What is Anti Money Laundering? Understand the Basics

You've heard the term. Seen it in headlines. Maybe even had compliance training mention it.

But what actually is anti-money laundering? And why does it matter for your business?

Let's start with the problem AML is trying to solve: money laundering.

What Is Money Laundering?

Money laundering is the process of making illegally obtained money appear legitimate.

Criminals generate cash through:

• Drug trafficking
• Fraud and embezzlement
• Corruption and bribery
• Human trafficking
• Arms trafficking
• Organized crime
• Tax evasion

But they can't just deposit $10 million in a bank account. That's suspicious. They can't buy property with suitcases of cash. That's illegal in most cases.

So they launder it. They move the money through legitimate businesses, financial services, and complex transactions until it looks clean. Until it appears to come from lawful sources.

Once laundered, criminals can use the funds openly. Buy real estate. Invest in businesses. Live lavishly. All while evading law enforcement.

That's the problem. And anti-money laundering (AML) is the solution.

What Is Anti-Money Laundering?

Anti-Money Laundering (AML) refers to laws, regulations, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income.

AML systems require businesses (like banks, lawyers, accountants, real estate agents) to:

• Verify customer identities (Know Your Customer — KYC)
• Assess money laundering risks
• Monitor transactions for suspicious activity
• Report suspicious matters to authorities
• Keep records for law enforcement investigations

The goal: Make it harder for criminals to launder money through the legitimate financial system. And when they try, detect it and disrupt it.

The Three Stages of Money Laundering

Money laundering typically happens in three stages:

1. Placement

Dirty money enters the financial system. This is the riskiest stage for criminals because large cash deposits or suspicious transactions can trigger alerts.

Examples:

• Depositing drug sale proceeds into bank accounts
• Using cash to buy high-value goods (property, cars, jewelry)
• Transferring money through currency exchanges
• Smuggling cash across borders

AML defenses at this stage: Threshold transaction reports (cash over $10,000), customer due diligence, transaction monitoring.

2. Layering

Once the money is in the system, criminals obscure its origin through complex transactions. They're creating layers between the dirty money and its criminal source.

Examples:

• Moving funds through multiple bank accounts
• Transferring money between countries
• Buying and selling assets repeatedly
• Using shell companies to hide beneficial owners
• Mixing illegal funds with legitimate business income

AML defenses at this stage: Transaction monitoring, beneficial ownership identification, suspicious matter reports.

3. Integration

Clean money re-enters the legitimate economy. Criminals can now use it openly without raising suspicion.

Examples:

• Purchasing luxury real estate with "investment funds"
• Buying businesses with "savings"
• Living off "business income" (which is actually laundered proceeds)
• Investing in stock markets with "legitimate wealth"

AML defenses at this stage: Ongoing customer monitoring, source of funds verification, enhanced due diligence for high-risk customers.

Why Money Laundering Matters

Some people think: "Why does it matter if criminals spend their money? At least it's entering the economy."

Here's why it matters:

1. It Funds Further Crime

Laundered proceeds finance more crime. Drug cartels use laundered profits to buy weapons, bribe officials, and expand operations. Terrorist groups use laundered funds to plan attacks. Human traffickers use laundered money to operate networks.

Disrupting money laundering disrupts crime.

2. It Corrupts Legitimate Businesses

When laundered money flows through legitimate businesses, it corrupts them. Businesses become vehicles for crime. Owners unknowingly (or knowingly) facilitate money laundering. That erodes trust in the financial system.

3. It Distorts Markets

Criminals with laundered funds can outbid legitimate buyers for property, businesses, and assets. They're not operating on economic fundamentals. They're just cleaning money. That distorts markets and harms honest participants.

4. It Undermines Governance

Corruption and bribery proceeds need laundering. When government officials can safely launder bribes, corruption flourishes. That undermines rule of law and governance.

5. It Enables Tax Evasion

Tax evasion proceeds need laundering. That deprives governments of revenue for public services and shifts tax burden to honest taxpayers.

Bottom line: Money laundering isn't a victimless crime. It's the financial infrastructure for serious crime.

How Much Money Gets Laundered?

The United Nations Office on Drugs and Crime (UNODC) estimates that 2-5% of global GDP is laundered annually.

That's $800 billion to $2 trillion per year. Globally.

In Australia, estimates vary, but AUSTRAC reports analyzing transactions worth over $10 trillion annually for suspicious activity. Even if a tiny fraction involves money laundering, that's still billions.

It's not a niche problem. It's massive.

Anti-Money Laundering: The Regulatory Response

Recognizing the threat, governments worldwide implemented AML laws. In Australia, that's the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).

The Act requires certain businesses (called reporting entities) to:

1. Enroll with AUSTRAC
Register your business as a reporting entity.

2. Develop an AML/CTF Program
A written document showing how you identify, assess, and manage ML/TF risks.

3. Conduct Customer Due Diligence (CDD)
Verify customer identities. Identify beneficial owners. Screen for PEPs and sanctions. Assess risk.

4. Monitor Transactions
Watch for suspicious activity throughout the customer relationship.

5. Report to AUSTRAC
Suspicious matter reports (SMRs) when you detect potential money laundering. Threshold transaction reports (TTRs) for cash over $10,000.

6. Keep Records
Maintain records for 7 years to support law enforcement investigations.

7. Train Staff
Ensure employees understand AML obligations and can identify red flags.

These requirements turn businesses into the first line of defense against money laundering.

Who's Covered by AML Laws?

Initially, AML laws applied to:

• Banks and financial institutions
• Money transfer services
• Currency exchange providers
• Casinos
• Bullion dealers
• Digital currency exchanges

These are called Tranche 1 entities.

But from July 1, 2026, AML laws expand to include Tranche 2 entities:

• Lawyers and conveyancers
• Accountants
• Real estate agents
• Trust and company service providers
• Dealers in precious metals and stones

Why? Because criminals use these services to launder money too. High-value property purchases. Complex company structures. Trust accounts. All can facilitate money laundering.

Expanding AML coverage closes gaps that criminals exploit.

AML in Practice: What It Looks Like

Bank Example:

Customer opens account. Bank verifies ID (passport, driver's license). Checks if customer is a PEP or sanctioned. Assesses risk (low, medium, high).

Customer deposits $500,000. Bank asks: "What's the source?" Customer says: "Sold my house." Bank requests settlement statement. Customer provides it. Source verified. Transaction proceeds.

Six months later, customer starts making multiple $9,500 deposits daily. Always just under the $10,000 TTR threshold. Transaction monitoring flags it. Bank investigates. Customer can't explain. Bank files SMR to AUSTRAC.

That's AML working.

Real Estate Example (Tranche 2):

Foreign buyer wants to purchase $4 million property. Real estate agent verifies buyer's identity. Identifies beneficial owner (it's a company — who owns it?). Screens for PEPs. Foreign buyer is a PEP.

Agent applies enhanced due diligence. Requests source of funds documentation. Buyer claims "business income." Agent requests financial statements and tax records. Buyer provides some documents, but they're inconsistent. Buyer becomes evasive.

Agent consults senior partner. Decision: refuse the transaction and file SMR. Too much risk.

That's AML working in Tranche 2.

AML Success Stories

Does AML actually work? Yes. Here are real examples:

Operation Ironside (2021)
Australian Federal Police disrupted organized crime networks laundering hundreds of millions. AUSTRAC intelligence (from SMRs and transaction reports) was critical in identifying money flows.

Commonwealth Bank Penalty (2018)
CBA failed to file over 50,000 threshold transaction reports and didn't monitor transactions properly. AUSTRAC imposed a $700 million penalty. The case sent a clear message: AML compliance is not optional.

Westpac Penalty (2020)
Westpac failed to report over 19 million international fund transfers and didn't adequately screen for child exploitation risks. AUSTRAC penalty: $1.3 billion. Largest-ever corporate fine in Australian history.

These cases show AML enforcement is real and penalties are severe.

AML Challenges

AML isn't perfect. Challenges include:

False Positives
Transaction monitoring generates many alerts. Most aren't actual money laundering. Compliance teams spend significant time clearing false positives.

Criminals Adapt
Money launderers evolve. New methods (cryptocurrency, offshore structures, trade-based laundering) emerge. AML systems must adapt too.

Compliance Costs
AML compliance is expensive. Staff, systems, training. Smaller businesses struggle with costs. But non-compliance is more expensive (penalties, reputational damage).

Privacy Concerns
AML requires collecting personal information, monitoring transactions, reporting suspicions. Balancing compliance with privacy rights is complex.

Despite challenges, AML is essential. The alternative — letting billions in criminal proceeds flow freely — is unacceptable.

Global AML Standards: FATF

AML isn't just Australian law. It's global.

The Financial Action Task Force (FATF) is an international body that sets AML standards. FATF's 40 Recommendations are the global AML framework.

Countries that don't comply with FATF standards end up on "grey lists" or "black lists." That limits their ability to participate in the global financial system.

Australia is a FATF member and implements FATF recommendations through the AML/CTF Act.

That means Australian AML laws align with international best practice. And businesses operating globally face consistent AML expectations.

AML and Terrorism Financing (CTF)

Notice the term "AML/CTF"? That's because anti-money laundering laws also cover counter-terrorism financing (CTF).

Terrorism financing is the opposite problem: small amounts of money (which might be from legitimate sources) funding terrorist activities.

AML/CTF laws address both: laundering large criminal proceeds and financing terrorism with small amounts.

CTF obligations include:

• Screening customers against terrorism sanctions lists
• Reporting terrorism financing suspicions within 24 hours (faster than SMRs for general money laundering)
• Freezing assets of sanctioned persons

The Bottom Line

Anti-money laundering is the system designed to prevent criminals from using the legitimate financial system to clean dirty money.

It works by requiring businesses to:

• Know their customers (KYC)
• Monitor transactions
• Detect suspicious activity
• Report to authorities
• Keep records for investigations

AML isn't perfect. It's expensive. It generates false positives. Criminals adapt.

But it works. It disrupts crime. It helps law enforcement. It protects the integrity of the financial system.

And from July 2026, it applies to lawyers, accountants, and real estate professionals in Australia. Not because they're criminals. But because criminals use their services to launder money.

Understanding AML is the first step to compliance. And compliance is the first step to protecting your business from exploitation by criminals.