Anti-money laundering (AML) efforts consist of the laws, regulations, and procedures, which are designed to prevent criminals from exchanging money obtained through illegal activities “dirty money” into legitimate income, or “clean money.” The term “dirty money” originates from the days of Al Capone, who “laundered” the money he earned from his illegal activities through a chain of cash-based coin laundromats.

There are three stages of money laundering: placement, layering and integration.

Placement is the act of injecting dirty money into a financial system, such as a bank account or a business. Some examples of placement methods, including blending funds with legitimate income (e.g., cash business), paying debt with dirty money, gambling, real estate investments, and foreign currency smuggling and exchanges.

Layering hides the source of the money through various obscure and hard-to-trace bookkeeping maneuvers. Layering often involves international transfers, especially to countries with laws that favor the privacy of the account holders. The money is usually split and moved multiple times until it is virtually impossible to trace back to the source.

Integration is when the now-clean money is withdrawn and placed into a “clean” bank account. The money then can be used for any purpose.

Anti-money laundering laws cover a limited range of money laundering activities and criminal activity, but the implications are far-reaching. For example, AML regulations require financial institutions, including banks, that issue credit or accept customer deposits to monitor customer behavior to ensure that they are not aiding money laundering activities. If banks do not comply with these laws and regulations, they can have costly effects, resulting in heavy fines and other enforcement actions.