Cryptocurrency Money Laundering: The Importance of AML Cryptocurrency Compliance

The global cryptocurrency market capitalization, a measure of the value of cryptocurrency in circulation, is around $1 trillion at the time of writing. Although some way off the heady days of late 2021 when the global market cap hit $3 trillion, crypto remains a trillion-dollar ecosystem supporting novel decentralized business models and financial services.    But cryptocurrency’s strengths as a decentralized asset make it as attractive to money launderers as it is to legitimate businesses. Last year, cryptocurrency money laundering transactions amounted to an estimated $8.6 billion, although it’s possible that figure significantly underestimates the true impact.    

Why Do Money Launderers Use Cryptocurrency?

Money launderers want to exchange illegally obtained assets for “clean” assets. They employ many techniques to do so, but the primary goal is to obscure the asset’s origin and establish what appears to be a justifiable history. Cryptocurrencies have many legitimate uses, but they also attract launderers because these transactions can be anonymous, fast and automated. Additionally, cryptocurrencies facilitate cross-border transactions while bypassing the controls of traditional financial institutions.   Money laundering follows a three-step process:  

• Placement, which introduces illegally gained assets into the financial system
• Layering, which implements a complex series of transactions to obscure the asset’s origins
• Integration, which puts the asset to work in the financial system by, for example, using it to buy real estate or passing it through a legitimate business

  Cryptocurrencies and the ecosystem of marketplaces and exchanges can facilitate each of these stages. Launderers can place fiat money by exchanging it for crypto on cryptocurrency exchanges. They can place cryptocurrencies by moving them from wallets associated with unlawful activity to exchange wallets. They can also exchange mainstream cryptocurrencies with traceable transaction histories for “privacy coins” engineered to obscure transaction histories and make it impossible to establish an audit trail.   Layering is the most complex money laundering stage, and it’s here that cryptocurrencies are particularly useful. Perhaps the simplest technique is creating many different cryptocurrency wallets and sending crypto from one to the other, often in small chunks, obscuring the crypto’s origins in potentially thousands of transactions. Additionally, launderers can use blender, tumbler and mixer services. These pool cryptocurrencies from multiple sources and carry out thousands of random transactions via wallets and fake exchanges. Eventually, the crypto is returned to the original owner in random increments at randomly determined times, making it extremely difficult to establish its origin.   Finally, once its origins are obscured, the cryptocurrency can be reintroduced into the financial system. This might be as simple as exchanging it for fiat on a cryptocurrency exchange or via a cryptocurrency ATM. Other methods might include investing in Web3 and decentralized finance businesses, investing in art or NFTs, using crypto to buy goods and services, or using it as collateral to borrow other cryptocurrency assets.    

Cryptocurrency Anti-Money Laundering Compliance Risks

The Financial Action Task Force (FATF) considers many businesses that offer cryptocurrency services to be virtual asset service providers (VASPs). VASPs are subject to the same anti-money laundering (AML) requirements as traditional financial organizations. If your business engages in any of the following activities on behalf of clients, it may be considered a VASP for AML purposes:  

• Exchanging cryptocurrencies for fiat currencies
• Exchanging one cryptocurrency for another
• Safekeeping cryptocurrencies

  We explain cryptocurrency regulatory compliance risks in more detail in the following:  

• AML Cryptocurrency Information for Financial Institutions. 
• The Importance of KYC for Crypto
• The Travel Rule for Crypto

   

How to Mitigate AML Cryptocurrency Risks

  Cryptocurrency money laundering is on the rise because it is difficult for businesses to implement effective AML processes. AML becomes more complicated when launderers can easily and quickly carry out thousands of transactions across different platforms, accounts and cryptocurrency wallets.    However, sophisticated modern cryptocurrency AML techniques can help Web3 and other cryptocurrency businesses mitigate cryptocurrency AML compliance risks:   

• Rigorous identity verification and cryptocurrency KYC processes can discourage launderers from placing crypto on your platform. 
• Real-time transaction monitoring can help your business to identify transactions that create compliance risks. 
• AML risk scoring can help you to identify risk factors and build effective risk models. 

  View our crypto AML checklist for additional information on the key anti-money laundering actions cryptocurrency exchanges must take to comply with AML cryptocurrency regulations in the U.S.   Alessa can help your business to minimize cryptocurrency AML compliance risks. Contact us for a free product demo to learn how our solutions can help your business implement effective crypto AML processes.