TL;DR
AML regulations attempt to stop the illegal laundering of illicit funds. Individual governments and multinational organizations like the FATF legislate against money laundering activities.
Money laundering takes โdirtyโ money and turns it into clean money. This can be done by disguising the origins of the funds, mixing them with legitimate transactions, or investing them into legal assets.
Crypto is an attractive way to launder money due to its privacy, difficulty in retrieving funds, and underdeveloped legislation. Large-scale seizures of crypto show criminals regularly use it to launder huge sums.
Binance and many other crypto exchanges track suspicious behavior as part of their AML compliance and report it to law enforcement.
Introduction
Anti-Money Laundering (AML) regulations help combat the washing of illegal funds. They are a requirement for centralized cryptocurrency exchanges to help keep customers safe and combat financial crime. Due to the anonymous nature of cryptocurrency, its regulation relies heavily on monitoring customer behavior and identities.
What is AML?
AML consists of regulations and laws that deter the movement and washing of illegal funds. AML is closely associated with the Financial Action Task Force (FATF) set up in 1989 to encourage international cooperation. For example, AML measures target terrorist financing, tax fraud, and international smuggling. AML differs by country, but there is a global effort to align on standards.
As technology has progressed, so have methods for money laundering. As a result, AML software typically flags behavior that may be seen as suspicious. These flags and measures include large transfers of money, repeated inflows of funds into an account, and cross-checks against users on watchlists. AML doesnโt just apply to cryptocurrencies. Any asset or fiat currency can be monitored and held to AML regulations.
Itโs taken some time for regulation to catch up with cryptocurrencies. As blockchain technology is constantly innovating, AML procedures change regularly along with compliance measures. However, this isnโt always seen as positive. Many cryptocurrency enthusiasts value the assetโs anonymity and decentralization. For this reason, increased regulation and documentation of usersโ identities are sometimes seen as contrary to cryptoโs ethos.
Whatโs the difference between AML and KYC?
Know Your Customer (KYC) checks are an obligation for financial institutions and service providers as part of AML laws. KYC requires a user to submit personal information verifying their identity. This process creates accountability for any financial transactions made by the user. KYC is a proactive part of AML and falls under customer due diligence. This contrasts with other AML practices that reactively investigate suspicious behavior.
What is money laundering?
Money laundering is when criminals make illegal funds appear as legitimate money, investments, or financial assets. The proceeds come from crimes such as drug trafficking, terrorism, and fraud. Laws and regulations combating money laundering differ by country. However, increasing alignment on rules is a goal of many jurisdictions and the FATF.
There are three stages to laundering money:
Placement: Introducing โdirtyโ money into the financial system, such as with a cash-based business.
Layering:ย Moving illegal funds around to make the tracking of them difficult. Using crypto is one way to hide the origin of โdirtyโ money.
Integration: Using legal investments and other financial channels to reintroduce the โdirtyโ money into the economy.
How do people launder money?
There are multiple ways to achieve the three steps above. A traditional method has been to create fake receipts for cash-based services in shops, restaurants, and other businesses. An individual or organization uses the businesses as fronts for money laundering. Criminals create counterfeit receipts and pay for them with โdirtyโ physical cash, turning them into legitimate income. This inflow is then mixed in with genuine transactions to make it difficult to distinguish between the two.
However, itโs now common for illegitimate funds to be digital rather than physical cash. This difference changes the methods used to launder money. There are now even more options to hide and wash โdirtyโ money than before. For example, you can directly transfer money without the use of a bank. Payment networks like Paypal or Venmo provide another layer for launderers to use and regulators to monitor.
Anonymizing technology such as VPNs and cryptocurrencies makes the situation even more challenging. Pinning down a specific individual to laundering activity can be impossible. One method to fight this has been tracking crypto โto the edge.โ By following a blockchain โpaper trailโ to an exchange, you can tie the laundered funds to a crypto exchange account or bank account under someoneโs name. However, purchasing crypto in cash or through peer-to-peer services makes tracking the entrance or exit of dirty money into the financial system difficult.
Another favored method is to use online gambling sites. Criminals deposit the money they want to launder in an online gambling account. They then proceed to place bets to make the account look legitimate. Finally, they remove their funds and end up with clean money. Typically this is done with multiple accounts as not to arouse suspicion. A single account with large amounts of funds might flag up an AML check.
How do AML measures work?
You can break down the basic activities of a regulator or cryptocurrency exchange into three steps:
1. Suspicious activities, such as large inflows or outflows of funds, are automatically flagged or reported. Inconsistent behavior, such as an increase in the number of withdrawals from a typically low-activity account, is another example.
2. During or after an investigation, the userโs ability to deposit or withdraw funds is stopped. This action cuts off any more possible laundering activities. The investigator then makes a Suspicious Activity Report (SAR).
3. If there is evidence of illegal activity, the relevant authorities are informed, and the evidence is supplied. If stolen funds were found, they would be returned to their original owners when possible.
Cryptocurrency exchanges typically take a proactive approach to AML. With the vast amount of compliance pressure placed on the crypto industry, itโs standard for exchanges like Binance to be more vigilant and cautious than required. Transaction monitoring and enhanced due diligence are the two key tools in fighting money laundering schemes.
What is the FATF?
The FATF is an international organization founded by the G7 to combat the financing of terrorism and money laundering. By creating a set of standards that governments worldwide should adhere to, launderers find it increasingly difficult to find jurisdictions to operate in.ย
Cooperation between governments also improves the sharing of information and tracking of launderers. Over 200 jurisdictions have committed to following the FATF Standards. The FATF monitors all participants to make sure theyโre sticking to the regulations with regular peer reviews.
Why do we need AML in crypto?
Due to cryptocurrencyโs pseudonymous nature, criminals use it to launder illicit funds and commit tax evasion. The regulation of cryptocurrency improves its overall reputation and makes sure that appropriate taxes are collected. Improvements in AML benefit legitimate crypto users, although it does require extra effort and time investment by all parties.
According to Reuters, criminals laundered an estimated $1.3 billion (US dollars) of โdirtyโ money through crypto in 2020. Crypto is suited to money laundering for several reasons:
1. Transactions are irreversible. Once youโve sent funds via the blockchain, they cannot be returned unless the new owner sends them back. The police and regulatory agencies cannot retrieve funds for you.
2. Cryptocurrency offers anonymity. Some coins like Monero prioritize the privacy of transactions. There are also โtumblerโ services that layer crypto through different wallets to make its trail difficult to track.
3. Its regulation and taxation are still uncertain. Tax authorities globally still struggle to tax crypto efficiently, and criminals exploit this.ย
Crypto money laundering examples
Authorities do have some success in tracking and catching criminals who wash their funds via crypto. In July 2021, UK police seized roughly $250 million of crypto used for money laundering. This seizure was the largest crypto seizure to date in the UK, beating a previous UK record of $158 million set just weeks before.ย
In the same month, $33 million was seized by Brazilian authorities in a sophisticated money-laundering operation. Two individuals and 17 companies were involved in purchasing crypto to hide illegally sourced funds. The criminal organization involved set up the companies with this sole purpose in mind. The cryptocurrency exchanges also cooperated with the criminal organizations knowingly and did not follow correct AML procedures.
How does Binance support AML?
Binance has proactively implemented numerous AML measures to help tackle money laundering, including expanding its AML detection and analytics capabilities. These efforts fall under its AML compliance program. Binance also works closely with international agencies in helping bring large cybercriminal organizations to justice.
For example, Binance played a role in providing evidence that led to the arrest of multiple members of the Cl0p ransomware group. Binance flagged suspicious transactions and criminal activity that were then investigated. Authorities used the research in cooperation with international agencies to identify money launderers from ransomware attacks, including the Petya attack.
Closing thoughts
While AML adds time to the process of trading cryptocurrencies, itโs important to keep everyone safe. Unfortunately, governments and organizations canโt get rid of all money laundering activities, but the implementation of regulations certainly helps. Technology is improving at spotting possible money laundering, and serious crypto exchanges are taking their role seriously in helping to tackle crime.