Avoiding Money Laundering Risks in Cryptocurrency Industry

In a couple of years, cryptocurrencies have exploded and are being used for transactions around the world. Due to its core nature of anonymity and lack of regulation, the cryptocurrency industry soon became the hub for illegal activities, the majority of which consisted of money laundering.

Since the industry was being targeted heavily, crypto businesses, regulators, and FIs adopted stringent security measures to reduce the rate of fraud. As of today, less than 1% of all Bitcoin transactions are made up of illegal activities. The same number was 35% back in 2012.

Bitcoin may be the biggest name in the crypto industry, it surely isn’t the only currency being used to launder money and destabilize the global economy. Regulatory bodies are skeptical about the unregulated nature of cryptocurrencies and want to put them under some kind of regulation moving forward. In the latest Anti Money Laundering Directive (AMLD6), some guidelines were released for crypto businesses operating in the EU. For crypto businesses to keep growing while establishing trust, it is vital to take some measures to reduce the risk of money laundering in the industry.

Cryptocurrency and Money Laundering

Back in 2019, criminal organizations and individuals laundered more than $2.8 billion using unregulated crypto exchanges. There are both advantages and disadvantages to using crypto to transact funds. Criminals are always deriving new ways to take advantage of the loopholes in the system to launder as much money as possible. To keep this in check, regulators have been working around the clock to identify the shortcomings and take preventive measures.

Every crypto exchange currently has the ability to identify potential risks that can be taken advantage of by fraudsters. Most of the cryptocurrency markets rely on the anonymous nature to grow their business, fraudsters on the other hand take advantage of this fact to convert their illegal money into legal funds. Being able to provide a certain degree of anonymity while reducing the risks of money laundering is facing up to be the biggest challenge for the industry. 

When financial institutions like banks and credit unions are heavily regulated and are legally obligated to follow a series of regulations, the lack of the same in the crypto industry makes it harder for regulatory bodies to allow crypto to be a mainstream form of transaction. The risk of money laundering in cryptocurrencies can be broken into the following categories:

1. Source of Funds

Sources of digital assets like cryptocurrencies can be tied to any number of illicit activities. For example, any funds transacted from a platform with little to no KYC/AML checks can be considered a red flag.

In a similar way, a single crypto wallet can be tied to multiple banks and credit cards, stating that a group is using a singular wallet to launder money. 

2. Suspicious Transaction Patterns

In some situations, the risks of money laundering in the crypto industry can be tied to a series of suspicious transactions.

For instance, criminal organizations tend to transfer money multiple times without a believable commercial explanation, which can be considered a red flag. Some common suspicious transaction patterns are:

  • High-frequency transactions, all more than $10,000 from different wallets into a single account.
  • Transactions from crypto wallets that don’t perform customer due diligence (CDD) checks. 

3. Money Laundering Risks Within a Specific Jurisdiction

Different geographical areas have different laws about KYC and AML regulations. Combine this with a lack of preventive measures or no regulatory bodies, and it creates opportunities for individuals and organizations to commit illicit activities. 

In an area that is deemed high-risk, there will be a larger pattern of illegal or suspicious transactions. As there are no laws that protect legit traders, it is better to stay away from high-risk areas. 

4. Frequency & Size of Crypto Transactions

Regulators and crypto exchanges need to thoroughly monitor the frequency and size of a transaction to eliminate the risk of money laundering from the crypto industry. Frequent transactions or high-volume transactions can be a disguise for money being laundered around the system. Some common activities to keep an eye out for are:

  • Clearing transactions below the reporting limit
  • Continuous high-value transactions during a single period into the same account
  • Quick transfer of funds from regulated jurisdictions to unregulated areas

How Regulators Respond to Existing AML Risks?

Legal businesses and organizations are always at the risk of their platform being used to launder money. Some common examples are:

  • Reusable debit cards
  • Initial coin offerings (ICOs)
  • Video game payment portals
  • PEP bribery
  • Money service businesses
  • Securities trading

Regulatory bodies are aware of common threats and risks of money laundering, that’s why they keep on developing regulations to minimize the risk and increase compliance in a vastly growing industry (Cryptocurrency). 

Financial institutions can stay compliant and reduce the risk of money laundering by following the guidelines set forth by the Financial Action Task Force (FATF). National governments are also trying to develop the latest methods to detect potential weak points that allow for money laundering and build methods to prevent it. 

Regardless of the constant changes in regulations and integration of technologies in the workflow, the risk of money laundering in the crypto industry is huge. A lot of work has to be done to ensure that the industry can keep its core value of anonymity while reducing the risks of money laundering. However, the question remains, “how do legit traders keep using cryptocurrencies and stay risk-free?”

Robust Customer Due Diligence Checks to Prevent Money Laundering

Needless to say that the current systems of due diligence aren’t enough to stop or reduce the flow of money laundering in the crypto industry. Crypto exchanges and wallets need to employ strong digital customer due diligence checks that can help them comply with KYC and eliminate the risks of money laundering. 

Being able to verify if a customer is who they claim to be during the initial steps of onboarding can help in slowing down the pace of money laundering. 

DIRO online document verification software provides instantaneous online document verification. With over 7,000 types of documents globally, DIRO can help crypto exchanges perform strong due diligence checks. DIRO verifies documents like address documents, bank statements, income tax return documents, student records, and more by cross-referencing data from an original web source and eliminates the use of fake and forged documents by 100%. If a criminal organization and entity can’t gain access to crypto exchange and wallet during onboarding, the flow of money laundering will automatically slow down. 

DIRO online document verification API key can even help organizations reduce the cost of manual verification and speed up the process while enhancing the onboarding experience for legit customers.

Avoid Risk of Money Laundering