AML and KYC Guidance for Crypto Exchanges and Wallets

Cryptocurrencies and crypto exchanges have entered our lives in recent years and have grown tremendously. While the total market value of cryptocurrencies was below $ 18 billion until 2016, it has risen above $ 100 billion since 2017. With the growth of cryptocurrencies, the number of crypto exchanges also increased significantly.


In this article, we will explain the money laundering and terrorist financing risks faced by the crypto industry and how the crypto exchanges can ensure Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance.


Why is the Crypto Industry Facing Money Laundering and Terrorist Financing?


The rapid growth in the crypto industry brought some disruptions with it. Criminal activities such as money laundering and terrorist financing pose a major threat worldwide. Criminal organizations aim to hide the source of the crime by laundering the money they get from crime. Criminal organizations and terrorist groups provide financial income to their organizations with money laundering and terrorist financing activities they carry out, and they damage society, the environment and the states by committing larger crimes.


All efforts to prevent money laundering are called Anti-Money Laundering. Regulators established to prevent financial crimes have published regulations and guides on how to prevent financial crimes from past to present. The crypto industry was late to fulfill AML obligations due to the controversy of its rapid growth. Crime organizations took advantage of the complexity of crypto AML regulations and attempted to carry out money laundering and terrorist financing activities over crypto exchanges instead of more established institutions such as banks.

"Criminals laundered $2.8 billion in 2019 sing crypto exchanges, finds a new analysis"


AML & KYC Compliance Processes for Crypto Exchanges and Wallets


After these threats faced by crypto exchanges, AML regulators took action and published AML recommendations and obligations for crypto exchanges. In this process, some regulators have issued new AML regulations for crypto exchanges, while some regulators have included crypto exchanges within existing AML regulations and laws. Still, work on the AML compatibility of crypto exchanges is not finished. As the process is more recent, governments and regulators continue to work on anti-money laundering and publish new regulations.


FATF Recommendations for Virtual Assets and Virtual Asset Service Providers


FATF completed its recommendations on cryptocurrency regulation on June 21, 2019. "Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers" explains how to work countries, regulators and virtual asset service providers must take on virtual assets. According to the FATF guideline, Virtual Asset Service Providers must apply a risk-based approach and risk-assessment like other financial institutions. Countries that are members of FATF are responsible for the implementation of these measures. These measures in the guide are expected to ensure the transparency of virtual asset transactions and keep funds related to crime and terrorism away from the crypto industry.


Risk-Based Approach to Virtual Assets


Virtual assets such as blockchain, bitcoin, crypto assets, virtual currencies have the potential to radically change the financial environment. Virtual assets have many potential benefits, such as facilitating, speeding up and cheapening of payments. However, with its features such as speed, global reach and anonymity, it has become a new financial tool for those who want to escape regulators and supervisors. Therefore, virtual assets faced the risk of being a tool to be used for financial transactions of criminals and terrorists.


After discussions about virtual assets, some governments made regulations about virtual assets, while some countries completely banned virtual assets. Countries going to regulate virtual assets could not act fast enough and could not fill the gaps in the regulatory system.


5AMLD - A Guide for Virtual Asset Service Providers in Europe


It was announced that the 5th AMLD published by the European Union in 2018 will be applied to virtual currency exchange platforms and custodian wallet providers. The European Union is taking solid steps together with FATF to combat financial crime. It does not hesitate to impose fines on organizations that do not meet their obligations. In the rest of the article, we will explain how virtual assets such as crypto exchanges should serve according to the European Union and FATF standards and the precautions to be taken.


What You Need to Know About Regulations of Cryptocurrency


AML Compliance Program of Cryptocurrency Exchanges


One obligation that crypto exchanges face is to have an Anti-Money Laundering compliance program like other banks and financial institutions. The key to an AML compliance program in FATF and EU standards is the "risk-based approach". In addition to this, in order for an AML compliance program to achieve its goal, it must work perfectly from start to finish. The compliance program of cryptocurrency exchanges must be run by a qualified AML compliance officer. Because businesses can face heavy fines and administrative penalties due to failures in AML compliance.


How to Build the AML Compliance Program


Customer Onboarding Process Under KYC and AML Obligations


Today, the customer onboarding process is the first step to creating a good customer experience. Therefore, businesses aim for their customers to open accounts quickly, easily and smoothly. However, businesses must protect themselves from risks and fulfill their obligations in the customer onboarding process. Crypto exchanges have to perform customer account opening processes under AML and KYC requirements, according to European Union regulations and Financial Action Task Force recommendations.


Customer Onboarding Process Under KYC and AML Requirements


Know Your Customer Requirements for Crypto Exchanges


The purpose of Know Your Customer procedures is for the business to recognize the person who will become the customer. If we talk about how this happens in general, the business collects customer data during customer account opening and checks the accuracy of this data. In this process, the accuracy of the data is as important as collecting the data. Because, If the data is not correct, all checks to be performed under the AML compliance program will lose their functionality. Today, there are various software like Sanction Scanner that helps verify this data.


Some data collected are (These data may vary from region to region):

  • Customer’s full name
  • Customer’s date of birth
  • Proof of customer address
  • Customer ID

Implementation of CDD Procedures


Risky customers are headaches for all businesses. In fact, the definition of a risky customer is somewhat broad. While businesses cannot work with some customers that seem risky, there is no situation that prevents them from working with some risky customers. Customer Due Diligence procedures are the process by which businesses control their customers and collaborators. Crypto exchanges are required to perform a risk assessment by implementing CDD procedures.


How is the customer's risk level determined?


  • It is checked whether the customer is in the list of sanctions, wanted or banned countries.
  • It is checked whether the customer is connected with any terrorist organization.
  • It is checked whether the customer is a politically exposed person.
  • It is checked whether the customer has news in the adverse-negative media data.


Read:

AML Screening Solution for Cryptocurrency Exchanges - Case Study


Transaction Monitoring for Virtual Assets


In the virtual currencies world, transaction monitoring tools that automatically monitor customer behavior enable crypto exchanges to detect suspicious transactions. Crypto exchanges examine customer activities and detect the high-risk activities of their customers. It is mandatory for VASPs to control customer transactions in accordance with AML / CFT regulations.


What is AML Transaction Monitoring?


AML Screening Solution for Crypto Exchanges and Wallets


Our AML Screening and Monitoring tool provides crypto exchanges to control their customers in sanction, PEP and adverse media data. Cryptocurrency exchanges can perform a global comprehensive risk assessment by performing checks on more than one thousand five hundred sanction and PEP lists of more than two hundred countries. With our AML Screening Service, businesses can meet global and local AML obligations and be protected from regulatory penalties. With our global sanction, PEP and adverse media data, we offer solutions that meet the AML needs of businesses in every region of the world. We strengthen your business' AML compliance globally and locally by developing our solutions according to the Financial Action Task Force and European Union regulations.

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