What is AML in Crypto? Who Must Comply with AML Crypto Regulations?

• March 21, 2023
• Rachna Pandya

What is AML in crypto, and why must all crypto businesses comply with Anti-Money Laundering regulations? – Well, all businesses that play a role in enabling cryptocurrency buying, selling, and transferring must adhere to Anti-Money Laundering (AML) regulations. This mainly encompasses banks and money service businesses, virtual currency exchanges, custodial wallet providers, mining operators and pools, ICO entities, and developers of cryptocurrency applications.

International organizations like the FATF have instituted a Crypto Travel Rule to ensure crypto transfers comply with the requisite AML protocols. However, it is worth noting that crypto AML regulations are still in their infancy, and there is ample room for improvement in this field.

The world of cryptocurrency is confronting a growing challenge of complying with Anti-Money Laundering (AML) regulations. Familiarizing oneself with AML regulations is crucial for businesses interested in entering the crypto space, and this blog post aims to guide you through the most critical aspects.

Cryptocurrency money laundering is a significant concern

Cryptocurrencies have been increasingly used as a tool to facilitate a wide range of criminal activities, including but not limited to bribery, corruption, narcotics trafficking, and more. Moreover, these digital assets provide a convenient means for converting illegal proceeds into fiat currencies, which makes it easier for criminals to launder their money. This has led to a rise in online scams, ransomware attacks, and even human trafficking on the dark web. Additionally, cryptocurrencies have been used to circumvent international sanctions and PEP watchlists, further exacerbating the problem.

In order to prevent money laundering in the cryptocurrency industry, it is crucial for all participants to have a deep understanding of the various criminal techniques employed to conceal the true source of illegal income. Unfortunately, the anonymity of cryptocurrency transactions makes it difficult for law enforcement to track the money trail and apprehend the criminals involved.

Despite the efforts made by exchanges and governments to prohibit the use of privacy coins, money launderers have been persistent in finding ways to transfer these assets and conceal their funds. Therefore, the industry needs to continue developing effective solutions to combat money laundering and maintain the integrity of the cryptocurrency market.

Common crypto money laundering schemes: –

• Criminals often demand payment in specific cryptocurrencies or convert their illegal funds into digital tokens, which they can then store in cryptocurrency wallets or exchange for other assets.

• Money launderers may resort to using privacy coins to conceal their activities. These cryptocurrencies are intentionally designed to be difficult to trace on blockchains, making it easier for criminals to evade detection.

• Sophisticated criminal organizations may use DeFi (decentralized finance) to transfer their crypto funds, as it is less regulated than centralized financial institutions and provides a more accessible means to evade detection.

• DeFi users interact with decentralized exchanges (DEXs) or crypto lending sites, making it harder for law enforcement to trace transactions and identify the individuals involved in illicit activities.

• In recent times, some money launderers have started using NFTs (non-fungible tokens) as an alternative way to hide their illicit funds.

Impact of AML on crypto transactions and markets

Compliance with Anti-Money Laundering (AML) regulations, including the use of KYC (Know Your Customer) and KYT (Know Your Transaction) procedures, is crucial to maintaining financial transparency and preventing illicit activities in the cryptocurrency industry. To achieve this, advanced analytics tools and methods such as customer profiling; sanctions, PEP, adverse media screening; transaction monitoring; and data analytics are utilized.

These methods can identify suspicious patterns in customer behavior, enabling crypto exchanges to detect potential money-laundering activities. Furthermore, they play a critical role in ensuring ongoing compliance with AML regulations by allowing exchanges to track unusual activities, minimize false positives, and promptly produce Suspicious Activity Reports (SAR) to avoid non-compliance penalties.

By implementing effective KYC and KYT procedures and other diligence measures, exchanges can better safeguard themselves against illicit activities such as tax evasion, bribery, corruption, and terrorism financing. AML regulations can also boost confidence in the crypto market, providing investors with greater security. Therefore, cryptocurrency companies must stay informed and comply with the constantly evolving AML regulations to maintain their reputation and integrity.

Industries subject to crypto regulations

The cryptocurrency industry is subject to stringent Anti-Money Laundering (AML) regulations. These regulations apply to a wide range of businesses within the industry.

Major industries that fall under crypto regulations include financial services, banking, investment institutions, digital currency exchanges, online gambling operators, corporate finance advisors, virtual currency businesses, mining pools, crypto wallets, payment processors, crypto mining companies, and blockchain service providers.

To combat money laundering, terrorist financing, and other financial frauds, crypto AML regulations require companies to identify their customers, monitor transactions for suspicious behavior and activity, and implement anti-fraud technology solutions. To ensure compliance, corporate finance advisors must keep up-to-date with global trends in AML compliance regulations impacting ICOs.

Mining pools and blockchain service providers must ensure the safety of their users’ funds from cybercriminals attempting to circumvent AML measures. Eligible Contract Participants (ECPs) investing at least $10 million into derivatives via futures exchange markets globally are subject to stringent criteria and significant new data protection requirements.

Banks, financial institutions, payment processors, and crypto mining companies are also subject to AML regulations. Failure to comply with these regulations may result in civil or criminal penalties. Adhering to AML compliance measures can help to promote transparency and security in the crypto industry, increasing investor confidence and ensuring reputably benevolent operations.

The FATF Crypto Travel Rule sets strict Identity Verification standards

The FATF Crypto Travel Rule is a set of guidelines established by the Financial Action Task Force (FATF) to combat money laundering and terrorist financing in the cryptocurrency industry. Under this rule, Virtual Asset Service Providers (VASPs), such as cryptocurrency exchanges, must collect and share information about their customers and transactions in retrievable formats.

DeFi Crypto

The Crypto Travel Rule, which is an integral component of the FATF Recommendation 16 on DeFi cryptocurrencies, is a crucial mechanism that enforces identity verification standards for crypto users and beneficiaries. Under this rule, VASPs are mandated to establish and maintain robust protocols for collecting and updating their users’ Personally Identifiable Information (PII).

Threshold Reporting

In addition, the FATF stipulates that any suspicious transactions exceeding a certain threshold of 1000 USD must be promptly reported, with appropriate PII furnished. Implementing well-established subpoenas is also recommended to aid in investigating Suspicious Transaction Reports (SARs), ensuring greater accountability and transparency within the industry.

Vigilance to mitigate risks

Moreover, the FATF strongly advocates for VASPs to exercise vigilance in preventing illicit financial activities by prohibiting crypto payments from sanctioned nations, individuals, or groups. By upholding these stringent measures, VASPs can contribute towards mitigating risks associated with money laundering, terrorist financing, and other unlawful activities, ultimately fostering a safer and more secure environment for using and trading digital assets.

Transparency to get rid of bad actors

The FATF Crypto Travel Rule is important for the cryptocurrency industry as it makes it more difficult for criminals to anonymously move large sums of money through the use of cryptocurrencies. The rule also helps to increase accountability and transparency in the industry, which is important for building trust and ensuring that legitimate players are not unfairly penalized due to the actions of a few bad actors.

Travel Rule to avoid hefty penalties

For crypto exchanges and other VASPs, complying with the FATF Crypto Travel Rule is crucial to avoid penalties and maintain their reputations as legitimate and trustworthy players in the industry. However, failure to comply with the rule can result in severe consequences, including fines and potential criminal liability. As such, crypto businesses must invest in the necessary technology and infrastructure to meet the rule’s requirements and ensure ongoing compliance.

AML in crypto – daunting yet an achievable task

Achieving crypto AML (Anti-Money Laundering) compliance can be complex and challenging for businesses, but possible. The regulatory landscape of Anti-Money Laundering (AML) for cryptocurrencies is particularly demanding due to the need for more traceability and transparency inherent in the industry. In addition, the anonymous and borderless nature of crypto transactions poses significant obstacles to detecting suspicious activities that could facilitate money laundering and terrorist financing risks.

To make the crypto compliance procedures more logical and achievable, authorities emphasize the gravity of these issues. As a result, major crypto exchanges have begun to fortify their identity verification processes during onboarding to align with AML regulations. However, for VASPs and crypto wallet providers, non-face-to-face user onboarding methods can heighten AML compliance risks.

To address these challenges, regulated businesses are encouraged to leverage crypto AML Transaction Monitoring Software to identify and report suspicious money laundering or terror financing attempts. By deploying such tools, businesses can bolster their AML compliance posture and contribute towards a safer and more secure crypto ecosystem.