The cryptocurrency industry is still very young. As with every evolving sector, crypto has some gaps and drawbacks. When we talk about decentralization as the main priority of crypto products and tools, we should also mention its vulnerability to malpractices and financial crimes coming from it. Anti-money laundering (AML cryptocurrency) compliance guards against the illegal use of digital assets by criminals and terrorist sponsors. AML rules touch on every aspect of the crypto industry – transactions and trading, cross-border payments, listing cryptocurrency on exchange, token, and stablecoin issuing, NFT marketplaces, etc.
Today, we will discuss how criminals can use crypto exchanges for money laundering and offer a checklist for AML checker implementation.
Gaps Allowing Criminals to Use Crypto for Money Laundering
Money laundering means actions aimed at disguising the origin of funds that were obtained illegally. For example, a drug dealer moves money multiple times among different wallets and crypto assets to eventually cash out as if they were earned legally. Here are three stages of money laundering:
- Layering – moving money through many different wallets and transactions, making it confusing to discover its origin.
- Injecting money into a legitimate financial system.
- Cashing out laundered money.
Criminals usually pass these steps through crypto exchanges, taking advantage of anonymous trading on exchanges that don’t comply with crypto AML regulations.
Crypto AML Compliance Checklist
Trading platforms must adhere to AML regulations to avoid being involved in criminal schemes. Here is a checklist for crypto exchanges on how to meet AML crypto requirements:
- Official registration in the jurisdiction in which a platform operates. In the U.S., it is FinCEN.
- Identity verification and KYC (know your customer) procedures – collecting data about clients and verification of identity.
- Customer risk assessments – sometimes, a crypto business needs to conduct enhanced due diligence (EDD) if there is a need for customer identity.
- Report suspicious activity to relevant regulation agencies.
- Transaction tracking – detecting shady transactions and patterns that signify illegal activity.
- AML compliance training – crypto companies need to train staff regularly on AML aspects to keep them aware of changing AML policies.
- AML personnel designation – hiring a person responsible for daily AML compliance reports.
Conclusion
“Due to” the decentralized nature of crypto transactions, the crypto sector has got a bad name as a space for criminals. As with every young sector, this industry needs to implement robust measures to protect against money laundering and terrorism financing schemes, and AML for crypto stands as one of the main tools. The more crypto companies comply with regulations, the better they will combat illegal activities and recover their crypto reputation.
