Cryptocurrency is an alternative to traditional fiat currency. It is a digital asset designed to work as a medium of exchange that uses cryptographical functions to conduct secure financial transactions.[1]. Apart from their obvious use case as money, cryptocurrencies can significantly increase global economic participation and protect against government overreach.
In fact, the decentralized nature of cryptocurrencies brings revolutionary changes in the payment system, facilitating direct transfers between two parties via private and public keys, allowing users to avoid the steep charges of traditional financial institutions.
However, a discerning look reveals that Cryptocurrencies can provide means for terrorist organizations and criminal associations to launder and relocate wealth across the globe quickly, easily, and privately. As the global use of cryptocurrencies continues to gather momentum, what are the potential risks and implications for compliance professionals? How can they stay a step ahead of money launderers?
- Cryptocurrency money laundering
The process usually starts at the placement level, including the disposal of cash and assets derived from criminal activities into the financial systems. And, since cryptocurrencies are digital and anonymous, it easy to take funds from multiple parties, to “co-mingle” them, and last but not least, to redistribute them.
This activity, usually called “mixers,” also known in the banking world as layering, obscures the origin and the receipt of funds and allows customers to convert them into fiat currency under less scrutiny, placing the funds into the financial ecosystem in a legal manner, also known as placement.
The higher the volume of black cryptocurrency that goes into the financial system and the more it is layered, the harder it becomes for investigators to see through the web of action and trace a path back to the source.
- Anti-money laundering initiatives
With the rise of protected transactions and greater frequency in laundering money with cryptocurrency, the pressure to combat money laundering involving cryptocurrencies increased. This includes the following:
- Adoption of strict AML procedures in financial institutions:
In the modern globalized world, the use of everyday activities of legal entities to have ill-gotten earnings “clean” is a common practice among money launderers groups. Therefore, financial institutions must establish a reliable control system, permitting them to distinguish normal customer behavior from possible unusual money flows and transactions. Higher risks transactions are predominantly found when customers whose major source of funds are derived from excessive inflows and outflows that do not seem to comply with the customer’s known source of funds or in situations where multiple customers send similar values similar timeframe to digital currency exchanges, etc.[2]
- Transaction monitoring
By following effective TM systems, financial institutions can detect and assess customers’ transactions over time to monitor unusual or suspicious activities. These patterns can later be compiled to formulate powerful intelligence for law enforcement.
TM system should nonetheless consist of: “A well-calibrated framework,” “a robust risk awareness,” “meaningful integration,” and an “active oversight.”[3].
- Improving regulation
The collaboration between international standard-setting bodies such as the Financial Action Task Force (FATF) is crucial to effectively combat money laundering by crypto cleansing with a set of international standards.
Some of the regulations imposed require cryptocurrency exchangers, digital wallet providers, and other firms to send customer data to institutions receiving digital funds transfers. Other regulations mandate that all e-wallets be registered to an existing person so that anonymous or pseudo-named wallets are no longer possible.
- Using blockchain as a solution
A blockchain is an online distributed public ledger, enabling “the supervision, validation, and recording of the complete history of each transaction.”[4].
As opposed to fiat currency, cryptocurrency is almost impossible to forge as each type carries its unique characteristics, verified through end-to-end miners. Without verifying all transaction phases, including the departure wallet, the destination wallet, and the amount, the transaction would be immediately blocked without any human interference.
Making use of the eventually help to overcome anti-money laundering challenges but come at the price of higher transaction cost and less anonymity.
[1] Andy Greenberg (20 April 2011). “Crypto Currency.” Forbes.com. Retrieved 8 August 2014
[2] Pascal Sprenger and Franzisca Balsiger (June 2018). “Anti-money laundering in time of cryptocurrency.” Kpmg.ch
https://assets.kpmg/content/dam/kpmg/ch/pdf/anti-money-laundering-in-times-of-cryptocurrency.pdf
[3] “Guidance for effective AML/CFT transaction monitoring controls”
[4] Pascal Sprenger and Franzisca Balsiger (June 2018). “Anti-money laundering in time of cryptocurrency.” Kpmg.ch
https://assets.kpmg/content/dam/kpmg/ch/pdf/anti-money-laundering-in-times-of-cryptocurrency.pdf
