How Money Laundering and Crypto Exchanges Work
Cryptocurrencies are flourishing, with the rise of
blockchain technology facilitating their spread. Cryptographic algorithms
protect these crypto assets from central bank authority and allow them to circulate
without any need for a financial system that relies on such oversight; this
makes cryptocurrencies disruptive forces in traditional finance - traded across
exchanges worldwide by criminals searching for anonymity or laundered through
legitimate transactions as well-intentioned acts slip through regulatory
cracks.
In 2019, criminals laundered around $2.8 billion in Bitcoin through
cryptocurrency exchanges an increase over 2018's figure by a whopping 1%. This
trend has prompted global regulators who have responded with new AML/CFT laws
applicable to service providers of cryptocurrencies such as the one recently
implemented from Japan that requires exchanges to register themselves and
report any suspicious activity - leading them towards more transparency than
ever before!
Crypto exchange service providers must understand the risks they face to avoid
illegal activity. Implementing AML/CFT solutions will keep them compliant with
jurisdictional regulations.
How Money is Laundered in Crypto Exchanges?
Cryptocurrencies are a popular way for criminals to launder money. Not only do
they provide an avenue of anonymity, but cryptocurrencies also transfer quickly
between users on exchanges and can be sent internationally with little cost as
well!
As we know, money laundering with fiat currencies is a process that requires
customers to create accounts and submit personal identifying information. The
launderers then use the banks’ infrastructure by conducting transactions to
disguise their origin of illegality while transferring funds into or out from
this system.
Crypto traders are in luck! Cryptocurrency transactions can happen without the
need to identify yourself or use a regulated banking infrastructure.
Transactions only require the unique address of your crypto wallet, which means
you won't have any trouble getting what’s owed if there's ever an issue between
senders and recipients anywhere on earth- it'll be right at their fingertips
because all they need is each other’s wallets - no intermediaries necessary.
Cryptocurrency transactions are not documented on paper. They can only be
verified by a system of encryption, which is stored in the blockchain itself
and cannot be Changed or Deleted without compromising its integrity as an
official record for timestamping each transaction timestamp. There are no
regulatory standards across all cryptocurrency exchanges due to inconsistent
governments' policies regarding digital currency - criminals benefit because
there's anonymity involved when moving funds online.
Cryptocurrency is a popular way to move money around the world, but it can also
be used by criminals. Cryptolaunder offers an easy way for them to do so in
secret without being detected - making their illicit activities much easier
than ever before!
Cryptocurrency exchanges are a great way to launder money. The specific
benefits of cryptocurrency exchanges for money laundering methodologies
include:
·
User identities: Cryptocurrency
uses cryptography which means they're protected against hacking attempts-- only
those who know someone's private key will be able to give them access; even
then there would have been no way if Alice has Paolo also placing orders in her
name.
·
Transaction speeds:
Cryptocurrency's high speed of transactions makes it an attractive option for
money launderers. Transactions occur quickly, sometimes in seconds and this
could be one reason why adopting crypto would make your life easier when trying
to avoid detection by AML regulations.
·
Structured deposits: Cryptocurrency
exchanges are the new smoking hole for laundered money. Laundering criminals
use these services to make multiple structured deposits that avoid triggering
AML reporting thresholds, all while you're on their website doing your taxes!
What are the Signs of Money Laundering in
Cryptocurrency?
Enhanced due diligence is required for cryptocurrency service providers to
comply with anti-money laundering laws and regulations. As with any financial
crime or violation that finances terrorism can be harmful to society at large
so it's important Services Providers are vigilant when identifying questionable
transactions and behavior from customers who have an interest in this type of
currency.
In 2020, the Financial Action Task Force (FATF) released a report on
cryptocurrency money laundering methods. They found that certain behaviors and
transactions are indicators for these criminals looking to launder their funds:
·
Transactional behavior: Several transactions can be a
sign that money laundering is happening. These include multiple small bills
being given to an individual, customers who frequently lose their funds and
need more than one transaction before withdrawing large amounts from ATMs or
making purchases in person while wearing expensive clothes with bulges
underneath them where bundles of cash are hidden; there's also the occasional
business person who exchanges $10 million worth on behalf of another member his
family just so nobody knows about it!
·
Customer identity: Cryptocurrency users should be
aware of the dangers that arise when anonymously making transactions. For
example, multiple accounts may be controlled from one IP address and there can
sometimes be discrepancies between identifying documents during account creation
or changes in personal details like name/address on file with different
entities for authentication purposes depending upon where you go online.
·
Money muling: Some criminals will take any opportunity
they can find to conceal the true origin of their funds. Cryptocurrency
transactions are a perfect way for money launderers and other criminal networks
to launder ill-gotten gains without having them traced back directly, since
many people who deposit cash into an exchange account may not even be aware of what
cryptocurrency was used as payment!
·
Funding sources: Cryptocurrency exchange service
providers should be on the lookout for red flags that indicate money laundering
activity. When funds come from sources linked to illegal activities, darknet
sites or those with inadequate AML controls there are higher risks of being
tied into criminal enterprises attempting to hide their ill-gotten gains by
moving them through legitimate channels like cryptocurrency exchanges.
AML and
Crypto Compliance
There is a growing concern about cryptocurrency money laundering, and global
regulators have been taking steps to introduce dedicated crypto AML measures.
In the European Union (EU), for example, Anti-Money Laundering Directives
extend the scope of record-keeping obligations on financial activities such as
trading in cryptocurrencies while Singapore has imposed controls over service
providers who operate within that country's borders with its Master Act Omnibus
2012 which includes many regulations including KYC requirements for overseas
customers using local currency through bank deposits, etc., The United States
Federal Information Security Management Association issued proposals last week
detailing how it wants FINCEN rules expanded into cover virtual currencies like
Bitcoin by creating new guidelines defining what exactly constitutes suspicious
activity.
Crypto exchanges and other financial institutions must consider their
compliance approach to cryptocurrency services carefully. Following FATF
guidance, firms should seek a risk-based AML solution with these measures:
·
Customer due diligence: Crypto service providers must
verify the identity of their customers accurately. In a cryptocurrency context,
it may be necessary for them to use digital identification methods that include
scans or biometric IDs such as fingerprints, faces, and voices to ensure
accuracy with each transaction.
·
Transaction monitoring: Firms should implement
automated monitoring technology to capture the necessary data. Firms need a means
of capturing all cryptocurrency transactions, as it is associated with
considerable digital activity and could be used for nefarious purposes if not
monitored properly.
·
PEP screening: A new report from the Financial Action
Task Force (FATF) lays out how to identify and handle politically exposed
persons (PEP). Cryptocurrency firms must screen their customers regularly for
them not only to maintain an adequate level of due diligence but also to establish
whether or not they are considered a PEP.
·
Sanctions screening: Cryptocurrency service providers
are required to screen their customers against the relevant international
sanctions lists. This is done by looking for ties between them and other
countries on those lists, as well as conducting background checks before
accepting new business prospects or consumers into crypto markets overall.
·
Adverse media: Cryptocurrency firms should screen for
adverse media coverage, including on traditional screen and print sources as
well as digital outlets. The output voice should be informative with an
understanding that some customers may engage in illegal activity which could
lead them to be the subject of negative news stories about their company's operations
or personhood online, but this does not mean all crypto traders are pirates!
Yotam
Namir is your trusted partner in the implementation of compliance regulations
for fintech companies. He founded Tech View, which helps you streamline client
onboarding, business monitoring and ensure due diligence with a single API solution
that has access to data globally.
Yotam
Namir is the founder of Tech View, a Complete Compliance Solution for fintech
companies. As an expert in compliance and AML regulations for financial
institutions, Yotam has more than 10 years of experience developing effective
compliance programs. He has helped many clients ensure their business complies
with global regulatory standards and streamline their onboarding process to
minimize time-to-market.
Whether you are a startup looking to enter the
regulated market or an established player wanting to expand your customer base,
we will help you meet your goals by providing cost efficient solutions that
provide scalability as your company grows.
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