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Anti-money laundering is a top priority for anyone working in cryptocurrency as it helps increase adoption, encourages safer peer-to-peer lending, and protects entire communities from illicit trade.
So what exactly is AML? And how does it help financial institutions increase their autonomy, even in anonymous environments?
What is AML?
AML is an initialism for Anti-Money Laundering (AML). An anti-money laundering approach applies to all financial institutions and activities—but AML is especially necessary in cryptocurrencies where illegal transactions are more common and harder to detect.
AML may seem like a buzzword to those outside the financial sector, but it offers real substance and value to financial institutions. BPPN is a concept that is implemented through regulation and is supported by llegislation that offers ways to manage physical and digital banking and exchange environments.
AML and Know Your Customer (KYC)
KYC is supported by the idea of customer verification to identify accounts that may be involved in illegal financial activities. In addition to practices such as transaction tracking and wallet screening, know your customer (KYC) provides a means to detect and prevent money laundering.
KYC helps detect ‘bad actors’ and anomalous behavior before the money trail even begins. Identifying suspicious accounts before they are created means that financial environments, particularly the much-scrutinized crypto market, can maintain customer confidence and seek greater stability, creating more accessible financial pathways for all.
KYC in the context of crypto helps remove accounts linked to money laundering practices from the crypto environment and attaches risk profiles to individual clients. It is a process of using sophisticated and rigorous procedures for entering the financial environment.
If there are question marks about an individual, and they qualify to become a buyer, they will be assigned a risk value and their exchange will be monitored to ensure they meet cryptocurrency exchange compliance.
The role of AML and AML legislation
AML plays a vital role in cryptocurrencies. The pseudo-anonymous (and therefore attractive) nature of cryptocurrency makes it a market particularly vulnerable to illicit exchanges. AML is needed to ensure that digital coins are only used for their intended purpose. We know that criminals are attracted to the crypto market, so AML practices, including the all important KYC process, are used to counter this.
Although AML is now a common term, with both customers and providers having a high awareness of it, it is ultimately up to the financial institution to implement it. Depending on the country, state or region, financial institutions will need to comply with anti-money laundering laws, such as:
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The Bank Secrecy Act in the USA
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The Proceeds of Crime Act 2002 (POCA) and Money Laundering, Financing of Terrorism and Transfer of Funds 2017 in UK
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The 5th AMLD in the EU
Anti-money laundering legislation works to provide definitive guidelines for financial institutions and offer guidance that is regularly revised in line with changes in the external environment. As we learn more about cryptocurrency scamwe can use this intelligence to create more robust strategies to detect and prevent financial crime.
Advancing the practice of combating money laundering through crime intelligence
So where better to look for anti-money laundering understanding than within the most common routes of criminal activity?
AML typologies tell us more about the approach of bad actors in the crypto market and how they are most likely to use digital environments to facilitate money laundering, either through illegal activities on the platform or by using the crypto market as an off-ramp to more complex money laundering routes.
Download our Typologies Guide to understand more about AML, where it may be headed in the future and how we can step forward to stop illegal activity before it happens.
