Anti-Money Laundering (AML)

What Is Anti-Money Laundering (AML)?

Anti-Money Laundering (AML) refers to a comprehensive set of systems and tools implemented by financial institutions and platforms to prevent illicit funds from entering and blending into the legitimate economy. AML procedures encompass identification, ongoing monitoring, and coordinated reporting.

Money laundering is the process of disguising “dirty” or illegal funds as “clean money.” It typically involves three stages: (1) Placement – introducing cash or illicit assets into the system; (2) Layering – obscuring the audit trail through multiple transfers, asset swaps, or cross-chain activities; (3) Integration – reintroducing funds in an apparently legal form. AML frameworks are specifically designed to counteract each of these phases.

Why Is AML More Important in Web3?

AML takes on increased importance in Web3 due to pseudonymous addresses, faster global asset flows, and the proliferation of cross-chain and decentralized services, all of which complicate risk detection.

On blockchain networks, funds can move cross-border in minutes with seamless transitions between protocols. For example, earnings can travel from an anonymous wallet through a cross-chain bridge into an exchange or decentralized lending platform, creating complex transaction paths. Without robust AML procedures, platforms would struggle to identify high-risk sources in time, and users could unknowingly interact with risky addresses.

How Does AML Work? What Are the Key Processes?

The core AML process forms a loop of “identification—monitoring—response”: first, verifying user identity and fund sources; second, continuously monitoring transactions; and third, responding to anomalies when detected.

Account verification is commonly known as KYC (Know Your Customer), which involves validating identity information and checking against sanctions or high-risk lists. Due diligence (sometimes called customer due diligence) investigates the origin and intended use of funds; enhanced due diligence is applied for higher-risk scenarios.

Monitoring involves setting thresholds and rules, such as detecting frequent large deposits within a short period, incoming funds from high-risk addresses, or transactions related to known mixing services. Accounts are risk-scored, with elevated scores triggering further review or restrictions.

The response stage includes recordkeeping and reporting. If suspicious activity is identified, platforms must retain evidence and report it to regulators according to local laws. These steps create a compliance chain that protects both the platform and compliant users.

How Is AML Enforced on Blockchain?

On blockchains, AML relies on address profiling and transaction graph analysis to convert on-chain behaviors into actionable risk signals, which are then correlated with platform account data.

Platforms build profiles for each wallet address—assessing factors like interactions with blacklisted services, frequent use of mixing tools, or links to sanctioned entities. Transaction graphs map out the flow of funds, tracing their origins and destinations.

For example, if an address sends funds to your platform account and the system detects that this address received assets from a high-risk source two hops earlier, it will raise an alert—possibly requiring you to provide additional fund source documentation or temporarily delaying withdrawals. Such measures are standard AML defenses.

How Do Exchanges Collaborate with AML Controls?

The integration of AML with exchanges spans account registration, transactional activity, and exception handling. Both users and platforms have responsibilities:

1. Register an account on Gate and complete identity verification by submitting clear, authentic identification documents as instructed.
2. Provide information about the source and intended use of funds. For larger amounts or frequent transactions, the platform may request proof of income or transaction purpose as part of due diligence.
3. Undergo risk assessment and limit setting. Based on your country/region, trading habits, and account history, the platform sets withdrawal and trading limits and performs ongoing evaluations.
4. Cooperate during review of suspicious transactions. For example, if funds arrive from a high-risk address, you may be asked for supplementary documentation or undergo manual review; withdrawals may be temporarily restricted for security.
5. Maintain records and access appeal channels. On Gate, you can submit supporting materials via ticketing or customer service; the compliance team then decides whether to lift restrictions or continue monitoring.

Risk Tip: If your transaction triggers AML rules, account actions may be temporarily limited. Preparing compliance documents in advance and avoiding interactions with unknown fund sources helps minimize false positives and delays.

What Are the Key AML Regulations?

The global AML framework is shaped by several sources, most notably recommendations from FATF (Financial Action Task Force).

In 2019, FATF extended the “Travel Rule” to Virtual Asset Service Providers (VASPs), requiring platforms to transmit essential sender and recipient information during asset transfers for traceability. As of 2024, many countries are localizing this rule with varying specifics.

Within the EU, member states adapt local laws based on Anti-Money Laundering Directives (AMLD), working toward unified supervision. In the US, the Bank Secrecy Act forms the foundation, with regulatory agencies issuing detailed rules and enforcement guidance. Other regions like Singapore impose jurisdiction-specific requirements that exchanges must follow.

How Can AML Be Balanced with Privacy?

Balancing AML with privacy is achieved through “necessary and minimal data sharing” and advanced privacy-preserving technologies.

Zero-knowledge proofs enable cryptographic verification of facts—such as “I am over 18” or “I completed KYC”—without revealing underlying personal data. This reduces exposure of raw data while fulfilling compliance obligations.

Platforms also implement selective disclosure and tiered access controls so that detailed information is only accessed when legally required or risk-justified. System design balances user experience, compliance costs, and privacy protection.

What Challenges Does AML Face in DeFi and NFTs?

AML enforcement is more challenging in DeFi and NFT environments because these services often lack centralized onboarding or traditional identity verification procedures.

In DeFi, users interact directly with smart contracts via wallets—protocols rarely possess identity data. Compliance is often implemented through front-end restrictions, address blacklists, and risk scoring but cannot cover all possible routes. NFT markets also face issues like wash trading and self-dealing (“self-buys”), complicating transaction authenticity and fund provenance analysis.

Cross-chain bridges and mixing tools further accelerate fund obfuscation during layering stages. Platforms must combine on-chain profiling, inter-institutional data sharing, and Travel Rule implementation to reliably identify and intercept high-risk flows.

AML Key Takeaways

AML forms a foundational rule set for both traditional finance and crypto sectors—aimed at disrupting the placement, layering, and integration of illicit funds. It relies on onboarding identification, due diligence, transaction monitoring, and suspicious activity reporting; on blockchains, this is executed via address profiling and transaction graph analytics. As the Travel Rule gains traction across jurisdictions, cross-platform information sharing will strengthen. Users can lower their risk of mistaken identity or account restriction by choosing compliant platforms, completing KYC checks, retaining proof of fund origin, and avoiding unknown addresses. Compliance and privacy are not mutually exclusive—with technical solutions and careful process design, both can be achieved for a more robust and sustainable market.

FAQ

What Is the Difference Between KYC and AML?

KYC (Know Your Customer) focuses on identity verification—ensuring you are who you claim to be—while AML (Anti-Money Laundering) centers on monitoring sources of funds. Used together, KYC confirms genuine user identity; AML tracks suspicious money flows. Both are essential components of a comprehensive compliance defense.

What Are the Three Main Stages of Anti-Money Laundering?

AML countermeasures target three stages: Placement—injecting illicit funds into the financial system; Layering—obscuring their origin through complex transactions; Integration—returning laundered money to the economy as seemingly legitimate assets. Regulators aim to disrupt each stage to thwart money laundering attempts.

Why Do I Need to Complete AML Verification When Depositing Crypto on an Exchange?

AML verification is legally required at exchanges to prevent criminal funds from entering the platform. By reviewing your fund sources, transaction history, and wallet addresses, platforms can identify suspicious activity. Though it may seem cumbersome, this protects your account’s safety and upholds industry standards—compliant exchanges like Gate strictly enforce these requirements.

What Is a Suspicious Transaction Report (STR)?

A Suspicious Transaction Report is an official document submitted by financial institutions to regulators when they detect potentially money laundering-related activity—for instance, sudden large transfers, frequent small transactions (“structuring”), or dealings involving high-risk jurisdictions. Filing an STR does not imply wrongdoing but assists authorities in tracking illicit fund flows.

How Does On-Chain AML Monitoring Work?

Blockchain AML utilizes real-time on-chain analytics tools that monitor transactions by comparing wallet addresses against blacklists and detecting suspicious patterns such as address clustering or behavioral anomalies. When high-risk transactions are flagged, exchanges may freeze accounts or block withdrawals. This method offers greater transparency than traditional finance but also demands higher technical sophistication—exchanges like Gate continually refine these systems.