One of the primary and most essential tasks of the financial and banking industry is to prevent money laundering and terrorism financing. The term ‘money laundering’ originates from the infamous gangster Al Capone, who used a chain of laundromats to launder or legitimize vast amounts of cash. Money laundering is the process of legalizing funds coming from illegal sources to hide the money’s origins and make it appear legal. To prevent this from happening and to track such activities, the AML procedure was created.
Anti-money laundering, or AML, is a complex set of measures and procedures that prevent the misuse of the financial system for money laundering, that is, criminal money legalization. AML policy seeks to prevent criminals from using their “dirty” money.
How does money laundering happen?
It usually consists of three stages. First, the money is placed into the financial system to mix “Dirty” money with other funds, making tracking their origin more difficult. Second, various transfers can be made within various accounts or directions in the case of crypto. For instance, criminals can move funds between countries using different banks and financial organizations. Third, the money is integrated into the legal economy. The simplest way to do that is via various transactions like buying real estate or sending money to a fictitious organization.
AML crypto check function
Crypto AML check, like any other type of AML checks, consist of a series of measures designed to meet international standards for anti-money laundering.
Main AML policy components at the cryptocurrency exchanges include:
KYC (Know-Your-Client) policy consists of the identity verification of any client using a financial platform;
Transaction control aims at detecting suspicious activities like vast sums transfers or repeating transactions;
Notice policy, informing the authorities about any detected suspicious activity.
Trustworthy cryptocurrency exchanges don’t perform any transaction without due AML crypto checks. They aim to prove that the transaction doesn’t involve any criminal trace and that the assets do not have any connections with dirty funds. All the deposits and withdrawals are checked using AML procedures. If the address is marked as high-risk, it may involve using DarkNet services, gambling, illegal services, malicious software, fraud, etc.
AML History
The history of the fight against money laundering (AML) began in the 1970s when the first laws were enacted in the USA to prevent the use of the financial system to legitimize criminal proceeds. The Bank Secrecy Act passed in 1970, mandated that banks and other financial institutions maintain and report suspicious transactions.
The Financial Action Task Force (FATF) was established in 1989. This international organization develops standards and recommendations for combating money laundering and the financing of terrorism (CFT). FATF has formulated 40 recommendations that have become the global standard in anti-money laundering.
Cryptocurrency exchange staff must know how to handle AML (Anti-Money Laundering) procedures, such as spotting and reporting suspicious activities. In many countries, government authorities regulate cryptocurrency exchanges, adding extra control and oversight for AML policies. In places where digital assets aren’t legal tender, the industry often regulates itself.
Why is AML essential for cryptocurrency security?
The cryptocurrency market needs AML for many reasons. First, it prevents the legalization of criminal activity incomes. As crypto transactions are anonymous, they can be used to legalize criminal activity income, such as drug, weapon, and human trafficking. AML measures aim to track and stop these transactions. Second, it prevents terrorism financing. As crypto can be used for financing terrorism, AML tries to find these transactions and freeze them. Third, it provides a regulatory plan. Not every country has strict cryptocurrency regulations in place, and AML measures try to form part of such regulations by offering help in controlling and tracing transactions and observing general rules.
Challenges in Implementing AML in the Cryptocurrency Sector
Despite tangible benefits, implementing AML in cryptocurrency still faces many challenges. One significant obstacle is the anonymity of cryptocurrency transactions. Unlike traditional banking systems, where identity verification or KYC is standard, many cryptocurrency transactions can be done without identifying all the parties involved. This anonymity makes it difficult to trace the origin of funds and identify potential misuse for criminal activities or terrorism financing.
Moreover, cryptocurrencies’ global and decentralized nature complicates regulatory efforts. Cryptocurrency transactions can effortlessly cross international borders without intermediary banks or traditional financial systems. This challenges regulators as different countries have varying AML regulations and enforcement capabilities. Ensuring consistent regulatory practices across all jurisdictions is a daunting task that requires extensive international cooperation.
Future Prospects of AML in Cryptocurrency
AML will likely see more strict cryptocurrency regulations as the cryptocurrency sector matures. As cryptocurrencies gain wider acceptance and recognition as legitimate financial instruments, regulatory frameworks will evolve to ensure they do not become ways for illegal activities.
Technology will be pivotal in shaping these frameworks. Blockchain technology itself offers unique opportunities for enhancing transparency and security. For instance, some blockchain platforms are exploring the possibility of ‘privacy coins’ that provide anonymity while allowing for selective transparency for regulatory compliance.
AML procedures are essential for cryptocurrency exchanges as they prevent the financial system from being used to legalize criminal income and finance terrorism. This helps lower the risks for financial institutions and clients, as some countries have cryptocurrency regulations that require some AML procedures and establish liability for failing to follow them.
Implementing AML procedures is key to providing financial resilience and fighting crime. That’s why banks and cryptocurrency exchanges must care for compliance in crypto to provide transparency. AML and KYC help safeguard clients’ data and prevent contamination with “dirty” funds.
Overall, AML in the cryptocurrency sector is a pivotal aspect of the broader policy to maintain the oneness of financial markets and protect them from criminal activities. The dynamic nature of digital currencies requires an equally adaptive and active approach to AML policies. With the evolving cryptocurrency market, the strategies must combat money laundering and terrorism financing. With the most advanced technology that improves regulatory cooperation and promotes educational efforts, the financial community can better safeguard against these threats and rest assured of the stability and security of the cryptocurrency ecosystem.
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