Testing and opining on a range of financial transactions and operations

Bitcoin and other popular cryptocurrencies are trending to be used in cross-border money transfers outside the control of government authorities. Some retail banks are also testing cryptocurrency as an exchange method. However, no global consensus on regulations governing the transfer of funds using cryptocurrencies exists. This regulatory issue increases compliance costs and opens the door to miscreants looking to circumvent restrictions by moving to jurisdictions with no or weak compliance controls.

In this blog post, we have tried to explain money laundering and anti-money laundering laws (AML), Know Your Client/KYC requirements, and their role in AML and AML concerning cryptocurrency transfers. We also look at money laundering in the context of cryptocurrency use.

What is money laundering?

Money laundering may take criminal proceeds and convert them into legitimate cash and assets. For example, a money-laundering operation could use illegally obtained money to acquire real estate. This piece of property is then sold, which proceeds from this sale. Then they are retained on a company's books as a legitimate profit. In this process, the money goes through various stages of 'laundering' as described below:

Stages of money laundering

1. Placement: This is the phase when a criminal moves the illegal funds into a legitimate source of income. (For example, creating false invoices to route the money into a legitimate cash-based business.)

2. Layering / Structuring: This involves breaking down significant funds that are in bulk into smaller portions. The intention is that these small sections of transactions fall under the threshold of anti-money laundering regulations and won't set off any alarms.

3. Integration: The funds are integrated back into the criminal's legitimate financial accounts. Like the previous stages, this typically involves a series of smaller transactions.

What are Anti-Money Laundering (AML) Policies?

AML regulations are policies, procedures, and techniques that prevent money laundering and are implemented by various governments worldwide. Money laundering has three main stages, as mentioned above. AML policies require that financial institutions and businesses put various controls to monitor suspicious activities associated with these three stages. AML laws have been in place for a long time, and they have now been bolstered to include crypto transactions.

Existing organizations like the Financial Action Task Force (FATF) and the International Monetary Fund (IMF) have incorporated additional digital assets. Several new crypto forensic firms have been set up to monitor the illicit transfer of funds. Generally, certain entities, such as financial institutions, banks, and businesses, must report suspicious activities and fulfill various obligations associated with AML laws.

Red Flags

There are no set methods to trace illegal activities. However, certain red flags can be watched out for in user behavior. Some of these red flags are explained below.

-Transaction patterns are a giveaway of laundering; multiple transactions of small amounts, transactions that do not fit the customer's profile, frequent fiat transactions to cryptocurrencies with no business paper trail.

-The same IP address handles multiple exchange accounts.

-Discrepancies in documents during account creation.

-Frequent changes in identifying information

-Launderers also use money mules. Customers who make deposits that do not match their wealth profile or are not familiar with the financial products they are using.

-Source of the crypto funds should be analyzed. Transactions sourced from darknet sites or sites located in countries with high risks can be considered suspicious.

To conclude, fraudsters and money launderers have updated their skills to deceive in today's digitally backed economies. However, Anti-Money Laundering laws and regulations are broadly targeting criminal activities. The big challenge for today's governments is to balance the threat of disruption posed by a crypto-inclusive financial market with the benefits of the economic activity crypto-assets can bring to the economy. This balancing act may take years to resolve, as several issues posed by crypto assets- such as the degree of anonymity afforded to users and the volatility of cryptocurrency prices-do not look like they are close to being sorted out.

This regulatory issue increases compliance costs and opens the door to miscreants looking to circumvent restrictions by moving to jurisdictions with no or weak compliance controls. The aim of an AML compliance program is to detect, respond to, and eliminate inherent and residual money laundering, terrorist financing, and fraud-related risks. At Remitall Software, we understand and address the challenges to develop a strong AML compliance program that helps expose bad actors and stay safe from non-compliance fees. Our experienced and knowledgeable compliance officers implement a robust anti-money laundering program on solid foundations of regulatory experience.

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