Category: AML

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Best AML Compliance Rules for Fraud Prevention

aml compliance rules

Money laundering schemes are almost impossible to detect if a financial institution doesn’t have a proper anti-money laundering compliance regulations program. Money launderers leverage internal systems of businesses like FinTechs, banks, insurance companies, cryptocurrency dealers, gaming platforms, casinos, and other financial institutions to move illegal money around to make the money look legit. The flow of money laundering can be disrupted following AML compliance rules.

The primary goal of anti-money laundering rules is to uncover abnormal patterns between millions of transaction data, generated every day with financial accounts. By implementing regulations that have been outlined by AML laws in the Bank Secrecy Act (BSA) and the USA Patriot Act, financial institutions and related service providers can help regulatory bodies and federal law enforcement agencies and prevent the flow of money laundering. In this article, we’ll discuss the top 10 AML rules for compliance programs.

What AML Compliance Rules Do I Need to Consider?

While building a successful AML compliance rule program, firms need to meet a minimum standard set forth by the federal government. If a financial institution, does not meet these standards, government agencies such as:

  • Financial Crimes Enforcement Network (FinCEN)
  • Financial Action Task Force (FATF)
  • Financial Industry Regulation Authority (FINRA)

If financial institutions fail to follow through on the rules and regulations, these agencies can fine the institutions.

Compliance teams need to make sure that all the regulations apply to a financial institution and its specific business type and locality. Businesses need to develop proper methods and internal controls, including risk assessment and customer identification programs, to fulfill the due diligence requirements.

Anti-Money Laundering Rules for Compliance Program

Complying with anti-money laundering rules can be challenging for businesses of all scales. As all businesses have different risk factors and appropriate thresholds. However, there are some basic rules that every financial institution needs to follow. 

Below, we have mentioned 10 rules for anti-money laundering compliance programs, and these rules are the first point in building a successful compliance program.

1. Structuring Over Time

Structuring is a money-laundering activity that involves splitting the transactions into multiple smaller transactions to avoid reporting requirements. This rule should detect an excessive proportion of transactions below the reporting limit. Financial institutions are required to report transactions over $10,000, so banks need to look for transactions that are just below $10,000.

2. Profile Change Before a Large Transaction

This rule is for identifying instances where customers make profile changes to PII (personally identifiable information) shortly after making a huge transaction. This often signifies account takeover or potential “transaction layering” activity to obscure the path of the funds.

3. Suspicious User Financial Behavior

Another common rule for anti-money laundering is keeping track of suspicious financial behavior. Financial institutions should look forward to identifying transactions that are different from an individual’s usual spending behavior. You should also look for behaviors that are not common for a financial party’s financial profile. 

4. Increase in Transaction Volume/Value

This rule for anti-money laundering should help in identifying parties with high pay-out transaction volumes or a significant increase in the value of a party’s outgoing transactions compared to their recent average.

A rule like this is perfect for a P2P payment network with the capability to withdraw funds to an external account. The rule should filter out entities that have their bank accounts for a short amount of time and parties with a low balance and low outgoing transaction value over the relevant time window.

5. Circulation of Funds

Circulation of funds happens when individuals pay themselves using different accounts. This rule should detect situations where:

  • The party deposits casino checks
  • Purchase of bank drafts that are used at casinos
  • Casino checks whose memo indicates that the funds aren’t the result of casino winnings

This rule should also look for transfers between parties that have the same IP address.

6. Excessive Flow-Through Activity

This rule for anti-money laundering should help in identifying parties where the total value of the credit is similar to the total value of debits in a short period. A rule like this should be perfect for a financial service that offers a collection of funds where there won’t be comparable spend activity.

7. Low Number of Buyers

For platforms that see several buyers, interacting with a single seller, the rule should detect merchants that only receive from limited buyers. This can help regulatory bodies uncover collusion and circulation of funds. This rule for anti-money laundering should only look for accounts older than a specific time period.

8. Low Communication Between Buyers and Sellers

Platforms that keep track of the frequency of communication between buyers and sellers on the service, this rule can also identify merchants with high earnings but very few sent messages, which can indicate money laundering instead of normal business activities. 

9. High-Risk Jurisdiction

This rule for anti-money laundering compliance relies on geographic-based risk factors for countries and regions where money laundering is common. Some examples of risk categories include high banking secrecy, high financial crime, high drug trafficking, and known tax-evading countries. 

It’s important to keep this AML program rule updated based on the latest information. For example, in June 2021, the FATF updated its list of the geographical locations under monitoring to also include Haiti, Malta, the Philippines, and South Sudan. Ghana was removed from the list after new information. 

10. Anonymous Source of Funds

The last AML Program rule should look out for situations where the party sends funds into decentralized exchanges and then extracts the funds, which is used to anonymize the funds. 

It can also help in identifying when the party converts the currency into gaming tokens and then withdraws them for money laundering purposes.

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Digital Banking and AML Regulatory Compliance

aml regulation in digital banking

As banks and financial institutions try to embrace advancements in financial technology, the digital banking sector has grown exponentially. The pace of digitization of banking systems has been reinforced by the covid-19 pandemic. Out of all bank customer onboarding in 2020, almost 65% of them were done with online methods. Unfortunately, as digital banking services become more meticulous, so do the criminals trying to find a way into banking systems.

In a changing and growing financial sector, firms need to prioritize compliance for their digital banking sectors and they need to make sure that they can detect and prevent money laundering and terrorist funding, and other financial activities. Banks and financial institutions need to continue to deliver regulatory compliance.

Digital Banking AML Regulation

Digital banking service providers are now facing both traditional money laundering risks and other risks that have become possible due to technological advancements in the banking sector. Those risks may be the reason for new methodologies such as phishing scams, malicious software, and virtual currencies to launder money with new digital banking systems. Digital banking services are popular with money launderers because of the anonymity offered by digital banking systems.

Global financing authorities are quickly trying to handle these threats and fill in the gap in regulations, by focusing on improving digital banking services. In the United States, the Financial Crimes Enforcement Network (FinCEN) has issued a set of rules and guidelines for organizations dealing with virtual currencies. Europe’s 5th Anti-Money Laundering regulations are a set of regulations for digital financial sectors and cryptocurrency service providers. Similarly to that, the Financial Action Task Force (FATF) has also released its guidance on digital identification and compliance with KYC and AML regulations.

How to Comply with AML Regulation in Digital Banking?

Banks and financial institutions need to make sure that they offer digital services in compliance with AML to reduce the risks of money laundering. Under FATF policies, most financial organizations need to follow a risk-based approach to fight AML. They need to implement an internal compliance program:

  • Customer Due Diligence (CDD): Financial institutions need to set up CDD measures to verify the identities of their digital banking customers. Under the risk-based approach, customers that come under a higher risk of money laundering should be verified with proper due diligence measures.
  • Monitoring Measures: Banks and Financial institutions will need to set up measures to monitor suspicious customer activities during digital transactions. Suspicious activities can include unusual transactions, transactions over the usual limit, or regular transactions with high-risk countries. 
  • PEP List Screening: Screening and monitoring potential customers on PEP (politically exposed persons), international sanction lists, and customer involvement in adverse media stories. Any of these can be enough to deem the customer as a potential risk.

Some rules and regulations require financial institutions to get licenses for certain digital services such as cryptocurrency exchange or features like digital wallets. FATF policies also require organizations to train their employees and appoint a compliance officer to go over all the AML programs.

Digital Banking AML Measures

To manage the new money laundering and digital banking risks, banks and financial institutions need to take new approaches to keep up with regulatory compliance. Firms need to change the way they collect and verify customer data. The most effective factors of a digital AML solution include:

  • Digital Identification: Digital ID systems include biometric verification such as fingerprints and retinal scans. Combine with fully equipped smartphones, both the customers and banks may use those systems for customer onboarding. Digital identities can support more accurate and efficient CDD during onboarding and throughout the business relationship. Technologies such as DIRO online document verification technology can verify customers online by verifying documents such as bank statements, address proof, and utility bills. DIRO’s document verification tech can verify documents instantly thus improving the overall digital onboarding process.
  • Artificial Intelligence: AI technology offers a wide range of opportunities for firms to improve their AML and KYC compliance. AI can help in prioritizing data collection and transaction monitoring. AI-based technologies can also improve the detection of red flags during online transactions and reduce the time and effort banks spend on detecting suspicious activities manually.
  • Blockchain: As cryptocurrency is slowly growing, blockchain technology is also becoming more common among banking institutions. Blockchain is a public distributed ledger and blockchain allows firms to record and verify transactions. The technology could be used to store and encrypt customer information as a secure block of information. The use of blockchain technology within AML regulations would help fight the challenges associated with digital banking.

Integrating Technologies for Smoother AML Compliance

Managing customer data and following compliance in the era of digital banking means leaving the traditional AML rules behind. Embracing smart technologies for verification and automation for a better customer experience. 

The utilization of DIRO’s document verification technology can offer real-time document verification with 100% of proof of authentication. DIRO’s online document verification technology can verify:

  • Bank statements
  • Bank account holder information
  • Proof of address
  • Insurance information
  • Utility bills
  • Student records & many more.

By employing instant online document verification technology, banks, financial institutions, and FinTechs can improve their digital banking methods. 

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Global Anti Money Laundering Regulations: New AML/CTF Laws & Regulations in European Union

CFT regulations in the EU

The United Nations Office on Drugs & Crime reports that the estimated amount of money laundered annually is 2-5% of the global GDP. To put that in number, the losses due to money laundering are $800 billion – $2 trillion. Following the Anti-Money Laundering Act 2020 being signed into law in the US, the EU and its member states are enacting the same legislation to combat money laundering and terrorist funding. In this article, we will go over the requirements for banks and financial institutions to conduct identity checks for money laundering and terrorist financing and the Know Your Customer process.

Identity Checks for Money Laundering & Fraud Prevention in EU

Identity checks are crucial for banks and financial institutions to screen for money laundering, fraud and uncover illegal financial activities. KYC (Know Your Customer) is the process of verifying a customer’s identity to ensure the customer provides personally identifiable information. KYC is also needed to understand the past financial behavior of customers with previous institutions or other money service providers. 

The Know Your Customer regulation helps in ensuring that the financial institution’s services aren’t misused for money laundering. Compliance with KYC ensures that customers with a suspicious financial background aren’t approved for an account at the bank or other institutions.

KYC Obligations in the EU 

There is a major push to develop identity documents across the EU because most Member States have their own independent regulations regarding KYC and ID verification.

ID Tampering & Fraud: Security Features & Common Criminal Typologies

One of the biggest challenges with identity document verification is forgery and document tampering. EU passports, national IDs, and other identity documents are targets for regular ID thieves and criminals. A strong AML compliance program includes ID tampering and fraud prevention strategies. 

Regulators and law enforcement authorities face threats every day such as:

  • Falsification of documents by overprint
  • Adding a laser-engraved personalization
  • Simulating optical variable devices (OVD)
  • Grinding to access the core of a document
  • Facial spoofing during remote eKYC activities

Common methods used in document tampering are:

  • Scratching
  • Dissolving
  • Cutting
  • Opening using heat, solvents, and tools

It is crucial for banks and financial institutions to keep their eye out for these threats and illegal activities during KYC verification processes. Banks and other institutions should focus on detecting the fraudsters in the manual and remote onboarding process.

eKYC Challenges That Banks Face

eKYC comes with a number of challenges not just in the sense of applying numerous regulations and obligations from regulators and preventing tampering of ID cards. Banks have to be able to use anti-fraud technology such as liveness detection to prevent bad actors before they access the bank’s resources for their gain. 

Ever since the beginning of the Covid-19 Pandemic, banks had to switch to digital technologies. Banks all over the world are now facing challenges with online financial services.

Anti-Money Laundering & Counter-Terrorist Financing Laws and Regulations in EU

The European Union has forced a number of regulations and laws in the past two years including:

  • Sixth Anti-Money Laundering Directive (AMLD6)
  • Markets in Crypto Assets Regulation (MICA)
  • Second Payment Services Directives (PSD2)
  • General Data Protection Regulations (GDPR)

According to industry experts, financial institutions and authorities do even more in their fight against money laundering and terrorist financing. The aim should be to close gaps and loopholes in the current legislation, clarifying regulatory details and toughening criminal penalties across the EU.

The new directive brought better insights and clarification and transparency in regards to some areas:

  • List of offense
  • Money laundering
  • Scope expanded
  • Stricter persecution and punishment (4-year sentences instead of 1 year)

According to some experts, the EU Second Payment Services Directive is bringing in change and innovation in the online payment industry. The directive consists of two main elements of popular importance for e-commerce merchants: strong customer authentication and the emergence of two types of new regulated payment providers. Privacy and customer experience are among the most critical aspects that push new bank customers to complete the onboarding process.

General Data Protection Regulation (GDPR)

General Data Protection Regulation (GDPR) is a number of directives for the European Union (EU) that enhance the protection of the personal data of EU citizens. It also requires companies to comply with the latest rules and regulations that enhance the data privacy and security of every individual within the EU. These rules are strict and include many rules that increase the rights of data subjects. 

Three concepts are important under the GDPR:

  • Consent
  • Security
  • Legitimate interest
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Five Ways to Tackle the Growing Money Laundering Problem

how to deal with money laundering problem

Banks, financial institutions, and other organizations face countless challenges every day to keep their business secure from fraud. Keeping track of all the anti-money laundering regulations and making use of the latest and most efficient technology to tackle the money laundering problem can be tough. This is basically an endless battle against fraudsters who try to acquire funds using illicit methods and banks need to learn how to combat money laundering. 

All that a fraudster needs is one bank system to stop paying attention and they gain a new portal to launder money. A single banking institution’s mistake can have a huge impact on the global economy, in a particular industry or the money could be used to fund terrorist activities. All major regulatory bodies like the FinCEN, need to keep updating their regulations to be able to fight the money laundering situation from growing and so that banks and other financial entities can find ways to combat money laundering.

There are several things that banks and other FinTechs can do to tackle money laundering. Following the ways to combat money laundering to the last point can reduce the chances of online fraud by tenfold.

How Technology Can Stop Money Laundering

1. Improve Searches By Utilizing Technology

The growth in technology can be utilized for providing fake information such as bank statements, and wrong proof of address to trick banks. It is becoming increasingly difficult for organizations to filter between potential threats and false positives. 

If a bank or any other financial institution wants to protect its current customers, it needs to look at its past mistakes and set up countermeasures for future mistakes. If institutions can reduce the count of false positives, they can expand their scope of fighting money laundering and other kinds of online fraud. 

Using machine learning and AI-based technologies to conduct searches at regular intervals can reduce the burden on AML officials. AI and Machine Learning technologies can help in finding out some false positives while searching through the database. You can even strengthen your process by AI searching on a broader scale and your manual team focused on one specific location. This combination of technology and manpower is one of the answers to how to combat money laundering with the use of technology.

2. Have Regular Cross Communication

Multiple organizations have a quarterly or half-yearly round table meeting with state and local law enforcement and other banks in the area to discuss all the latest trends and how to fight the money laundering problem. The primary goal of these meet-ups is to stay up to date on all the methods of fighting fraud that can risk the security of customer data in any way. 

By staying connected, law enforcement can inform banks about the latest schemes opted by fraudsters to trick organizations. While a lot of banks have systems in place that allow them to stay on top of all the new schemes used by fraudsters, this alliance can be really helpful in curbing money laundering activities. 

By having constant meetings, banks, and law enforcement can keep each other on top of all the new trends/schemes. Verify any suspicious activities and enhance the business-law relationship. All this is one strong step in keeping customer’s information safe and making sure no one acquires money using illegal methods. While this isn’t the answer to how technology can stop money laundering, it is still an effective method of making sure the fraudsters don’t operate freely.

3. Use Data Analytics to Find Patterns

Making use of data analytics is one of the best methods of fighting money laundering practices. Data analytics helps banks and financial organizations understand the pattern in recurring money laundering or online fraud activities. There can be a pattern like a specific geographical location origin, specific product/service type, and a specific job occupation type. 

Once the AML officials recognize such patterns, they can develop countermeasures or special strategies that can reduce potential risks. The objective of using data analytics is to analyze a customer in “real-time” and reduce the risk for banks before anything happens. Money launderers need less than a week to place the money in the bank and after that, the money is gone, so is the person who deposited it. 

Data analytics deem people with multiple PINs or people with connections to tax frauds as potential threats. Knowing this information during the customer onboarding process can help banks prepare for fraud and learn how to deal with money laundering problems.

4. One Standard System All Across The Institution

 Like any other industry, banks also grow themselves by acquiring their rivals. Constant acquisitions lead to a wide network of different computer systems, different bookkeeping types, and other differences. 

Some divisions may use spreadsheets, some may use ledgers, and this difference in the system can benefit those who are looking for a weakness in the system for fraudulent activities. That’s not all, this can also lead to information breach, customer information loss, and loss in working efficiency. 

This is one of the reasons why all industries are moving towards a complete digital working environment. The growth of the cloud industry can support huge organizations running on digital technology, this also improves the privacy of data.

5. Training Against Fraud Is Crucial

Almost every bank or financial institution has a team of AML officials that ensures finding and getting rid of any suspicious activity. To be able to do that, AML officials need to know what to look out for. That’s why proper training is needed to detect fraud and report it to the right authorities.

Training the staff that’s your first countermeasure against money laundering is crucial. Let’s say some cyber attacker is using an account of a deceased person to launder money, if your staff doesn’t know what anomalies to look out for, this activity would go unnoticed. Training the front-end staff on what they need to notice is one of the best methods to fight money laundering problem and comply with AML regulations.

DIRO’s Assistance to Banks for Fulfilling AML Regulations

DIRO’s award-winning document verification technology aims to weed out fake or fabricated documents. Banks, financial institutions, and FinTechs can use DIRO’s instant document verification technology to verify documents submitted during the KYC and AML Compliance process. 

The technology instantly verifies the document against the original document on any third-party web source. It even provides strong proof of authentic documents that can be used as original documents. DIRO places the document on the blockchain which makes sure the information is provable and unable to temper with. Using the technology, banks can improve the overall customer onboarding process by reducing friction and also reducing the risk for money laundering and other types of online frauds. The utilization of DIRO document verification technology is one example of how technology can stop money laundering.

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What Is AML: DIRO’s Role In AML Compliance

anti-money laundering compliance

Anti-money laundering (AML) is a set of laws, regulations, and proceedings that were made to prevent criminals, cyber attackers, and even businesses from disguising funds acquired using illegal methods as legal money. 

Firstly, the illegal funds are covertly introduced into the legit financial system, then the money is moved around so the government and regulating bodies can’t keep a track of it. Money laundering can usually support crimes such as drugs, trafficking, and terrorism, it can even impact the global economy. 

While the anti-money laundering act covers just a limited range of transactions, the impacts can be wide-ranging. The AML laws require banks, FinTechs, and financial institutions to follow all the rules to reduce the risks of money laundering. Let’s start with learning what AML is in banking so we can move on to how to prevent AML risk with DIRO.

How Anti Money Laundering Works?

AML laws are made to target illegal activities that revolve around manipulating the market, deal with illegal goods, tax evasion, and several other methods to hide the funds that are acquired using illegal methods.

Criminals tend to launder the money that they obtain through ventures like drug trafficking, etc. so the money can’t be traced back to them. One of the most common methods of hiding the money from governments and other regulatory bodies is by moving the money around using legal cash-based businesses. These businesses are either owned by the criminals themselves or they are run by their supporters. These businesses that seem legal upfront then deposit the illegal money which can later be used by criminals for terrorism, destabilizing the global economy, and more. 

Another common way money launderers hide their money is by depositing cash into foreign countries in small amounts as not to arouse suspicion or use the cash to buy assets that can later be converted into cash. A lot of money launderers will invest their money using methods that can provide them with high returns in a limited time. 

One of the major factors of AML regulation is the “holding period”. According to this rule, the deposits made into an account are to remain there for at least 5 trading days. This holding period is set in place to reduce money laundering and mitigate financial risks. How anti-money laundering works is by building a set of rules and regulations that are to be followed by banks and other financial entities.

Reporting Suspicious Activity

It is the duty of financial institutions and banks to keep an eye on customer deposits and other transactions that seem suspicious and could be a part of money laundering activity. All financial institutions have to verify where large sums of money originated from, and report all the transactions that contain cash more than $10,000. If banks want to comply with AML regulations, they must make sure that all their clients are aware of the rules.

If a specific person or organization is under money laundering investigation by regulatory bodies, they will look for inconsistencies or activities that look suspicious in all the financial records. With the financial industry becoming tougher to survive in, extensive records are kept and managed for each and every financial transaction. During the investigation, when law enforcements try to trace a crime, they use specific methods that are better than others to find the origin of funds.

If the law is investigating robbery, embezzlement, or larceny, they often can send money back to the victims. Let’s say that a federal agency uncovers a money laundering crime, the agency has the means to trace it back to those from whom the money was taken.

The Difference Between AML and KYC

The difference between AML and KYC is quite simple to grasp. While both the compliances are closely related to each other, they have some minimal differences. In banking, KYC rules are the rules that organizations have to follow to identify customer identities. 

AML has a much wider application, it is the measures institutions follow to tackle and prevent money laundering, terrorism financing and reduce other financial crimes. Banks follow KYC and AML compliance to make sure their crimes face minimum risks.

History of Anti-Money Laundering

Anti-money laundering became prominent in global financial operations in 1989, it came into existence when countries from all over the globe joined forces and built the “Financial Action Task Force”. The primary objective of this international force is to develop strategies that can be used to fight money laundering and promote the implementation of these strategies globally. After the 9/11 terrorist attack, the FTFA expanded its efforts to diminish or completely stop terrorist financing. 

Another organization that builds upon AML compliance and works tirelessly to fight against money laundering is the International Monetary Fund (IMF), just like FTAF, the IMF has the support of 189 countries to fight money laundering and fight terrorist funding.

How to Control AML Risk With DIRO?

DIRO’s award-winning document verification technology is the ideal solution for smoothening and streamlining KYC and AML compliance. We have worked tirelessly to develop a technology that can verify any document from any third-party web source globally. 

Banks, financial institutions, and FinTechs can make use of DIRO’s document verification technology to mitigate the risk of money laundering & other financial crimes by verifying account holder information and bank statements in mere minutes. 

Employing DIRO’s innovative technological solution, financial organizations can cut costs by reducing manual document verification. It can also help in improving the customer onboarding experience by reducing the friction of AML and KYC compliances. Having DIRO’s document verification technology, financial organizations can make a huge impact on KYC & AML compliance.

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Why Anti-Money Laundering is Important for Financial Institutions?

anti-money laundering

Money laundering is a type of financial fraud, and it affects the global economy in a huge way. Criminals try to hide their illegal money from regulatory bodies, disguising its origin and converting the money into legal funds. Every year, losses due to money laundering equal 2-5% of the global economy ($800 million – $3 trillion). Anti-Money laundering refers to the activities financial institutions perform to achieve compliance with legal regulations to actively monitor for reporting suspicious activities. 

History of Anti-Money Laundering Regulations

The United States was one of the first countries to enact anti-money laundering legislation. The regulation came into existence with the Bank Secrecy Act (BSA) in 1970. BSA was an early effort to detect and prevent money laundering, since then BSA has been amended and made stronger by additional anti-money laundering regulations. The Financial Crimes Enforcement Network is the regulatory body that ensures that AML regulations are followed by financial institutions. 

In 1989, companies and organizations formed the global Financial Action Task Force (FATF). FATF’s goal is to devise and promote international standards to prevent the growing threat of money laundering. After the unfortunate attack of 9/11, the FATF expanded its regulation to include AML in its workflows. With 189 member countries, their main purpose is to ensure the stability of the global economy.

Why is Anti-Money Laundering Important?

 Money laundering often accompanies activities like smuggling, illegal arms sales, embezzlement, trading, bribery, and other schemes. Money laundering is a common part of organized crime including human trafficking, arms and drug trafficking, and prostitution rings.  

Anti-money laundering is also related to counter-financing (CFT), which financial institutions use to tackle terrorism financing. AML regulations combine money laundering, with terrorism financing.

Anti-Money Laundering & Counter-Terrorist Financing Laws and Regulations in the EU

The European Union has forced a number of regulations and laws in the past two years including:

  • Sixth Anti-Money Laundering Directive (AMLD6)
  • Markets in Crypto Assets Regulation (MICA)
  • Second Payment Services Directives (PSD2)
  • General Data Protection Regulations (GDPR)

According to industry experts, financial institutions and authorities do even more in their fight against money laundering and terrorist financing. The aim should be to close gaps and loopholes in the current legislation, clarify regulatory details, and toughen criminal penalties across the EU.

The new directive brought better insights and clarification and transparency in regard to some areas:

  • List of offense
  • Money laundering
  • Scope expanded
  • Stricter persecution and punishment (4-year sentences instead of 1 year)

According to some experts, the EU Second Payment Services Directive is bringing change and innovation to the online payment industry. The directive consists of two main elements of popular importance for e-commerce merchants: strong customer authentication and the emergence of two types of new regulated payment providers. Privacy and customer experience are among the most critical aspects that push new bank customers to complete the onboarding process.

General Data Protection Regulation (GDPR)

General Data Protection Regulation (GDPR) is a number of directives for the European Union (EU) that enhance the protection of the personal data of EU citizens. It also requires companies to comply with the latest rules and regulations that enhance the data privacy and security of every individual within the EU. These rules are strict and include many rules that increase the rights of data subjects. 

Three concepts are important under the GDPR:

  • Consent
  • Security
  • Legitimate interest
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Avoiding Money Laundering Risks in Cryptocurrency Industry

Avoid Risk of Money Laundering

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.

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KYC & AML Guide for Crypto Businesses

KYC & AML Guide for Crypto

Money laundering is a huge threat to the global economy and unfortunately, cryptocurrency has become the magnet for fraudsters looking to launder money with minimal friction. Ever since it started growing, the crypto industry has become holy ground for money laundering and terrorist funding.

To disrupt the flow of money laundering and terrorist funding, regulatory bodies all over the world are implementing anti-money laundering measures. These measures can help prevent money laundering using cryptocurrency exchanges and wallets.

Robust internal AML programs include full-proof KYC procedures to identify and verify users. Using this, authorities have to root out suspicious activities in the crypto industry. This will also lead to more expensive customer onboarding for customers in the crypto industries and make the process full of friction. Manual verification processes won’t work for the crypto industry that is slowly getting regulated.

Fortunately for the crypto industry, there are thousands of FinTechs that can help achieve compliance while still offering a positive customer experience.

Importance of KYC & AML Regulations in Crypto Industry

Over time, the financial industry is evolving and cryptocurrencies are rapidly changing the way transactions take place. For international monetary exchanges, virtual currency is taking the place of traditional currency.

However, this comes with its fair share of challenges, a major issue is that criminals launder money using anonymous crypto exchanges. The fifth anti-money laundering directive makes it clear that crypto exchanges and wallets have to operate under anti-money laundering regulations.

This means a robust AML program helps identify and protect against suspicious activities. Crypto exchanges and wallets need to integrate KYC & AML regulations in the onboarding workflow to protect against financial crime.

Currently, most crypto exchanges don’t have proper AML strategies. A recent study states that 69% of crypto exchanges don’t have a complete and transparent KYC procedure in place.

Understanding AML Regulation

The term anti-money laundering or AML dictates a set of rules and legal regulations that are built to identify fraudsters and prevent illegal activities. It includes activities such as trading illegal goods, tax evasion, drug, and human trafficking, and laundering ill-gotten funds. 

To prevent money laundering and other financial fraud, regulatory bodies make it a legal obligation for banks and the financial industry to conduct due diligence checks while onboarding customers. The unregulated nature of the crypto industry has given birth to a whole new type of financial crime, where criminals can launder money and cover their tracks.

This is a huge issue on cryptocurrency gambling websites, money laundering crypto mixer platforms, and exchanges.

How Does KYC & AML Affect Crypto Exchanges?

For businesses operating in the crypto exchange, AML programs are a must, for protection against fraud and to stay compliant with growing regulations. This means the implementation of an effective AML program that includes a customer Acceptance Policy (CAP), Customer Identification Program (CIP), continuous monitoring, and risk management.

The CAP refers to the identification of new customers using official ID documentation. CIP is the process of verifying a customer from this documentation and against official databases. Ongoing monitoring allows crypto exchanges to identify suspicious transactions and ensure customer details aren’t outdated. 

In the USA, FinCEN puts all types of crypto exchanges the same way. This means that all cryptocurrency exchanges must carry out all KYC and implement effective AML programs, regardless of the type of cryptocurrency. 

Why is KYC Important for Crypto Exchanges?

Money laundering has become a global issue and the losses incurred to the global economy due to money laundering equal almost 5% of the global GDP. These procedures help financial institutions to mitigate and manage fraud. So how is KYC useful for crypto exchanges?

  1. KYC Builds Trust and Transparency

For cryptocurrencies to become a streamlined service, there need to be some regulations set in place to eliminate fraud. By implementing KYC procedures, exchanges can demonstrate that they are trustworthy and have the right regulations set in place to prevent fraud. 

  1. KYC Reduces the Risk of Financial Crime

Proper KYC procedures reduce the chances of financial crime as users are identified and verified. Having robust KYC programs can help weed out criminals and high-risk candidates, which in turn reduces the likelihood of illicit activity occurring through exchange or wallet. 

  1. KYC Will Ensure Stabilization in Crypto Market

AML and KYC regulations are important for stabilizing crypto exchanges for upcoming years. For customers to truly trust a system, they need to know the system in assessing risks to protect the users.

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What’s Next for the AML Regulation? Fraud Prevention and AML Compliance

how aml compliance can reduce risk

The landscape of AML regulation is vast and diverse, and to prevent fraud the financial industry needs to keep up with the ever-changing rules and regulations. On January 1, 2021, the National Defense Authorization Act passed a new act containing a variety of defense and national security matters. This act included reforms to US anti-money laundering (AML) and counter-terrorism financing (CFT) laws. 

The new developments in the AML/CFT laws will have a huge impact on the financial institutions and specific other business types. While there are a lot of changes in the AML Act, there few particular changes that financial industries need to keep their eyes on:

  • Creating a non-public registry that tracks the beneficial owners of certain organizations.
  • Enhancing the AML whistleblower program similar to Dodd-Frank Act’s SEC Whistleblower program.
  • Expanding the US regulator’s statutory authority to ask for documents from foreign institutions.
  • Increasing penalties for BSA and AML violations.
  • Establishing priorities and strategies for AML policies
  • Creating an annual reporting requirement to apprise Congress of all Department of Justice (DOJ) settlements including the Bank Secrecy Act (BSA).

The Current AML Landscape

Today, money laundering has reached almost every single industry and market. The scale and the impact of the pandemic are almost impossible to determine, however, the United Nations Office on Drugs and Crime (UNODC) offers an estimate that the money laundered globally is around 2-5% of the global GDP. To put that in context, the annual loss due to money laundering is about $800 billion – $2 trillion. 

To reduce the global fraud loss, the Anti-Money Laundering regulations are set in place. Financial institutions have a legal obligation to monitor their clients and prevent money laundering and report any financial crime the companies detect to the right authority. 

AML laws were made global after the creation of the Financial Action Task Force, the task force works as a money laundering and terrorist financing’s primary enemy. Most of the regulated markets and countries in the world have strict AML laws and regulations, failure to comply with the laws can lead to strict penalties. 

There are a variety of AML regulatory bodies all over the globe, and where the business is situated determines the kind of regulatory body and the kind of international regulations they need to comply with to keep the business running. Businesses that operate within the EU must follow the 6th anti-money laundering directive. 

The Future of AML Compliance

Compliance and regulation all over the world are unpredictable. Fraudsters all over the world are using cryptocurrency and multiplayer games to launder money under the noses of financial regulatory bodies. Anti-money laundering regulations are changing and covering newer markets all the time. To keep up with all the compliances and changes, businesses need to adapt to new standards and protect the businesses from regulation examination and suffering heavy penalties.

The EU recognized the need for stricter regulations on the crypto industry with the 5th AML directive. The new AML compliance stated that cryptocurrency exchanges and the custodian will have to:

  • Perform CDD (Customer Due Diligence) checks as the part of Know-Your-Customer (KYC)
  • Financial investigators can be authorized to obtain the addresses and identities of cryptocurrency owners which eliminates the anonymity and the risk of money laundering from the process. 
  • Cryptocurrency exchanges and wallet providers will need to be registered under relevant regulators in their home country. 

The EU understands that the regulation of virtual currency providers and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions. To efficiently fight the risks that come along with anonymity, the 5th AML directive claims that national financial institutions should be able to obtain information that allows them to associate virtual currency addresses with the identity of the owner. 

Additionally, businesses must understand how to remain compliant with the AML regulations, which is now harder to do as the UK has left the EU. The UK is considered one of the most regulated countries in the world when it comes down to financial institutions. Regulations are becoming even stricter with the Anti-money laundering 6th directive which came into effect just recently.

What’s Next for AML Regulation? 

Cybercrime was mentioned for the very first time in the AML 6th directive, protecting businesses against cybercrime is a tough undertaking. Using the right kind of techniques, businesses can pinpoint and tackle any potential money laundering activity. 

The UK government has advised that eID verification should be the ideal method for maintaining compliance. The money laundering and terrorist funding amendment has made it clear that eID verification is one of the most effective ways to ensure compliance. Using online document verification technologies like DIRO instead of manual document and identity verification is another step that businesses need to follow to comply with the new AML directives.

Newly growing markets and modern forms of verification are becoming subject to regulation. To do everything effectively and reduce the chances of fraud, businesses need to follow all the regulatory body’s advice. 

How DIRO’s Online Document Verification Can Help?

It doesn’t matter where your business is located, you do need to comply with local and international regulations, but keeping up with the ever-changing regulations is a tough task. DIRO’s online document verification can help you achieve what you want.

Our online document verification technology allows businesses to verify documents necessary for complying with AML directives. DIRO’s online document solution verifies documents instantly including the business beneficial owner information. Our API integrated buttons can improve the overall document verification process and lead to a more streamlined AML compliance across all industries.

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Handling the New AML Compliance Challenges With Latest Payment Methods

aml compliance challenge

The global prepaid card market will reach $3.65 trillion by 2022. It is also expected to grow more based on the advancement in technologies and with customers slowly moving towards a digital and cashless economy instead of the old methods of cash and cheque. These latest payment methods are crucial for building vital cash flow for businesses and they can even be used for government relief programs. Although, there are a lot of risks involved in these latest online payment methods and for the users who indulge in these payment methods.

Prepaid cards can be filled with money, can be used globally, and are much easier to set up in comparison to other types of cards. Users who utilize these payment methods can be open to exploitation. Hackers who use sophisticated methods can easily take advantage of the anonymity provided by these cards.

Reducing the Risk of New Payment Methods

According to some reports, the fraud revolving around different types of prepaid cards reached around $103 million. This amount of fraud is in the United States alone. Financial services and institutions rely on old, manual, and insecure technology to monitor transactions and verify customer identities to reduce the number of frauds. If a lot of regulations are enforced in place, it will make it tougher for hackers to combat fraudulent card activities.

The best thing is that reducing the risk faced by new payment methods and prepaid cards is not only possible, but it can also be really easy to reduce risks by using the right kind of technology. Making use of automated technology that can give you real-time insights into frauds, reduce false positives, and provide a holistic view of users to improve a positive customer experience.

The best methods of reducing fraud need to have all the components to help you meet up with verification and AML compliance. Technologies like DIRO document verification API can be utilized to verify documents in real-time during the onboarding process and reduce the risk of fraud. Businesses can utilize the DIRO’s document verification technology to improve their chances of reducing fraud.

Challenges Faced To Reduce Risks In Handling the New AML Compliance Challenges

1. Digitization of Products and Complex Payment Streams

Keeping up with new technological advancements is one of the major concerns of financial institutions. In the past, there was a major reliance on manual methods to accomplish tasks, it left a lot of room for error and there was a lot of room for false positives. Manual methods leave the process of detecting financial crime ineffective.

Regardless of constant technological growth, countless steps of operational and AML compliance decisions are made manually every day. Spending resources on unnecessary investigations and using human analysts for every decision costs Financial institutions billions of dollars each year.

2. Increasingly Sophisticated Hackers and Criminal Networks

Financial institutions aren’t the only ones who are utilizing advanced technological methods. Hackers and criminal groups are also improving their methods for scamming people. Almost every new day we see new AML threats arising from digitization, financial criminals are benefiting from this improvement in technologies and they are becoming better.

Criminals make use of complex networks, exploiting weak points in the operations of banks, the latest payment methods such as prepaid cards, and capital markets.

As with most types of crime, when one method of money laundering becomes tougher to accomplish, financial criminals will find newer methods of executing the crime. All types of financial institutions have to update their AML compliance to make sure they stay ahead of criminals.

3. Expanding Volumes of Data

Another challenge that financial institutions face is the volume and breadth of data. There will be more than 175 zettabytes of data used by 2025. However, as the amount of data keeps expanding, financial institutions keep struggling to harness its value.

Criminal organizations often launder money between several networks at the same time to make sure they aren’t spotted by financial institutions. Using machine learning and AI-based technology, banks and other financial institutions can find suspicious activities and reduce the risk of financial fraud.

How Does DIRO Help in Handling the New AML Compliance Challenges?

Following all the latest AML regulations can be a huge task for financial institutions as they keep changing with time. Banks, financial institutions, and FinTechs need to employ the latest payment methods and they also need to utilize the latest technologies meant to increase security.

DIRO’s document verification technology can be used to verify documents instantly. To reduce the risk of fraud, institutions can verify any kind of documents during the customer onboarding process. The technology can verify utility bills, address proof, bank statements, and even student records. To minimize the risk of fraud, these organizations can improve their chances of figuring out suspicious activities and can reduce the risk of financial crime.