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How Banks Do AML Checks: 6 Key Steps in 2026 | Adv Shoeb Hakim

Adv Shoeb Hakim

How do banks do AML checks

Updated: August 2026 | Reading Time: 10 minutes

How Banks Do AML Checks 2026 Guide by Adv. Shoeb Hakim

Introduction

Understanding how banks do AML checks is essential for compliance professionals, bankers, and anyone working in the financial services industry. Anti-Money Laundering (AML) checks are the systematic processes that financial institutions use to prevent, detect, and report money laundering activities. In 2026, with global regulators tightening scrutiny and financial crime becoming increasingly sophisticated, the question of how banks do AML checks has never been more critical.

Banks implement a comprehensive AML program that involves multiple interconnected steps—from verifying customer identities at onboarding to continuously monitoring transactions, filing Suspicious Activity Reports (SARs), maintaining meticulous records, and implementing robust compliance programs. Each step plays a vital role in safeguarding the financial system from exploitation by criminals.

Authored by Adv. Shoeb Hakim—a criminal defence, AML, digital forensics, and cybercrime specialist with decades of experience training police and judiciary—this comprehensive guide explains how banks do AML checks in 2026, breaking down each step and highlighting key regulatory developments.

What Are AML Checks in Banking?

How banks do AML checks involves a multi-layered approach to identifying and mitigating money laundering risks. The AML check process is designed to ensure that banks know who their customers are, understand the nature of their transactions, and can identify suspicious activities that may indicate money laundering or terrorist financing.

The foundation of how banks do AML checks is the FATF 40 Recommendations, which serve as the global benchmark against which every bank’s AML program is measured. These recommendations are organized into categories addressing customer due diligence, record-keeping, suspicious transaction reporting, and other preventive measures.

Here are the key steps involved in how banks do AML checks:

Step 1: Customer Due Diligence (CDD)

Customer Due Diligence is the first and most critical step in how banks do AML checks. It involves verifying the identity of customers and assessing their risk of involvement in money laundering before establishing a business relationship.

Know Your Customer (KYC)

Banks verify the identity of their customers by collecting and verifying personal information such as name, address, date of birth, and government-issued identification documents. For corporate customers, banks must identify beneficial owners and understand the ownership and control structure. This is the foundational step in how banks do AML checks.

In India, the RBI KYC Master Direction provides the operational framework for CDD, requiring regulated entities to frame a board-approved KYC policy. The periodic KYC update cycle has been rationalised: high-risk customers must update their KYC every two years, medium-risk customers every five years, and low-risk customers every ten years.

Risk Assessment

Customers are assessed for their risk of involvement in money laundering based on factors such as their business activities, geographic location, transaction patterns, and Politically Exposed Person (PEP) status. Under FATF Recommendation 1, financial institutions must apply a risk-based approach—higher risks receive stronger controls, while lower-risk cases may admit simplified measures.

Step 2: Transaction Monitoring

Transaction monitoring is a core component of how banks do AML checks. It involves continuously monitoring customer transactions to identify suspicious activities that may indicate money laundering or terrorist financing.

Ongoing Monitoring

Banks track customer transactions in real-time to identify activities that deviate from established patterns. This includes monitoring for large or unusual transactions, rapid movement of funds, transactions involving high-risk jurisdictions, and structuring (breaking down large transactions to avoid reporting thresholds).

Automated Systems

Many banks use sophisticated automated software to flag suspicious transactions for further investigation. FATF’s 2026 Typologies Refresh highlights emerging risks, including cross-chain crypto laundering and nested VASP relationships. Financial institutions are expected to recalibrate their risk assessment methodologies and transaction monitoring scenarios against these new typology indicators.

Step 3: Suspicious Activity Reporting (SAR)

Suspicious Activity Reporting is a critical obligation in how banks do AML checks. When a bank identifies a suspicious transaction, it must file a Suspicious Activity Report (SAR) with the relevant authorities.

Reporting

If a bank identifies a suspicious transaction, it must file a Suspicious Activity Report (SAR) with the relevant authorities. This report includes details of the transaction and the reasons for suspicion. In the United States, SARs are filed with FinCEN. In India, they are filed with FIU-IND under the Prevention of Money Laundering Act (PMLA). Under FATF Recommendation 20, financial institutions must report suspicious transactions promptly.

Confidentiality

The filing of SARs is confidential, and banks are prohibited from informing the customer involved. This ensures that investigations are not compromised.

Step 4: Record Keeping

Record keeping is an essential administrative component of how banks do AML checks. Banks are required to maintain records of customer identification, transaction history, and SARs for a specified period.

Documentation

Banks are required to maintain records of customer identification, transaction history, and SARs for a specified period, usually five to seven years. This includes customer identification documents, transaction records, SAR copies, and internal investigation files.

Accessibility

These records must be readily accessible for review by regulatory authorities. FATF Recommendation 10 requires financial institutions to maintain records of transactions for at least five years.

Step 5: Compliance Programs

Compliance programs are the internal governance framework of how banks do AML checks. Banks must develop and implement internal AML policies and procedures to ensure effective compliance.

Internal Policies

Banks must develop and implement internal AML policies and procedures. This includes appointing a compliance officer responsible for overseeing the AML program.

Training

Regular training programs for employees to ensure they understand AML regulations and can identify and report suspicious activities. FATF’s 2026 Typologies Refresh requires that training and awareness programmes be updated to reflect new typologies.

In the United States, FinCEN’s April 2026 proposed rule would require covered institutions to integrate FinCEN’s AML/CFT priorities into their risk assessment processes and satisfy clear expectations regarding governance, independent testing, and the defined role of a U.S.-based AML/CFT officer. The proposal introduces a formal definition of an “effective” AML/CFT program.

Step 6: Regulatory Reporting

Regulatory reporting is the final step in how banks do AML checks. Banks must comply with national and international AML regulations and undergo regular audits and reviews.

Compliance with Regulations

Banks must comply with national and international AML regulations, such as the Financial Action Task Force (FATF) recommendations and local laws. In the EU, the Anti-Money Laundering Regulation (AMLR) under Regulation (EU) 2024/1624 will apply from 10 July 2027, creating a directly applicable single rulebook for AML/CFT across the EU.

Audits and Reviews

Regular audits and reviews of the AML program to ensure its effectiveness and compliance with regulatory requirements. The FATF’s June 2026 Plenary reinforced the importance of evidence-based compliance, with regulators increasingly expecting firms to demonstrate how their controls identify risk and support investigations.

2026 Regulatory Updates Affecting How Banks Do AML Checks

Several significant regulatory developments in 2026 affect how banks do AML checks. Here are the key updates:

FATF June 2026 Plenary Outcomes

The FATF Plenary held in Paris from 17–19 June 2026 brought several important developments:

  • Grey List Changes: Bosnia and Herzegovina and Iraq were added to the FATF grey list (jurisdictions under increased monitoring), while Algeria and Namibia were removed. Financial institutions with exposure to grey-listed jurisdictions should review customer risk ratings and enhanced due diligence requirements.
  • Black List Unchanged: Iran, North Korea, and Myanmar remain subject to FATF’s highest level of scrutiny.
  • Beneficial Ownership Focus: FATF continues to highlight the risks posed by opaque ownership structures, placing ongoing pressure on firms to strengthen ownership verification.
  • Recommendation 6 Update: The Plenary updated Recommendation 6 to ensure that sanctions measures do not block humanitarian assistance.
  • Payment Transparency: FATF continued to prioritise improvements in payment transparency across domestic and cross-border transactions, including stronger expectations around identification of originators and beneficiaries.

FinCEN AML/CFT Program Reform (United States)

On 7 April 2026, FinCEN issued a Notice of Proposed Rulemaking to fundamentally reform AML/CFT program requirements under the Bank Secrecy Act:

  • “Effective” Program Standard: The proposal introduces a formal definition of an “effective” AML/CFT program, focusing on whether the program is reasonably designed to ensure BSA compliance and identify actual risks.
  • Risk-Based Internal Controls: Every covered financial institution would be required to establish a risk-based set of internal policies and procedures.
  • Two-Tiered Enforcement Framework: The proposal distinguishes program establishment from implementation.
  • Implementation Timeline: FinCEN proposes a 12-month implementation period following issuance of a final rule.

EU AMLR (Anti-Money Laundering Regulation)

Regulation (EU) 2024/1624 creates a directly applicable “single rulebook” for AML/CFT across the EU:

  • Effective Date: The AMLR applies from 10 July 2027.
  • Business-Wide Risk Assessment: Obliged entities must carry out a business-wide risk assessment to identify and assess their exposure to money laundering and terrorist financing risk across their entire operations.
  • Risk-Based CDD: The AMLR requires risk-based AML/CFT measures and customer due diligence.
  • Cash Cap: The regulation sets a €10,000 cash cap.

RBI KYC Master Direction (India)

The Reserve Bank of India’s Master Direction on KYC continues to govern AML compliance for Indian banks:

  • Risk-Based KYC Updates: High-risk customers must update KYC every two years, medium-risk customers every five years, and low-risk customers every ten years.
  • Board-Approved Policy: Every regulated entity must frame a board-approved KYC policy covering customer identification, transaction monitoring, and risk management.
  • Digital Onboarding: The Master Direction has been updated to address emerging risks in digital onboarding.

Why AML Checks Matter in 2026

Understanding how banks do AML checks is crucial for several reasons:

  • Preventing Financial Crime: AML checks disrupt criminal networks by detecting and reporting suspicious activities, protecting the financial system from exploitation by drug traffickers, terrorists, fraudsters, and corrupt officials.
  • Ensuring Regulatory Compliance: Non-compliance can result in severe penalties. In 2025 alone, global regulators imposed over $8 billion in fines for AML failures.
  • Protecting Institutional Reputation: A single compliance breach can erode decades of trust. An effective AML check process safeguards the bank’s reputation and customer relationships.
  • Supporting Law Enforcement: AML checks provide vital intelligence that enables law enforcement to investigate and prosecute financial crimes.
  • Demonstrating Effectiveness: Regulators increasingly want evidence that AML controls are effective—not just that policies exist.

Conclusion

Understanding how banks do AML checks is essential for navigating the modern financial landscape. From Customer Due Diligence and transaction monitoring to SAR filing, record keeping, compliance programs, and regulatory reporting, each step plays a vital role in safeguarding the integrity of the financial system.

In 2026, with evolving regulations from FATF, FinCEN, the EU AMLR, and the RBI, how banks do AML checks must be continuously strengthened. Financial institutions that invest in robust AML programs not only meet regulatory requirements but also build trust, protect their reputation, and contribute to a safer global economy.

Whether you are a compliance officer, a banker, or a customer, understanding how banks do AML checks is essential for navigating the modern financial landscape.

Frequently Asked Questions

Q1: How do banks do AML checks?

Banks do AML checks through a comprehensive six-step process: (1) Customer Due Diligence (CDD/KYC), (2) Transaction Monitoring, (3) Suspicious Activity Reporting (SAR), (4) Record Keeping, (5) Compliance Programs, and (6) Regulatory Reporting.

Q2: What is Customer Due Diligence in AML checks?

Customer Due Diligence is the first step in how banks do AML checks. It involves verifying the identity of customers through KYC processes and assessing their risk of involvement in money laundering based on factors like business activities, geographic location, and transaction patterns.

Q3: What is transaction monitoring in AML checks?

Transaction monitoring is a core component of how banks do AML checks. It involves continuously monitoring customer transactions in real-time to identify suspicious activities that may indicate money laundering or terrorist financing, often using automated software.

Q4: What is a Suspicious Activity Report (SAR) in banking?

A SAR is a formal report filed by financial institutions with their Financial Intelligence Unit (e.g., FinCEN in the US, FIU-IND in India) to report suspicious transactions or activities that may indicate money laundering, terrorist financing, or other financial crimes.

Q5: What are the FATF 40 Recommendations?

The FATF 40 Recommendations are the global standard for AML/CFT, providing a comprehensive framework for combating money laundering and terrorist financing. They form the basis for how banks do AML checks worldwide.

Q6: How has FinCEN’s AML program reform affected banks in 2026?

In April 2026, FinCEN proposed a rule introducing a formal definition of an “effective” AML/CFT program, requiring risk-based internal controls, and establishing a two-tiered enforcement framework.

Q7: What is the EU AMLR and when does it apply?

The EU Anti-Money Laundering Regulation (AMLR) under Regulation (EU) 2024/1624 creates a directly applicable “single rulebook” for AML/CFT across the EU. It applies from 10 July 2027.

Q8: What are the RBI KYC requirements for Indian banks?

The RBI KYC Master Direction requires banks to frame a board-approved KYC policy covering customer identification, transaction monitoring, and risk management. High-risk customers must update KYC every two years, medium-risk every five years, and low-risk every ten years.

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By Adv. Shoeb Hakim
Criminal defence, AML, digital forensics, and cybercrime specialist; former General Counsel, Credit Suisse; training police and judiciary since 1995.

📌 Connect: https://www.linkedin.com/in/shoebhakim | https://shoebhakim.com/shoeb-hakim-blog/
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Disclaimer: This content is for informational purposes only and does not constitute legal advice. Readers should consult qualified legal counsel for advice on their specific circumstances.

Additional Page Metadata

  • Author: Adv. Shoeb Hakim
  • Author Bio: Adv. Shoeb Hakim is a Mumbai-based criminal defence, AML, digital forensics and cybercrime specialist. Former General Counsel at Credit Suisse. Has been training police and judiciary since 1996. Provides expert commentary on anti-money laundering, banking compliance, financial crime prevention, and regulatory risk management.
  • Article Publisher: Adv. Shoeb Hakim
  • Article Section: Anti-Money Laundering | Banking Compliance | Financial Crime | Regulatory Compliance | Risk Management
  • Article Tags: How Banks Do AML Checks, AML Checks in Banking, AML Process, Anti-Money Laundering, CDD, Transaction Monitoring, SAR Filing, Record Keeping, Compliance Programs, Regulatory Reporting, FATF 2026, FinCEN 2026, EU AMLR, RBI KYC, Adv Shoeb Hakim

#HowBanksDoAMLChecks #AMLInBanking #AntiMoneyLaundering #AMLCompliance #BankingCompliance #FinancialCrime #CDD #TransactionMonitoring #SAR #RecordKeeping #CompliancePrograms #RegulatoryReporting #FATF #FinCEN #EUAMLR #RBI #KYC #MoneyLaundering #BankingSector #AdvShoebHakim

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