Crypto
2 min read

AML (Anti-Money Laundering)

Laws and procedures designed to prevent criminals from disguising illicit funds as legitimate income. Crypto exchanges and custodians implement AML controls, including transaction monitoring and reporting of suspicious activity.

The three classic stages

AML compliance is built around the assumption that money laundering happens in three stages, each of which presents detection opportunities:

  • Placement — putting illicit cash into the financial system. The most heavily monitored stage; cash deposits over thresholds, structuring (depositing just under thresholds), and unusual cash-intensive businesses are red flags.
  • Layering — moving funds through complex transactions to obscure their origin. Wire transfers across jurisdictions, shell companies, and rapid in-and-out trading patterns all fall here.
  • Integration — funds re-enter the legitimate economy as ostensibly clean assets, used to buy property, businesses, or investments.

What AML programs actually do

A regulated financial institution's AML program typically includes:

  • KYC at onboarding — verifying customer identity and screening against sanctions lists.
  • Ongoing monitoring — automated systems flag transactions matching defined risk patterns (large transfers, unusual destinations, structuring).
  • SAR filing — submitting Suspicious Activity Reports to financial regulators (FinCEN in the US) when activity meets reporting criteria.
  • Recordkeeping — retaining transaction data for several years.
  • Independent testing — periodic audit of the program itself.

Penalties for inadequate programs can be severe. HSBC paid $1.9B in 2012 for laundering Mexican cartel money; Danske Bank's Estonian branch became the largest case in European history when €200B+ of suspicious flows passed through it.

Crypto-specific AML

Centralized crypto exchanges in regulated jurisdictions implement the same playbook as banks: KYC, transaction monitoring, sanctions screening, SAR filing. Where crypto AML differs is in chain analysis. Specialist firms — Chainalysis, TRM Labs, Elliptic — maintain heuristic clusters of wallets associated with exchanges, mixers, sanctioned addresses, and known illicit actors. Exchanges feed this data into their monitoring systems and screen incoming and outgoing transfers.

The Tornado Cash sanctions in 2022 set a precedent: the US Treasury sanctioned a smart contract (a coin mixer by another name), making interaction with the contract itself potentially sanctionable. The case is still working through courts.

The trade-off

AML imposes real friction on legitimate financial activity — onboarding delays, denied transactions, reporting burdens. Critics note that the conviction rates for actual laundering remain low and that the regulatory cost falls heaviest on smaller institutions. Defenders point to the deterrent effect and to specific high-profile interdictions. The political consensus, even amid that debate, has been to extend AML obligations rather than retract them.