If you have been following closely what is going on in the crypto market, then you definitely know a thing or two about the latest policies that are being implemented to stop the illicit transfer of funds using crypto. Many crypto exchanges and other financial enterprises have proposed serious measures to make sure that money laundering and other illicit transfer of funds doesn’t take place through crypto.
It is not a hidden secret that crypto transactions are anonymous, which means that no one can really trace who the sender or receiver was because of the perfect security that blockchain technology lends to the whole transition. That is why many people use crypto for the illicit transfer of money and to hide their income, so they don’t have to pay taxes and cheat the system out of the money that is really owed to them.
FATF, along with various other multinational organizations, have opted against money laundering practices, and to make the whole thing null and void, anti-money laundering rules are now in effect. If you are not acquainted with the term money laundering, then you must square your knowledge about it in order to move further in this article.
What is Money Laundering?
Money laundering is the practice of taking dirty money which was earlier set aside for paying taxes and other duties and is practically being hidden from the eyes of the government or to the organizations to whom this money is owed and then turning it into clean money. This is basically sending this bad money through multiple channels around the globe and creating a financial funnel through which the money passes and eventually comes off as cleaner or something that is earned by an individual through proper channels but, in reality, is the same money which is dirty and should have been paid to the government or other legal entities in the first place.
Anti-money laundering practices ensure that the money in question is not being washed away and so that the users or people behind the whole operation could get their hands on the money that was earlier owed to government agencies or taxation authorities. This is an additional measure that crypto exchanges have now taken in order to keep their operations seamless and safe for every customer and to tackle financial crime that is money laundering.
Because cryptocurrencies and transactions that take place on blockchain technology are completely anonymous, this adds to the overall problem of people getting away with illegal trades and transactions that have no fair value. The regulation of anti-money laundering practices on the other hand, relies completely on the monitoring of customer behavior and taking note of their digital as well as financial identities so that a proper infrastructure can be built.
How did AML Come into Effect?
As explained above, many times, anti-money laundering is a set of regulations and monetary laws that are there to detect the movement of illegal funds from one place to another and to stop their washing. The financial action task force did set up a complete infrastructure to stop the transfer of illegal funds from one place to another via digital means in 1989, and a pact was made to encourage the cooperation of international countries and financial enterprises.
Because of anti-money laundering policies, tax fraud and international smuggling of assets could be brought to an end. The standards, however, that are knitted into the financial regime and infrastructure of a country might differ from territory to territory and region to region, but a basic charter of these standards remains ideally the same globally. Due to the advancements in technology and the introduction of the crypto space, money laundering practices have been revamped, and people are using cryptocurrencies and blockchain technology to transfer their funds from one place to another via illegal means.
Anti-money laundering software systems have been developed by crypto exchanges and cryptocurrency developers to understand the malicious behavior of people who are typically involved in such activities, and these work by flagging any illegal or out of the context thing or activity that the software comes by. If there is suddenly a large transfer of money from one place to another and it is taking place consistently then software would be able to flag that activity and report it back to the proper authorities. Repeated inflows of cash into a particular account, and the cross-checking of certain users that are on the global watchlist help the software to remain accurate and just.
These anti-money laundering practices are not practically limited to cryptocurrencies but also extend their reach to Fiat and other dedicated monetary alternatives. The anti-money laundering system has been given a tough time by blockchain technology and all the innovation that is taking place in that space, but it is now fair to say that a proper infrastructure has been built, and a thorough compliance measure is now in effect to tackle such odd behaviors and money laundering issues on a wider scale.
A lot of people enjoy the anonymity factor that decentralization and cryptocurrencies have brought them, but in the long run, it is not that beneficial if the platform is used for illegal or illicit financial activities. Therefore a need to enhance the security of the system along with proper AML policies is the first priority that regulatory enterprises across the world are entertaining at the moment.
Major Differences Between AML and KYC
KYC or know your customer is a standard procedure that a multitude of crypto exchanges and financial enterprises out there employ who are potentially in charge of regulating and orchestrating transactions on behalf of the users. According to this, every user who takes part in a dedicated transaction has to give a relative exchange or financial enterprise in question their personal data, including their name, address, date of birth, and other particulars that can be used to run a background check on them.
This allows the enterprise in question to verify the identity of the user and to make sure that they are not on a dedicated watchlist for money laundering or other such illicit acts. The process develops accountability for particular transactions that were carried out by the user in question. You can say that KYC is customer due diligence and is a wider part of anti-money laundering because to stop money laundering, it is first essential to know who the person is that seems to be carrying out these transactions or illicit financial rulings.
KYC helps in making sure that anti-money laundering practices, in effect, are able to investigate suspicious behavior by feeding the software with relative data about multiple users so that a deep comparison regarding their behavior on financial exchanges can be made.
A more widely accepted definition of money laundering is when certain people try to make illegal funds appear perfectly legal and come from a valid source that can be defined via investments, financial records, and other business streams through which the money has been laundered. AML practices are not practically challenged by any sovereignty or country by being refined to make sure that these reflect on the present financial laws and setup of the country in question.
A shocking aspect of money laundering is that the bad money just gets mixed up with the good money, and at some point, it becomes difficult to tell which is which, and that poses a serious problem for the authorities in charge of the money-laundering investigation. Sometimes they can’t even tell what particular businesses these money launderers use for the sake of laundry or cleaning the money in question.
To understand more closely how money laundering takes place, you must facilitate yourself with three particular stages of money laundering. The first one is called placement, and it involves the introduction of dirty money to a properly established financial system primarily dealing in cash. The business continues to work with both bad and good money, and the books come out perfectly clean depicting only money that was earned from the business in question. The next step is called layering, which involves the movement of these illegal proceeds around and introducing them into multiple financial elements so that these become more difficult to track.
If something can’t be tracked properly, then there is literally no proof of connecting the money to a dirty source which is why many people out there render the services of cryptocurrencies on the basis of their extreme anonymity and having no record of their operation whatsoever except what is made available on the blockchain and is actually public data and that is not much to go with. The third and final step is known as integration which involves the use of legal investments and other potential financial setups for re-injecting the dirty money back into the economy.
Everyone seeing the flow of that money is going to see it as white money that is from a potential legal business, and that is how money is laundered and rendered clean of any involvement that it might previously have with a bad business or illegal activity.
How do AML Practices Prevent Money Laundering?
As explained earlier, anti-money laundering policies are going to work differently for different countries and territories, but when it comes to cryptocurrencies and crypto exchanges, these work in a rather synchronous fashion. To understand how these regulations take effect and put a stop to money laundering, you might have to consider the three elementary steps involved in the process. First of all, suspicious activities taking place on a crypto exchange, such as massive inflow and outflow of cash from dedicated accounts, are flagged and duly reported.
Along with this illicit behavior of users, such as making consistent withdrawals or adding too much crypto in a dedicated wallet, whereas the wallet in question remained under the radar for being an extremely low activity account, is potentially a dedicated example of how these accounts and people in charge of the money laundering gets flagged. Moving on, an investigation is opened for the users of the account in question, and for the time being, until the investigation is over users can’t deposit or withdraw any more funds from their accounts.
This particular action is going to cut them off at the source, which means that they can’t make any more transactions or money laundering activities at all until the investigation is complete and they are in the clear. A suspicious activity report is made by the investigator, and all the findings are submitted both to the crypto exchange at which the activity took place and to the concerned authorities who are in charge of keeping the anti-money laundering practices intact. Last but not least if the evidence of illegal activity against a user is confirmed, then the relevant authorities would be notified, and the evidence which was found and crosscheck during the investigation is handed over to them. Eventually, if the crypto that was used to move laundered money is found somewhere or the stolen goods are recouped, then these would be returned to the original owners in a practical time frame.
Crypto exchanges, on the other hand, take a more direct approach with anti-money laundering policies because of all this regulatory pressure that is applied to them and the authorities always breathing down their necks. It is standard for crypto exchanges to run a deep background check on each and every user, and if needed, then the check might be run a couple more times to ensure that the user is actually clean and there is nothing misguiding about them. This way, these crypto exchanges remain perfectly in sync with anti-money laundering policies as dictated by dedicated financial as well as regulatory channels of the country or territory they are operating in.
How do Bad Guys Launder Money?
The three steps of money laundering have been explained in grave detail earlier; if you want to have a much deeper insight into how these people are able to pull this great illicit feat, then try to catch up with all the information that will be provided shortly. A more traditional way of pulling the laundering of money is to use fake receipts and then try to mix them along with genuine receipts in a cash-based business. It can be a restaurant, a hair salon, a gaming arcade, or something where business is conducted on a cash basis, and checks or other forms of digital payments are not entertained.
The people who are laundering money would then try to buy some of the receipts with dirty money and then mix these off with original receipts. This way, they will create a humongous mix-up of these receipts, and at some point, it would become extremely difficult or even impossible to know which is which. When something can’t be distinguished from its counterpart, there is no way to prove that something illicit or illegal is going on.
Other than that, third-party payment processors and digital apps have also made it quite easier for people to launder money in small amounts because usually, there is no background check whatsoever when it comes to using these payment processors. This way, they are able to wash their dirty money through potentially accurate financial channels. You might be assuming that as the whole transaction is completely digital wouldn’t it be possible to trace it back to the source?
Yes, it is something that can be done, but then again, a lot of confusion has been created in terms of making consistent and relatively smaller digital payments that are just too much work for a regulator or an agency looking into the matter to distinguish them as either genuine or fraudulent and illicit.
Other than that, cryptocurrencies have provided these money launderers with the required anonymity the need to shadow their money-laundering operation. If you are well acquainted with how cryptocurrencies and decentralization work, then you know how difficult it is to track the money that was transacted through crypto because of literally having no footprint of money at all.
You can, however, follow a blockchain paper trail, and it might lead you to a particular exchange in question if you are lucky enough, and from there, you might be able to get to the account that was used to launder money which would ultimately lead you to someone’s name or an actual person in charge of all this.
But it is relatively a shot in the dark, and it might not hit the target. VPN technology is another factor that these criminals are extremely fond of using because it repurposes the IP address of these people using a digital medium to transfer money from one place to another. So if their IP can’t be traced to a particular location, it means that the person in question can’t be found. But it isn’t like there is no stopping these people because the likes of anti-money laundering policies and know your customer approach is now helping both the traditional and crypto environment to tackle this issue at great length and to make sure that the evil of money laundering can be nipped in the bud.
