The dynamic evolution of cryptocurrency has helped build up a significant presence in the financial market, the crypto market is relatively new in the scene and is vulnerable to financial crimes. The amount and nature of data that can be stored and utilised for screening purposes have evolved – and so must technology. Money laundering has become an increasingly pressing issue over the last few decades. In the first five months of 2020, crypto thefts, hacks, and frauds made up an estimated value of $1.36 billion. To combat the presence of financial crimes in the market, the Financial Action Task Force (FATF) adjusted Recommendation 15 to include crypto business in 2018.
What is Anti-Money Laundering (AML)
According to the International Monetary Fund (IMF), the money laundering rate ranges between 2 to 5% of the global GDP. The decentralisation and semi-anonymity of cryptocurrency allow offenders to obscure the origins of financial crimes. Financial institutions and governments are regularly looking for innovative ways to combat money launderers, and copious anti-money laundering regulations have been issued to tackle financial offenses. Financial institutions must report any financial crime they detect to relevant agencies under AML legislation.
Read more about how Financial crimes are conducted via crypto here.
How did AML regulations come about?
AML initiatives were recognised when a group of countries came together to form the Financial Action Task Force (FATF) in 1989. Their mission is to publish anti-money laundering measures, establish and implement international standards to prevent money laundering, and combat terrorist financing. Other important institutions include the International Monetary Fund (IMF) which similarly, aims to prevent terrorist financing and instill pressure on its 189 member states to comply with AML regulations.
How Crypto businesses can detect money laundering
- Know Your Customer
KYC is an AML process utilised for effective risk management, transaction monitoring, and new customer policies. It identifies and assesses the risk levels of potential customers.
- Travel Rule
The newly issued FATF’s Recommendation 16, Travel Rule, stipulates that Personally Identifiable Information (PII) of beneficiary and originators with crypto transmittals exceeding 1,000 USD have to be declared. VASPs, Financial Intermediaries have to provide names, account numbers, physical addresses, and identification numbers of relevant parties.
- Transaction Monitoring
VASPs can now integrate transaction monitoring that alerts businesses to specific indicators of money laundering. The Red flags of money laundering include transactions of unusual sizes and frequency and suspicious sources of origins.
Cost of Non-Compliance
Virtual Asset Service Providers (VASPs) in countries monitored under the FATF must now comply with new regulatory measures lest they face the consequences of non-compliance. Ongoing monitoring and regulatory pressure have been cited as the reason for crypto exchanges to shut down. South Korea Daybit shuts down after being unable to cope with new regulations about AML and identity verification. Hong Kong has also announced that fines worth US$644,054 and prison terms have been handed out for unlicensed trading activities. VASPs have turned to Regtech technologies which can help them automate compliance processes and become cost-effective. This is largely attributed to the costly, time-intensive, and inaccurate manual due diligence process.
With Regtank, companies can automate their processes and mature their approach to identifying and assessing anti-money laundering risk.
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