Money-laundering in Crypto Q+A

In the UK, why do you think most of the crypto firms failed money laundering/counter-terrorism standards? Is it a lack of expertise in these organizations or something else?

In most cases a lack of expertise and internal process. Frustratedly, many UK-based crypto firms were unable to provide sufficient evidence that they had adequate levels of know-your-customer (KYC), and a robust anti-money laundering (AML) and anti-terror financing solution in place.

The registration process is not impossible, The Financial Conduct Authority (FCA) does provide feedback and clear expectations. Last month the FCA reported that 41 had been approved by the regulator from the 300 applicants received.

There is an opportunity to reapply so it is important for firms to reach the required level and then evolve with the latest FCA guidelines and regulations to prevent exposing their businesses to the fraud, financial crimes, and Ponzi schemes that have made a mockery of out the market.

What interesting trends are you seeing with regard to crypto and money laundering?

There are emerging trends in crypto that leave the door open for money laundering but regulators are closing the net.

Cryptocurrency can provide a vehicle for money laundering and a front for some of the world’s worst crimes – including human trafficking, tax evasion, internet scams, and sanction violations. Its victims are often the poorest and most vulnerable in society.

Increased use of decentralized exchanges (DEXs) that offer a higher level of anonymity compared to centralized exchanges. This can make them attractive to individuals looking to launder money.

The use of privacy coins and crypto-mixers offer a higher level of privacy. Transactions on these networks can be difficult to trace, making it easier for criminals to launder money.

In response, regulators are taking steps to increase regulatory oversight of the industry and to better monitor transactions for signs of financial crime. Blockchain analysis tools are becoming more sophisticated, allowing regulators and law enforcement agencies to track and trace cryptocurrency transactions more effectively. This is helping to reduce the anonymity of cryptocurrency transactions and making it easier to detect money laundering and other financial crimes.

Are smaller exchanges doing enough to protect against money laundering?

There is some progress but not nearly the levels required. Keeping the user safe from financial crimes is paramount. By adopting cutting-edge electronic verification (EV), a small crypto exchange can check the identity of a user, safeguard assets, and enforce accountability.

Common practices such as requesting an ID document are no longer sufficient. Not only do they not meet know-your-customer (KYC) and AML standards, but they can also leave the door open for identity theft.

Perpetual know-your-customer (PKYC) is a far more dynamic approach that’s better suited to the fast-paced, ever-changing crypto landscape. Reactive checks are replaced with proactive real-time monitoring, utilising hundreds of data sources including credit reference agencies to continually update client information and highlight any potential red flags.

Electronic verification (EV) is a technology advancement that the digital asset industry cannot ignore to manage their compliance responsibilities moving forward.

Crypto exchanges should be prepared to cooperate with law enforcement agencies when required. This may involve sharing information on transactions or customers, or working with law enforcement on joint investigations.

What can the National Crime Agency, and other global law enforcement agencies, do to stop more money laundering with crypto?

The regulators and law enforcement agencies can work together to improve their understanding of the crypto ecosystem and the methods used by criminals to launder money. This may involve working with industry experts, conducting research, or monitoring online forums and dark web marketplaces.

Dedicated blockchain analysts can use tools to track and trace cryptocurrency transactions and to identify individuals or entities involved in money laundering.

Global law enforcement agencies can take enforcement action against individuals and entities involved in money laundering in the crypto space. This may involve arresting individuals, seizing assets, or disrupting the operations of criminal networks.

Agencies can work to educate the public about the risks associated with crypto and the importance of using reputable exchanges that comply with AML and CFT regulations. This can help to reduce the demand for illicit services and to prevent people from unwittingly participating in money laundering.

In your opinion, when did cryptocurrency become a popular way to launder money for criminal organizations? Is this something we know?

Cryptocurrency has been a popular way to launder money for criminal organizations since adoption in the mid-2010s. As cryptocurrencies gained in popularity and value, criminals were provided a largely unregulated method to launder money and conceal illicit activities. The decentralized and anonymous nature of crypto, combined with the ease of cross-border transfers, made it an attractive choice for criminal organizations looking to move large sums of money quickly and discreetly.

Over time, as cryptocurrencies have come under scrutiny by regulators, their use for money laundering has become more difficult. However, criminals continue to find new ways to use crypto for money laundering. As a result, it remains a challenge for law enforcement agencies and financial regulators to detect and prevent money laundering in the crypto space.

To find out more about anti-money laundering and electronic verification, visit: https://www.smartsearch.com/