Introduction

With crypto AML regulations becoming more stringent and fines reaching previously unheard-of levels, crypto businesses cannot afford any breaches in compliance.

Coincheck, a Japanese cryptocurrency exchange, lost $500 million in one of the largest crypto heists in 2018. Money laundering ensued as the infiltrators needed to conceal the source of their illicit funds and convert them to legal tender. Thirty people were charged in 2021, three years after the Coincheck heist, after being caught attempting to exchange $100 million through an illicit darknet exchange.

However, the darknet isn’t the only place criminals go to launder their money. Lawful crypto services are frequently used by criminals, particularly at the end of their money laundering journey. So, how do you prevent criminals from using your platform to launder money? And what if money laundering goes undetected? Let us now delve into the subject.

Why must crypto businesses comply with AML regulations?

The 5th AML Directive, enacted in 2018, brought European crypto businesses under its regulatory purview, subjecting them to the same AML rules as financial institutions.

The Financial Action Task Force (FATF) updated Recommendation 15 the same year to include crypto businesses. This prompted both European and non-European FATF members to require crypto businesses to comply with AML standards. As a result, cryptocurrency businesses may now face sanctions, including fines and even jail time, for failing to meet AML obligations such as customer due diligence, transaction monitoring, suspicious activity reporting, and other requirements.

Who’s affected

All cryptocurrency businesses, formally known as Virtual Asset Service Providers (IDPs), located in countries that have incorporated FATF requirements into their national laws, must implement measures to detect money laundering, terrorist financing, and other financial crimes. Examine your federal AML laws to see if your jurisdiction has implemented FATF requirements.

How criminals use crypto platforms to launder money

Criminals employ a variety of methods to conceal the origins of illicit funds. The following are the top five most common money-laundering schemes in the cryptocurrency industry:

1. Combining services- Offenders take advantage of mixing services, which allow users to divide virtual assets, send them through a series of wallets, and then recombine them to appear legitimate.
2. Unregulated trades- Criminals frequently switch between cryptocurrencies to hide their tracks. They use cryptocurrency platforms with lax AML compliance policies, such as peer-to-peer exchanges, to convert “dirty” cryptocurrency to “clean” cryptocurrency while remaining anonymous. This was the scheme used in the Coincheck heist in 2018.
3. Platforms for gambling- Money launderers can place low-return bets on gambling sites that accept cryptocurrencies; they won’t win much, but they’ll get real money.
4. Money-laundering- Offenders frequently use money mules (people with a clean transaction history) to transfer or cash out illegal cryptocurrency. Money muling is a widespread money laundering technique in the cryptocurrency industry.
5. Prepaid cards- Prepaid crypto cards also facilitate money laundering by allowing criminals to convert “dirty” virtual assets into fiat money.

Even if offenders use money laundering schemes to conceal the origins of illicit funds, you can still track their activity using blockchain analysis. Financial Intelligence Units can track down which cryptocurrency platform facilitated money laundering and take legal action against it, even if the venue did not do so on purpose.

As a result, businesses must ensure that they can identify money laundering and other financial crimes. Let’s go over how to do it.

How can crypto businesses detect money laundering?

To ensure that a crypto business is not a front for money laundering, it must have at least the following three procedures in place:

1)Know Your Customer (KYC)- When 1) establishing a business relationship, 2) when an existing customer conducts an occasional transaction, and 3) in other circumstances specified by law, crypto businesses must conduct customer verification.
Verification typically entails gathering the customer’s name, address, and date of birth. However, depending on the jurisdiction, there may be additional requirements.

2)Transaction tracking- To better assess the money laundering risks that customers may pose, cryptocurrency businesses must implement an ongoing transaction monitoring system that detects specific money laundering indicators. Companies, for example, can examine wallet addresses and transaction hashes.

Why choose Surepass?

Surpass has created highly secure proprietary APIs to assist you with your identity verification tasks. You are only minutes away from using our solutions once you have completed your registration with us. Our APIs will allow you to automate manual processes and will be simple to integrate into your existing systems. Surpass enables companies to improve the efficiency of their regulatory reporting, risk, and data management processes, which is becoming increasingly important in the regtech industry. Our comprehensive verification-as-a-service offerings ensure that you remain in compliance.