictions, identified by organizations like the Financial Action Task Force (FATF) due to deficiencies in their AML controls, also necessitate EDD. Additionally, complex and opaque ownership structures or unusual transaction patterns without clear economic purpose can trigger EDD, requiring a deeper level of scrutiny into the customer’s activities and source of funds.

Any unusual or inconsistent transaction or behavior can also trigger an immediate screening requirement, even if it does not fit neatly into other categories. Financial institutions are required to file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) when they detect such red flags. For instance, large cash transactions exceeding $10,000 in a single business day, or multiple related transactions totaling over this amount, mandate the filing of a Currency Transaction Report (CTR) with FinCEN. Attempts to structure transactions to avoid these reporting thresholds are illegal and can also trigger SARs and further investigation.

Continuous AML Monitoring Requirements

AML screening is not a one-time event; it is an ongoing process that requires continuous vigilance to be effective. This dynamic approach ensures that financial institutions adapt to changing risk profiles and detect evolving money laundering tactics. Regular re-verification and updates of customer information are necessary to ensure accuracy and relevance over time.

Periodic reviews of customer accounts, transactions, and associated risks are conducted to assess whether a client’s risk profile or behavior has changed since their initial onboarding. These reviews help confirm that the organization’s AML policies are consistently followed. The frequency of these reviews often depends on the customer’s assessed risk level, with higher-risk customers typically undergoing more frequent evaluations.

Transaction monitoring involves the ongoing analysis of customer transactions to detect patterns or activities that may become suspicious over time, even if individual transactions were not initially flagged. Systems are designed to identify unusual activity, such as large or frequent transfers inconsistent with a customer’s known profile. This continuous scrutiny helps to uncover potential illicit financial activities that might otherwise go unnoticed.

A customer’s risk profile can change due to new information or evolving circumstances, such as changes in their business activities, geographic affiliations, or financial behavior. Regular risk re-assessments are conducted to update these profiles, necessitating updated screening or due diligence measures. This ensures that the level of scrutiny applied remains appropriate to the current risk posed by the customer.

Finally, continuous screening against updated government sanctions and watch lists is required. Financial institutions must regularly check their customer base against lists published by authorities like the Office of Foreign Assets Control (OFAC) to ensure they are not doing business with prohibited individuals or entities. This ongoing process is crucial for maintaining compliance and preventing financial institutions from inadvertently facilitating illegal activities.