Are Anti-Money Laundering Regulations Effective and Worth the Cost?

The United Nations estimates that $800 billion to $2 trillion dollars are laundered globally every year. Money laundering refers to the process of disguising the origins of funds obtained through illegal means. Criminal enterprises disguise the origin of illegally obtained funds to mask their criminal activities and evade discovery, while allowing the organization to use the funds. Stopping money laundering is critical to combatting criminal enterprises and the Treasury Department is set to overhaul anti-money laundering (AML) efforts in the U.S.

In April of 2026, the U.S. Financial Crimes Enforcement Network (FinCEN), a bureau within the Treasury Department, released a proposal to modernize regulations for financial institutions.

The primary AML statute, the Bank Secrecy Act (BSA), imposes significant compliance obligations on banks and has been amended and expanded several times since it was enacted in 1970. The BSA requires banks to report suspicious transactions and cash transactions over $10 thousand. Banks are also required to verify their customers’ identities and assess their customers’ risk of money laundering. The BSA has not escaped criticism. Common criticisms of the BSA are the high compliance costs incurred, the vast majority of the required reporting going unused, concerns about privacy and surveillance, and the lack of measurable efficacy in stopping money laundering.

The Financial Action Task Force (FATF), a global financial crime watchdog organization, assessed their own recommended policies, which many countries such as the U.S., U.K., and Switzerland. In a study of many countries’ AML efforts, the FATF found that strong compliance rates did not necessarily result in a decrease in illegal activity. Their findings show that a country’s AML frameworks can appear effective without meaningfully hindering illegal activity.

Some analysts observe that TD Bank’s (TD’s) recent money laundering case exemplifies the criticisms of AML regulations. In October 2024, the Bank pleaded guilty to felony conspiracy charges for money laundering. It faced over $3 billion in penalties, and regulators set a maximum limit on the amount of assets the bank can manage. According to the Justice Department, TD failed to monitor transactions totaling $18.3 trillion over the past 10 years and had facilitated the laundering of hundreds of millions of dollars belonging to criminal organizations by failing their compliance obligations. Despite this, the bank’s AML program remained adequate on paper.

The changes proposed by FinCEN earlier this year would reduce compliance burdens on banks and shifting AML requirements to be outcome-focused, rather than procedure-based. The proposal would also reduce enforcement action against banks by regulators. The proposal would give banks greater discretion in their risk assessments and resource allocations. Enforcement actions would only be warranted by systemic or serious failures in a bank’s AML program and regulators would need to consult FinCEN prior to any actions.

In this week’s Saturday Seminar, scholars and regulators examine the effectiveness of existing AML frameworks, evaluate proposals to modernize compliance requirements, and debate the merits of a risk-based regulatory approach.

• Anti-money laundering regimes should be grounded in a risk-based approach rather than uniform compliance requirements, argues analysts at the FATF in their latest recommendations. The FATF policy-analysts recommend that countries and financial institutions identify, assess, and mitigate money laundering risks in proportion to their severity, allowing simplified measures in lower-risk contexts while requiring enhanced controls where risks are greater. They emphasize allocating resources based on evolving risk assessments rather than relying solely on standardized procedures. The authors contend that, by prioritizing effectiveness and flexibility over formalistic compliance, the proposed framework provides a universal foundation for countries in their efforts to modernize AML regulation.
• In a research paperfor the Journal of Economics and Management, Anna Popik-Mazur, of the University of Warsaw, surveys the methods researchers use to estimate the volume of money laundering. Popik finds that even though there is no universally accepted way to measure illicit financial activity, money laundering is unquestionably extensive. She contends that the difficulty in determining a concrete figure stems from differing definitions and methodologies, and the fact that, by its nature, successful money laundering is concealed within the financial system. Popik also observes that there is a massive application for AI in AML in the areas of detection and risk scoring, allowing more transactions to be effectively monitored.
• In a Journal of Economic Criminologyarticle, George Pavlidis of Neapolis University examines explains how anti-money laundering regulations can produce adverse effects when implemented through overly rigid compliance frameworks. Pavlidis argues that institutions and regulations both often resort to disproportionate measures, including the termination of banking relationships with higher-risk clients, restrictions on access to financial services, and burdensome requirements imposed on nonprofit organizations. He contends that AML systems are most effective when they apply regulatory requirements proportionally to actual risks instead of relying on blanket compliance obligations. Pavlidis concludes that regulators should implement AML/CFT measures in accordance with the risk-based approach and the principle of proportionality, rather than encouraging compliance for its own sake.
• In thisGovernment Accountability Office (GAO) report, analysts assess the collaboration between and performance of the various agencies combating illicit finance and criminal activity, including money laundering. The GAO analysts found that, although the law enforcement entities, intelligence groups, and agencies collaborate, their progress toward their objectives and effectiveness of their efforts are unknown because they lack an overarching joint goal and performance information is not collected or assessed. For example, individual agencies have specific estimates related to resource needs to counter illicit finance, there is no overall estimate of resource needs. The GAO recommends that the S. Treasury Department work with relevant agencies to track collaborative progress toward AML objectives.
• In its 2026 National Money Laundering Risk Assessment, the Treasury Department analyzescurrent vulnerabilities that can be exploited by illegitimate or criminal actors seeking to launder money through U.S. financial infrastructure. The report describes potential shortcomings in internal bank compliance models that can allow illicit transactions or activity to go undetected, and highlights two recent cases where regulators brought enforcement actions against banks who maintained inadequate AML risk controls. Although the report calls attention to potential risks and vulnerabilities, it also makes the case that compliance burdens on U.S. banks should not be excessive relative to the actual costs of illicit money laundering and advocates a more calibrated balance between burdens and outcomes.
• A joint rule proposal, by the Treasury Department, Federal Deposit Insurance Corporation, and National Credit Union Administrationwould align these agencies’ AML approach with FinCEN’s proposed rules. The proposal aims to modernize AML compliance and encourage greater cooperation between FinCEN and the agencies. Banks would be required to establish and maintain risk-based policies that focus more attention and resources toward high-risk customers and activities. Regulators contend that the new proposed framework would have several benefits, including increased regulatory and supervisory clarity for banks, greater identification and reporting of high risk and illicit activities, and a decrease in the incidence of low-risk customers being denied access to banking services due to false flags being raised on their non-illicit transactions.
• In a paperin the University of Chicago Press Crime and Justice Journal, Mirko Nazzari and Peter Reuter criticize both the existing AML framework and the methods by which it is assessed, calling it a failure and a system in need of complete reform. According to Reuter, the metrics that the FATF and others use to assess the AML system are outputs of the system itself, such as number of SAR reports, and do not assess actual effectiveness. He states that there is no evidence money laundering has declined or become more difficult. Reuter asserts that, in the AML regime, banks are incentivized to over-report and have no incentive to actually combat money laundering.