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What Is Anti-Money Laundering (AML)?

AML regulations are intended to stop the illegal laundering of funds that have been obtained illegally. There are governmental institutions nationwide and multinational organizations such as the FATF that legislate against money laundering. It is the act of changing "dirty" money into a clean one, a process known as money laundering. A form of this can be accomplished by concealing the origin of the funds, mixing them with legitimate transactions, or investing them into legitimate assets.

The use of cryptocurrency presents an attractive way to launder money due to the privacy it offers, the difficulty in tracing funds and the underdeveloped legislation. Large seizures of crypto demonstrate that criminals use it to launder large sums of money regularly.

Introduction

Regulating anti-money laundering (AML) helps to prevent the laundering of illegal funds to the public. In order to keep users safe and combat financial crime, centralized cryptocurrency exchanges are required to have them as a requirement. The anonymity of cryptocurrency makes the regulation of it reliant heavily upon monitoring customer behavior and identifying the customer.

What is AML?

This refers to the regulations and laws that come into play to prevent the movement and washing of illegal funds. As part of the Financial Action Task Force (FATF) set up in 1989 to promote international cooperation, AML plays an important role in combating money laundering. An example of an AML measure would be to prevent terrorist financing, tax fraud, and international smuggling. Although the laws relating to AML differ from country to country, there is an effort worldwide to align the standards.

The methods for combatting money laundering have advanced at the same rate as technology. Because of this, AML software is often triggered to flag behavior that may be considered suspicious. Flags and measures include large transfer amounts of money, repeated deposits into an account, and cross-checks with users on watchlists to determine if there has been any suspicious activity. AML is not just meant to apply to cryptocurrencies. The monitoring of any asset or fiat currency can be held to the same AML requirements.

Regulation has taken quite some time to catch up with the growth of cryptocurrency. Because of the rapid evolution of blockchain technology, AML procedures change regularly as well as compliance measures due to the continuous innovation. The outcome of these changes is not always positive. Many cryptocurrency enthusiasts appreciate the anonymity and decentralisation of the asset. This is why increased regulatory oversight and documentation of users' identities is often seen as antithetical to the ethos of crypto.

What’s the difference between AML and KYC?

It is a requirement that all financial institutions and service providers perform a Know Your Customer (KYC) check as part of AML legislation. These checks require users to provide certain personal information in order to verify their identity. It is a process that ensures the user is held accountable for any financial transactions they make. KYC is an important part of the Anti Money Laundering (AML) process, and falls under customer due diligence. KYC differs from other AML practices where suspicious activities are investigated reactively.

What is money laundering?

When criminals pose as legitimate financial assets, investments, or investments, they are called to do money laundering. These funds are obtained from criminal activities such as drug trafficking, terrorism, and fraud. Each country has its own laws and regulations for combating money laundering. In addition, many jurisdictions and the FATF are committed to increasing the alignment of rules.

Laundering money can be divided into three stages:

1. Placement

Incorporating "dirty" money into the financial system, for example, through cash-based transactions.

2. Layering

Transforming illegal money to make it harder to track. There's a way to hide the source of dirty money by using crypto.

3. Integration

This involves utilizing legal investment channel and other financial channels to reintroduce "dirty" money back into the economy.

How do people launder money?

It is possible to achieve the three steps outlined above in many different ways. The traditional way to get around the law is to create fake receipts that look like cash receipts for cash-based services provided by shops, restaurants, and other places of business. These operations are used by an individual or organization in order to launder money. They generate counterfeit receipts with a view to turning them into legitimate income by paying for them with something called "dirty" cash. It is then a very difficult task to differentiate between subterfuge and true transactions because these inflows are mixed in with real transactions.

It's quite common for illegitimate funds to be distributed via digital streams rather than through physical cash. This differs from the traditional methods of laundering funds. This changes the way money gets laundered. Now, "dirty" money can be hidden and cleaned in even more ways than before. In some cases, you may be able to transfer money directly without using a bank. PayPal and Venmo are examples of payment networks that launderers may use and regulators may monitor.

Using technologies which offer anonymity, such as VPNs and cryptocurrency, makes this situation even more challenging. Identifying a specific individual responsible for the laundering activity is a complex process. The simplest way to fight this is to track crypto "to the edge." By following the "paper trail" of a blockchain in the direction of an exchange, it is possible to tracing the laundered funds back to a crypto exchange or bank account under someone's name. In spite of this, it has been difficult to track the entry or exit of dirty money into the financial system when crypto is purchased in cash or through peer-to-peer services.

It is also possible to use online gambling sites as a way of making money. The money that the criminal intends to launder is deposited into an online gambling account. When the account looks legitimate, they proceed to make wagers to conceal their true identity. In the end, they disappear with the funds and have a clean deposit. This is typically done with multiple accounts in order to avoid suspicion of fraud. It might be worth checking AML checks on a single account that has large amounts of funds.

How do AML measures work?

A cryptocurrency exchange can be divided into three steps:

There are several ways to identify or report suspicious activities, such as large inflows of funds or large outflows of funds. Inconsistent behavior is another example, which includes an increase in withdrawals from an account that has a typically low level of activity.
The ability of the user to deposit or withdraw funds may be suspended during or after an investigation. By doing so, any further organized crime activities are prevented. An investigator then makes a report of suspicious activity (SAR) to the appropriate authorities.
When evidence is found to support illegal activity, the appropriate authorities are notified as well as the evidence is provided. As soon as possible, funds found to have been stolen will be returned to their original owners.

Cryptocurrency exchanges tend to be proactive when it comes to anti-money laundering. Money laundering schemes are combated through transaction monitoring and enhanced due diligence.

What is the FATF?

As an international organization, the FATF was established by the G7 in response to terrorism financing and money laundering. It becomes increasingly difficult for launderers to find jurisdictions to operate in when a set of standards are created that governments worldwide must adhere to. The sharing of information and the tracking of money launderers are also improved through government cooperation.

Approximately 200 jurisdictions have agreed to adhere to the FATF Standards. During regular peer reviews, the FATF monitors all participants to ensure that they are complying with the regulations.

Why do we need AML in crypto?

Criminals use the characteristics of cryptocurrency such as its pseudonymous nature to launder illicit funds and evade taxation as a way to launder illicit funds. By regulating cryptocurrencies, the industry gains a better reputation and is better able to collect appropriate taxes. As AML becomes better, legitimate crypto users will benefit from it, although it does require additional effort and time investment on the part of all parties.

A Reuters report indicates that criminals will likely launder an estimated $1.3 billion (US dollars) in "dirty" money through crypto in 2020.

All transactions are irreversible. In the case of funds that have been sent via blockchain, they cannot be returned to you unless the new owners send them back to you. Police and regulatory agencies are not able to recover your funds for you.
Cryptocurrency provides anonymity. Some coins prioritize privacy, such as Monero. In addition, there are "tumbler" services that layer cryptocurrencies through different wallets so that their trail becomes difficult to trace.
The status of its regulation and taxation remains uncertain. Criminals exploit the fact that tax authorities worldwide struggle to tax cryptocurrency efficiently.

Crypto money laundering examples

Criminals who wash money through cryptocurrency have been tracked and caught by authorities a number of times in recent years. On July 2021, the UK police seized approximately $250 million US of cryptocurrency used for money laundering. In terms of crypto funds, this was the largest seizure that had taken place in the UK to date, surpassing a previous record of $158 million set just weeks earlier.

An operation involving sophisticated money laundering has been successfully seized by Brazilian authorities in the same month, resulting in a cash haul of $33 million. A total of 17 commercial companies and 2 individuals were involved in the purchase of crypto for the purpose of hiding illegally derived funds. The criminal organization that was involved set up these companies with the sole objective of hiding illegally sourced funds. Furthermore, cryptocurrency exchanges also cooperated with the criminal organizations in a knowingly criminal manner and did not follow the correct procedures regarding anti-money laundering.