In the latter half of the 20th century, the term “money laundering” entered the common vocabulary as the government passed laws to combat actions that hid the source of profits from alleged criminal enterprises. At this time, financial institutions in California and individuals are obligated to report many types of financial transactions to comply with the many anti-money laundering (AML) laws on the books.
Development of AML
The battle against organized crime resulted in the passage of the first AML law, the 1970 Bank Secrecy Act. AML laws counteract strategies meant to make illegally gained money appear as legitimate income. The type of illicit activity behind the profits does not matter. Drug traffickers, terrorists and white-collar crime schemes may all produce profits that someone would want to launder.
As lawmakers responded to increasingly elaborate methods for money laundering, they passed additional AML laws. In the 1980s, concerns were highest around detecting drug trafficking profits. By the 1990s, financial account monitoring became more aggressive. Most recently, the Anti-Money Laundering Act of 2020 tightened restrictions on the use of shell companies to obscure the source of funds.
How AML works
AML laws create reporting requirements concerning financial transactions and the people behind them. AML laws compel banks to report transactions in excess of $10,000 to government authorities, confirm the identities of bank customers and routinely monitor accounts for suspicious activities that hint at money laundering.
Identity confirmation and monitoring is known as customer due diligence. This due diligence includes identifying the people opening accounts and any other large stakeholders associated with the business depositing funds. To stay on top of ongoing account surveillance duties imposed by AML laws, financial institutions must hire a compliance officer who specializes in detecting suspicious transactions.