Abstract

The structure of the financial industry is fast evolving from conventional and traditional banking transactions to digital or virtual currencies in the form of cryptocurrency. Despite its innovation and far-reaching benefits, it poses some challenges and creates new financial crimes, whereby criminals can now harness technology to launder money and cover their tracks virtually. This can be seen on cryptocurrency gambling websites, money laundering crypto ‘mixer’ platforms (such as Coinmixer, DarkLaunder, and Chipmixer), and exchanges.

Introduction

Money laundering in the era of cryptocurrency is more convenient, although more complicated, than the conventional laundering schemes.  The first step of the virtual cleansing process is called “layering,” according to CipherTrace. This involves moving money around the cryptocurrency system until the web of transactions is sufficiently difficult for investigators to trace. Once the money’s history is appropriately murky, the funds can be integrated into the mainstream financial system with little risk.

The sites used for transactions dealing with Cryptocurrency are highly unregulated, most of which have little to no regulation for “Know Your Customer” making it increasingly difficult for investigation on the trail of money moving in and out of these services. Therefore governments around the world are working incessantly on creating Regulations aimed at halting the global wave of money laundering through virtual currencies. The Fifth Anti-money Laundering Directive (AMLD5) in Europe and FinCEN’s Final Rule in the USA makes it clear that virtual currencies and the exchanges on which they trade are subject to anti-money laundering legislation.

Proper KYC procedure involves aggregation of a customer’s Personal placeable data (PII): full name, date of birth, and address. This is often verified against customer’s official government-issued documentation (e.g.passport or driver’s license). The address can be proved by the lease contract or utility bill.

Unfortunately, transactions involving crypto exchanges are not yet active in compliance with  AML policies. In March 2019,a report by confirm revealed that 69% of the 216 crypto exchanges do not have “complete and transparent ” know-your-customer (KYC) procedures in place and only 26% have ‘high’ levels of anti-money laundering (AML) procedures. A good number of those exchanges have improved their policies and procedures, however there are new players who highly disregard AML/KYC.”

Some AML programs include foolproof KYC processes to identify and verify users. With this, authorities hope to root out suspicious activity in the crypto sector. However, for crypto exchanges and wallets, this also means more expensive onboarding, peppered with friction, and can be vulnerable to data breaches. Unscalable manual KYC processes simply aren’t going to cut it in a world where regulation is increasing at an alarming rate.

Conclusion

There is need for solid and mandatory AML program with KYC rules  to  help identify and safeguard against financial crime and money laundering.