CONTENTS

• What are the challenges faced by crypto exchanges without KYC?
• The KYC Landscape in Crypto Exchanges
• KYC Builds Trust and Lowers the Risk of Transparency
• Benefits of KYC in Crypto Exchanges
• Overview of Crypto Exchanges in 2023
• The Role of KYC Solution Providers in Securing Crypto Exchanges
• Unlocking Efficiency with IDMERIT

What are the Challenges Faced by Crypto Exchanges Without KYC?

Before the widespread adoption of KYC in the cryptocurrency industry, there were several challenges:

1. Possibility of increasing Fraud: Cryptocurrencies, in their early days, offered a high degree of anonymity. While this was seen as a benefit by many, it also attracted individuals involved in illegal activities such as money laundering and fraud.
2. Reputation Risks: The association of cryptocurrencies with illegal activities tarnished their reputation. Trust and acceptance in the broader financial ecosystem were hindered, slowing down mainstream adoption.
3. Financial Risks: Without robust KYC solutions, financial risks and scams increase. Financial criminals who wanted to commit fraud were often attracted to crypto exchanges with no transparency or accountability. This led to financial losses.
4. Security Threats: The absence of KYC measures has made cryptocurrency exchanges more susceptible to hacking and cyber threats. These vulnerabilities resulted in significant losses for both users and platforms.

The KYC Landscape in Crypto Exchanges

KYC in crypto exchanges refers to the process of verifying the identity of users. It’s a robust mechanism that helps crypto platforms establish the real-world identities of their customers. The primary goal is to prevent fraudulent activities and to create a secure environment for trading digital assets.

To implement KYC effectively, crypto exchanges often turn to KYC solution providers. These solution providers offer a suite of services tailored to the unique needs of the cryptocurrency industry. By collaborating with these experts, crypto exchanges can streamline the onboarding process, enhance security, and reduce the risk with financial regulations. Below is how KYC solutions unlock the power in crypto exchanges:

1. User Verification: KYC solution providers use a variety of methods, including document verification and facial recognition, to ensure users are who they claim to be.
2. Risk Mitigation: By assessing user-profiles and tracking their activities, KYC solutions help exchanges identify high-risk individuals or entities. This proactive approach reduces the potential for financial crimes.
3. Enhanced Security: By implementing robust identity verification, crypto exchanges protect themselves and their users from security breaches and unauthorised access.

KYC Builds Trust and Lowers the Risk of Transparency

Financial misconduct, spanning a spectrum of illicit activities such as tax evasion, bribery, graft, financing of terrorism, and cyber intrusions into online banking systems, imposes an annual financial burden of approximately $1.4 to $3.5 trillion globally, with an estimated $2 trillion channelled through the laundering process.

Notably, crypto exchanges stand as susceptible targets, experiencing losses amounting to $4.26 billion in 2019 alone. The integration of Know Your Customer protocols within the realm of cryptocurrency and crypto exchange platforms can play a pivotal role in the identification and authentication of users, thereby diminishing the risk of financial crime and unauthorised operations.

Benefits of KYC in Crypto Exchanges

Implementing KYC solutions in crypto exchanges brings a multitude of benefits. These include:

1. Enhanced Trust: Users are more likely to trust and engage with exchanges that prioritise security and trust. KYC solutions make the decision-making process easy on the basis of identity verification.
2. Reduced Fraud: KYC solutions act as a deterrent to fraudsters and significantly reduce the incidence of fraudulent activities.
3. Combating Money Laundering: KYC & AML solutions help crypto exchanges avoid hefty fines and reputational damage. These solutions help in recognizing people involved in money laundering and terrorism financing.
4. Reduced Operational Costs: Automated KYC processes streamline user onboarding and reduce the need for manual verifications, cutting operational costs.
5. Global Expansion: Crypto Exchanges that prioritise KYC can expand to more countries by demonstrating a commitment to international regulations.

Overview of Crypto Exchanges in 2023

In 2023, cryptocurrency prices demonstrated remarkable resilience, especially considering that both Bitcoin and Ethereum had their worst annual performances in 2018. Despite a relatively unexciting performance in September, Bitcoin prices have surged by 63.3% year-to-date, while Ethereum prices have increased by 40.2%.

According to the most recent research conducted by Coinfirm, it has come to light that 69% of the 216 crypto-related businesses under scrutiny do not possess “comprehensive and transparent” KYC solutions, a critical component of their AML initiatives.

A separate report from CipherTrace further underscores this concern, indicating that among the top 120 crypto exchanges, one-third exhibit subpar KYC processes, and two-thirds are deficient in maintaining robust KYC policies.

The Role of KYC Solution Providers in Securing Crypto Exchanges

KYC solution providers help to authenticate business identities for crypto industries. They offer a range of services that encompass identity verification. The following identity verification methods are essential for crypto exchanges to stay secure and stable:

1. Document Verification: KYC solution providers enable exchanges to verify the authenticity of identity documents, such as passports and driver’s licences.
2. Biometric Authentication: Facial recognition technology ensures that the person submitting the documents is the same as the one in the ID.
3. Watchlist Screening: KYC solution providers allow exchanges to check users against global watchlists, identifying politically exposed persons (PEPs) and other high-risk individuals.
4. Ongoing Monitoring: Regularly updated profiles and transaction monitoring help exchanges identify changes in user behaviour that may indicate illicit activities.

Unlocking Efficiency with IDMERIT

There are several key strategies through which a crypto management platform can enhance security:

• Advanced identity verification
• Efficient onboarding process
• Ongoing monitoring
• Risk assessment tools

IDMERIT provides robust identity verification and Know Your Customer solutions. After harnessing these identity verification solutions, you’ll be able to manage custom workflows tailored to different usage scenarios and incorporate a range of verification methods to align with KYC methods. As a result, we not only guide in maximising conversion rate but also significantly enhance the efficiency of the verification pipeline.

If you’re interested in discovering how IDMERIT can assist you in achieving identity trust and security for your cryptocurrency exchange, please don’t hesitate to get in touch with us or join our community for a direct conversation with our product team. We’re here to engage in a discussion with you!

The post A Comprehensive Guide of KYC in Crypto Exchanges in 2023 appeared first on IDMERIT.

Contents:

• What is Money Laundering
• What are the 3 Stages of Money Laundering
• Placement
• Layering
• Integration
• Examples of Money Laundering
• IDMERIT AML Solutions for Businesses

What is Money Laundering

Money laundering is a complex method of converting a large amount of illegally gained profit into lawfully acceptable form. The term ‘money laundering’ is derived from the idea of cleaning, i.e., laundering ‘dirty money’ into white money, for its integration into the financial system.

Money Laundering is considered a serious punishable offense involving all sorts of people, from corporate to street offenders. The proceeds of crime sources include felonious activities like narcotics trafficking, bribery, corruption, terrorist financing, human trafficking, etc.

What are the 3 Stages of Money Laundering

Let us discuss what are the 3 stages of money laundering. Since money laundering is a premeditated crime, it comprises i. placement, ii. layering, and iii. integration steps to make dirty money seem legitimate and bring it to the economy.

Placement

For money launderers, placement is the most vulnerable stage wherein the dirty money is surreptitiously introduced into the economy as monetary instruments or as direct deposits into the bank accounts. In the case of bank account deposits, smaller deposits below threshold levels are made to subvert reporting.

Since the money origin is illegitimate, placement involves the maximum risk. All jurisdictions worldwide have instituted stringent cash deposit measures to conform to Cash/Currency Transaction Reporting (CTR) filing obligations.

There are several ways of placing illicit money into the financial system, like loan repayment, gambling, fake invoicing, foreign exchange, and blending funds. Concurrently, money launderers exploit cash-intensive businesses that promote easy money movement, for instance, car washing, check cashing services, gaming, etc.

Opening foreign shell organizations or trusts and transferring cash below custom thresholds overseas to conceal the beneficial ownership is an intricate placement scheme that is difficult for the AML authorities to get hold of.

Layering

Once the money is placed into the bank in the first stage, the layering process disguises the illegitimate money source by maneuvering transactions and accounts. The purpose is to make it cumbersome for the authorities to follow the audit trail involving a series of domestic and off-shore transactions made using the different channels of payments.

Purchasing and selling expensive, luxurious goods – like land, jewelry, painting, etc. – is an example of layering in money laundering and is, in fact, the most favorable method for financial criminals to make use of their illicit funds.

One of the complex layering methods implies a series of irrational international transactions especially covering the jurisdictions that allow shell organizations and private banking. Abrupt holding company takeovers and real estate investments could also be set as pertinent examples here.

To move large amounts of proceeds of crime, money launderers hire professional bookkeepers to assist in fund transfers across international jurisdictions. Online remittance and crypto payments have aggravated the situation, especially with the ease of buying and selling cryptocurrency criminals misuse the exchanges to layer the ill-gotten funds and cover up their source.

Integration

Integration defines the final money laundering stage, wherein the illegally obtained money is returned to the legal financial system after completing the placement and layering stages. The criminal proceeds get washed off and integrated into banks and financial institutions as clean money.

Common integration tactics take in selling off expensive and luxurious items bought during the layering stage. Other instances are cash outflows from shell organizations, including fake payroll pay-outs, loan disbursement to shell company directors, shareholder dividends, etc.

Examples of Money Laundering

Drug trafficking is one of the most serious money laundering threats worldwide today. The narcotics industry is completely illegitimate and cash-intensive. Other examples of money laundering are human trafficking, arms trafficking, smuggling, bribery, corruption, etc.

Terrorist financing is a widely prevalent nuisance, and online payments and cryptocurrencies have intensified the situation. Many terrorist organizations today misuse digital finance to transfer terrorist funds across borders.

Other examples of money laundering comprise white-collar crimes such as corporate embezzlement and investment rip-offs, including insurance and mutual fund scams.

It must be noted that Trade-Based Money Laundering (TBML) is one of the most excruciating crimes, which is extremely difficult to trace and establish in front of the law. Today, Trade-Based Money Laundering (TBML) covers almost $2 trillion worth of global trade. Common TBML methods that money launderers exploit are over-under and multiple invoicing, over-under and inferior shipment, fake or phantom shipment, and shell company trading.

IDMERIT AML Solutions for Businesses

It is a general notion that anti-money laundering policies are meant for the banking and financial sector. But, in fact, all regulated non-financial industries like remittance, accounts, legal, insurance, investment, fintech, etc., now fall under the scope of AML-CFT obligations.

At the same time, regulations in high-risk sectors like cryptocurrencies, third-party payment processing, forex, casinos, gambling, etc., call for enhanced diligence methods to combat money laundering and terrorist financing threats arising from the ease of international transfers offered to individuals and merchants.

Combatting money laundering is a global effort; IDMERIT extends tailormade AML Solutions that operate in tandem with national and international AML-CFT guidelines. Contact IDMERIT IDMaml consultant and book a demo to understand more about AML requirements for your business.

The post Money Laundering Explained: What are the 3 Stages of Money Laundering appeared first on IDMERIT.

• Fintech and Money Laundering Pain Points
• Why Fintech AML Compliance is Important
• AML in Fintech-Associated Risk and Challenges
• How to Select an Effective Fintech AML Solution

Anti-money laundering, AML in fintech has several risk mitigation requirements, and fintech AML compliance holds equal gravity as compliance in conventional financial institutions. Fintech is one of the fastest-growing industries that has been rising at a meteoric rate in terms of technology, usability, and revenues.

The word ‘fintech’ is extremely broad, and its scope is still unknown to many. Fintech chiefly includes mobile banking, digital banking, crypto trading platform, decentralized finance (DeFi), payment apps, mobile wallets, lending apps, crowdfunding, insurance, and trading apps.

Be it e-wallet, lending, trading, etc., all have one common feature, i.e., they deal with user onboarding and transaction processing in volumes. Hence, financial technology or fintech businesses have absolutely no escape from anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations.

AML in fintech is also essential as financial technology faces huge competition from traditional financial services, and there is constant pressure on fintech businesses to follow AML-CFT guidelines, overcoming all the challenges and frictions coming in the way of achieving optimum fintech AML compliance.

AML in fintech

Fintech and Money Laundering Pain Points

Modern-day financial miscreants always look for platforms with high transaction volumes and mass payment processing options. Hence, fintech is the most convenient platform for criminals, and more and more money launderers today prefer laundering illicitly gained money via transaction aggregation, also known as transaction laundering.

Fintech money laundering also involves channelizing money by misusing e-commerce platforms for fake payments. For instance, many fintech and money laundering methods are carried out by camouflaging banned products or services beneath a front site or a legitimate-looking site. Fintech and money laundering nuisances thus go hand in hand. At times, the process is extremely difficult for the authorities to capture to bring the perpetrators of the crime to justice.

Why Fintech AML Compliance is Important

Financial technology has achieved its new zenith with advancement and sophistication in technology, user experience, and global internet capacity. However, this comes alongside an ongoing risk of identity theft, financial fraud, and terrorism threat. The fact is that innumerable financial technologies are sprouting at unprecedented levels, and since fintech is mainly technology-based, they face much pressure to remain fraud-proof. AML in fintech is an emerging regulation, and regtech firms are offering special fintech AML solutions for those startups that find it challenging to cope with fintech money laundering.

AML in Fintech-Associated Risk and Challenges

The financial technology methods are extremely fast and huge in capacity, making money launderers exploit the fintech platforms while keeping pace with its technological advancement. For instance, fintech payments are fully remote over the internet. The financial miscreants leverage the virtual nature of the payments, take advantage of its anonymity, and conceal their identities to perform high-level frauds linked to identity thefts.

Secondly, speed has been directly linked to user experience in fintech. However, fraudsters often take advantage of this feature by exchanging large transactions across domestic and international accounts, even before the authorities can respond to the alerts and initiate an investigation. Experienced and sophisticated fraudsters get away with huge illicit money transfers in a jiffy, even before the risk team can determine whether they should file a suspicious report to the concerned state authority.

Third-party payment systems have spread sporadically in the form of apps across phones, tablets, and computers, paving the way to money muling, smurfing, and structuring illicit money to the point that it is untraceable. It is extremely important for the fintech AML compliance team to monitor and understand the crime pattern constantly and scrutinize the payment vulnerabilities to outpace the AML fintech financial crimes.

How to Select an Effective Fintech AML Solution

Fintech is fast growing and equally competitive; fintech payments are preferable to those users and merchants looking for speedy transactions and faster receivables. Fintech payment platforms, be it digital banking, crypto trading, payment app, or e-wallets – mainly all process user payments in batches to speed up the account settlements. Money launderers take advantage of this process and exploit the blindspots in fintech AML compliance, making the industry extremely vulnerable to aggregating batch transactions.

AML fintech noncompliance could cost businesses huge financial penalties or even bring them to the brink of permanent closure. IDMERIT offers IDMaml, a world-class fintech AML solution with end-to-end fintech AML compliance functionality. IDMaml extends individual and business identity verifications; sanctions, PEP, adverse media screening; and transaction monitoring all on one platform.

IDMERIT’s custom-made fintech and AML solution is an all-in-one payment risk mitigation platform for companies requiring bulk payment batch processing daily. For companies seeking an optimum fintech AML solution, contact IDMERIT AML fintech connoisseur and understand the complete nitty-gritty of fintech and money laundering risk mitigation procedures today.

The post AML in Fintech: A Guide to Fintech AML Compliance, Challenges, and Solutions appeared first on IDMERIT.

• Banks and Money Laundering
• Steps to Achieve AML in Financial Services
• Banking AML Compliance and SAR, STR filings
• How to Ensure Optimal AML in Finance Procedures

Anti-Money Laundering, AML in banking and finance, is a legal obligation that the industry must oblige to ascertain they do not knowingly or unknowingly support money laundering and terrorism financing activities. Banking is a major financial service, and AML in banking is almost synonymous with AML in finance.

Banks are obligated to perform all anti-money laundering checks on their customers, as the launderers most exploit the banks for placement, layering, and integration – the three stages of converting the illicitly gained money into financially acceptable form.

Unlike earlier methods of form filling for filing suspicious transaction reports (STRs) for cash deposits beyond the threshold levels, modern anti-money laundering or AML in finance follows advanced Artificial Intelligence (AI) and Machine Learning (ML) technologies. Simultaneously, many banks are adopting Blockchain technologies to fulfill their AML-KYC compliance needs.

Banks and Money Laundering

With increasing volumes of online payments and virtual banking operations in practice, new forms of money laundering in banking have become all the more sophisticated and not as easy to capture.

For instance, a rise in the number of card fraud, friendly fraud in payments, and a new form of e-commerce money laundering, called transaction laundering, all have come into play.

It makes the current situation challenging for banks and money laundering detecting authorities, adding complexity to the daunting task of bringing perpetrators of financial crimes to justice.

Steps to Achieve AML in Financial Services

To remain AML-CFT compliant, anti-money laundering or AML in banking has certain procedures. The first always remains to Know Your Customer (KYC) or Know Your Business (KYB) for identity verification of the customer and to ensure the person is the person they claim to be. However, AML in financial services is also about continuous due diligence and ongoing monitoring. Frequent ID document checks and upgrades also form an important part of the AML measures and are often linked to enhanced due diligence.

The next in the AML in financial service fraud mitigation measure is client screening against individual, organizational or national sanctions. Client screening against politically exposed persons (PEPs) and adverse media lists is next on the list, and also equally important to check if the customer holds any influential position or has gained negative publicity in the past.

Banking AML compliance procedures have one final important measure, i.e., transaction monitoring. Positive KYC identity verification and screening checks don’t mean the customer is risk-free. Hence, AML in banking calls for continuous monitoring of customer behaviors and activities. To abide by this important AML in banking obligation, the financial institution must use an effective AI-ML base transaction monitoring solution.

Banking AML Compliance and SAR, STR filings

Financial Action Task Force (FATF), an international AML-CFT policy-making body for financial and regulated institutions, ascertains the prominent role of the Financial Intelligence Unit (FIU) in combatting money laundering and terrorism financing nuisances. Each FATF member nation has one national FATF FIU body setup.

The banking risk team is subject to filing all Suspicious Transaction Reports (STRs) and Suspicious Activity Reports (SARs) to the state FIU within the stipulated time for prompt investigations.

How to Ensure Optimal AML in Finance Procedures

Employee training and effective in-house risk mitigation technology are the two main factors that define the quality of AML in banking efficiently. Practical AML staff training, with regular tests and revisions, determines the proficiency levels of the staff. Alongside this, the banking AML compliance engine must be such that it can be easily integrated into the existing operating system without creating much friction.

State-of-the-art automation tools for anti-money laundering in banking can save the organization from financial penalties and help build a strong reputation that helps in customer retention and new client acquisitions.

If you are a financial service looking for AML-CFT implementation in your organization, IDMERIT offers hassle-free integration with single API AML automation. You may further read pertinent information on our website or book a free consultation and get in touch with our AML financial crime manager for your business.

The post Anti-Money Laundering (AML) in Banking and Finance: Best Practices appeared first on IDMERIT.

• Why is AML in the Payment Sector required?
• AML Transaction Screening
• AML Transaction Monitoring
• Challenges in AML Transaction Monitoring
• Selecting the Best AML Solution for Payments

Why is AML in the Payment Sector required?

AML in the Payment Sector has an inevitable role in mitigating the risk of transaction laundering, the online form of money laundering currently posing the most imminent cyber threat. Payment processors must exert due diligence during merchant onboarding and transaction processing and remain vigilant during the complete payment processing cycle. Payment gateways and payment processing businesses owe enhanced anti-money laundering measures to the banks and financial institutions they are linked to, as any negligence on the security part while aggregating the payments might lead to a financial and reputational loss of the payment entity as well as the financial institution.

Anti-money laundering, or AML, in the payment sector has a broad scope, and there are two core technological components for risk mitigation in this field. The first is AML Transaction Screening for verifying merchants against the global sanctions listing to determine the risk levels they brought to the payment business. The next is AML Transaction Monitoring, an AI-ML-based engine to monitor merchant behavior and activities and their transaction risk levels.

As payment aggregators process mass transactions, a due merchant onboarding process to ascertain the risk levels of the merchants is an important degree of AML-CFT execution. Drafting terms agreement with the merchant, a thorough examination of the business by the designated compliance officer, AML training for the onboarding division staff, and continuous merchant review as part of the due diligence are all important steps to achieve compliance for AML in the payment sector.

AML Transaction Screening

Screening merchants against the global sanctions database eliminate the risks of doing business with individual and entities detrimental to the AML-CFT standards. High-volume transaction merchants bring the maximum revenues to the payment gateways and processors, but this should not come at the cost of illicit money laundering activities many high-risk businesses might be involved in. Politically exposed persons (PEPs) and adverse media screening are the next two important screening phases to accomplish the requirement of AML in the payment sector.

A more advanced and comprehensive AML Transaction Screening has multiple security features for pre-screening, merchant KYC and identity verifications, background checks, and past transactional record proofs. Website content analysis and compliance security checks are the screening tools for underwriting the merchant credit risk.

AML Transaction Monitoring

Recently, the significance of live transaction vigilance has grown manifold, and even the international AML-CFT regulators, like the FATF and EU AMLD, have emphasized AML Transaction Monitoring. The regulators maintain that filing Suspicious Transaction Reports (STRs) and Suspicious Activity Reports (SARs) is the most substantial part of AML risk mitigation obligations.

The AI Machine Learning algorithms build a logic to relate the live data from transactions with the static customer data from CRM. In keeping with the pre-defined logic, the business transactions must match the thresholds set at the time of merchant onboarding. Different merchants have different payment thresholds depending on the transaction volumes, nature of the business, and country of operation.

This whole AML Transaction Monitoring automation is hence operated via a detection engine. The engine is built on a rule-based scenario model. It senses whether any merchant transaction or activity poses a risk to the AML-CFT security standards of the payment provider. The system sends an alarm as soon as a threat is determined, and the compliance team must review the alert. Any suspicious or threatening behavior or activity must be filed with the concerned authorities in the form of Suspicious Transaction Reports (STR) and Suspicious Activity Reports (SAR).

Challenges in AML Transaction Monitoring

False positives have been considered the biggest challenge. It is equally time-consuming and affects the business bottom line as genuine merchants often feel harassed and choose a different payment vendor instead because of excessive friction. However, the primary challenge that the payment providers find is to accomplish a frictionless integration of the AML Transaction Monitoring solutions in the existing organizational infrastructure. A comprehensive AML solution for payments with an easy cloud-based API solution doesn’t require additional hardware. It is much more scalable for integrating into the payment gateway and processing systems.

Thirdly, transaction laundering is a growing form of online money laundering and currently stands as the most significant challenge or threat to the payment industry. In transaction laundering, legitimate-looking merchants sell illegal goods or services via genuine-looking sites; the technique is highly sophisticated, and capturing it requires an advanced AML solution for payments.

Selecting the Best AML Solution for Payments

A cutting-edge solution for AML Transaction Monitoring comes with dual Know Your Merchant (KYM) and Know Your Payment (KYP) features. IDMERIT offers global payment providers its flagship IDMkyX AML-KYC and Identity Verification products.

IDMkyX is a complete one-stop solution to the requirement for AML in the payment sector. To learn more about AML Transaction Screening and AML Transaction Monitoring, please schedule an IDMkyX demo with our AML professional to learn more about our AML solutions for payments.

The post The Inevitable Role of AML in the Payment Sector and AML Transaction Monitoring Best Practices appeared first on IDMERIT.

• International AML-CFT Standards
• The U.S. Bank Secrecy and PATRIOT Acts
• The U.K. POCA Act and FCA Compliance
• The EU AMLDs and eIDAS Guidelines
• COAF and BCB Identity Verification Compliance in Brazil

In the past two decades, the concepts like global AML regulations and identity verification compliance have begun to gain much attention, mostly in the wake of the 2001 United States terror attacks that brought in laws such as the US PATRIOT Act, making the identity verification of individuals and businesses compulsory as part of AML-CFT measures.

This article spotlights how international organizations like FATF, EU AMLD, and sanctions bodies like OFAC eventually became prominent with important overhauls in identity verification requirements for banks and regulated sectors to combat the growing nuisance of money laundering and terrorism financing.

International AML-CFT Standards

The Financial Action Task Force (FATF) is an international AML-CFT policy-making body that sets global AML regulations. The 40 FATF AML and 9 CFT Recommendations are the pillars of international AML CFT standards. The 40 FATF AML Recommendations comprise guidelines on customer identity verification, risk-based KYC, Sanctions, PEP, and confiscating of assets.

Alongside verification of individuals and entities, FATF underscores the gravity of transaction monitoring and setting up Financial Intelligence Units (FIUs) by each FATF member nation. The financial and obligated institutions must monitor their customer transactions in real-time and submit Suspicious Activity Reports (SARs) and Suspicious Transaction Reports (STRs) to the state FIU for advanced scrutiny.

To combat the growing money laundering threats at the onset of virtual assets/cryptocurrencies, FATF has set forth Crypto Travel Rule to ensure the origins and movements of virtual currencies/tokens are monitored to combat money laundering predicate crimes linked to anonymous crypto transactions.

In addition to FATF, other international identity verification compliance-setting bodies observe identity verification requirements in banking and financial institutions. These institutions are the Wolfsberg Principles, Egmont Group of Financial Intelligent Units, Basel Committee on Banking Supervision, and FATF local chapters known as FATF Style Regional Bodies (FSRBs).

The U.S. Bank Secrecy and PATRIOT Acts

In the United States, the 1970 Bank Secrecy Act (BSA) forms the core of AML-KYC compliance; over the years, the BSA Act has evolved from time to time. The two most important thresholds for AML reporting under the BSA mandate are the Currency Transaction Report (CTR) and Suspicious Transaction Report (STR).

In the United States, the US PATRIOT Act 2001 mentions the state’s identity verification requirements, such as the Customer Identification Program (CIP), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD) for individuals and organizations.

The Bank Secrecy Act (BSA) authorities work with the Office of Foreign Assets and Control (OFAC) to impose various domestic and international sanctions on individuals, trade, and organizations. On the other hand, the Financial Crimes Enforcement Network (FinCEN) acts strategically with the U.S. AML authorities to disseminate BSA regulations.

The U.K. POCA Act and FCA Compliance

In the United Kingdom, KYC, CDD, and Transaction Monitoring measures are the three-core AML compliance that regulated businesses must follow. Proceeds of Crime Act, POCA 2002 defines all money laundering predicate crimes in the country. Additionally, the Sanctions and Anti Money Laundering Act, SAMLA 2018, gives the U.K. AML authorities the right to impose prompt sanctions against non-abiding entities and potential high-risk individuals.

The Financial Conduct Authority (FCA) is an important regulatory body that sets and examines the banking and financial sector’s AML compliance program in the U.K. The FCA works with Her Majesty’s Revenue and Customs (HMRC) to set AML-CFT standards for all the non-financial regulated sectors in the U.K.

The EU AMLDs and eIDAS Guidelines

Within Europe, the European Union (EU) Anti-Money Laundering Directives (AMLDs) are followed by the member states. The EU AMLD sets shared AML regulations based on regional typologies, and these guidelines are mandatory for the member nations to comply. The EU AMLDs recommend important AML-CFT guidelines, including risk-based intelligence, virtual assets rules, Politically Exposed Persons (PEPs), bribery, and corruption measures.

The EU adopted eIDAS guidelines in 2014 to homogenize digital identification and electronic signature and to ease inter-European business processes. The electronic IDentification, Authentication and Trust Services (eIDAS) brings remote video identification compliance for digital reforms in the EU and establish the region as a ‘Digital Single Market’.

COAF and BCB Identity Verification Compliance in Brazil

Money Laundering crimes linked to narcotics trafficking have been extensively prevalent in Latin American nations. The Brazilian Central Bank (BCB) works with the Conselho de Controle de Actividades Financieras (COAF) in Brazil, the largest South American economy, to bring AML reforms. The COAF is the main AML-CFT authority in Brazil that guides identity verification requirements, sanctions, PEP, adverse media, and transaction monitoring compliances to the financial and obligated sectors.

To learn more about international AML-CFT standards and your industry identity verification compliance, you may contact our IDMerit AML-KYC compliance officer. Thousands of businesses worldwide use IDMerit products and services; we ensure our clients always keep up with the global AML regulations and remain AML regulatory compliant with national and international standards.

The post Major Global AML Regulations and Identity Verification Compliance appeared first on IDMERIT.

How Does AML apply to Crypto?

Cryptocurrency advancement and its affiliations with financial crimes go hand in hand. Anti-Money Laundering (AML) in crypto is continuously evolving for its complex digital nature; criminals heavily exploit cryptocurrencies for bribery, corruption, narcotics trafficking, and ML-TF activities. Recently, cryptocurrencies have become the most sought-after method for miscreants who scheme to convert illegal crypto proceeds to fiat currencies. Other potential cryptocurrency money laundering threats involve online scams, ransomware, human trafficking, dark web activities, and sanctions or PEP watchlists evasions.

Different nations and international organizations have introduced crypto AML regulations to help the crypto industry combat financial crimes. Additionally, many nations have even banned crypto mining and put stricter vigilance on crypto exchange activities. An increasing number of nations have also merged the FATF Crypto Travel Rule within their AML regulations for cryptocurrencies. However, the regulations in the field of AML for crypto firms are still in their nascent stage.

Anti-Money Laundering and Crypto Regulations

Cryptocurrency Regulations in the U.S.

In the United States, cryptocurrencies are not yet defined as legal tender by its major AML-CFT standards-setting body, the Financial Crimes Enforcement Network (FinCEN). All state-approved cryptos are called “other value that substitutes for currency”. The BSA guidelines and registration with the FinCEN are the two important crypto regulations in the USA that all cryptocurrencies and Virtual Assets Service Providers (VASPs) must abide by and remain updated with.

The U.S. FinCEN AML-CFT Program – on crypto plus VASP- summarizes every aspect of AML-CFT, i.e., Know Your Customer (KYC), Currency Transaction Report (CTR), Suspicious Activity Report (SAR), Suspicious Transaction Report (STR), and Customer Due Diligence (CDD). The FinCEN is very particular about its June 2019 Travel Rule that mandates VASPs to maintain crypto CTR, SAR, and STR records and simultaneously report transactions crossing standard thresholds. For the crypto exchanges, the threshold is 10,000 USD.

The Securities and Exchange Commission (SEC) mentions that Cryptocurrencies are securities just like digital wallets. On the other hand, there is free trade for crypto derivatives, as mentioned by the Commodities Futures Trading Commission (CFTC).

The Office of Foreign Asset Control (OFAC), the U.S. statutory body on sanctions compliance, asserts mandatory screening against all virtual currency transactions, failing which the transaction must be blocked off instantly. FinCEN and OFAC applaud the Financial Action Task Force (FATF) Travel Rule regulation for scrutinizing cross-border crypto payments and anonymity in transactions.

Cryptocurrency Regulations in the U.K.

The Financial Conduct Authority (FCA) is the main AML-CFT body for cryptocurrency measures in the United Kingdom. All the Virtual Asset Service Providers (VASPs) must be registered with the FCA. Cryptocurrencies are not yet considered legal tender, and all crypto trading platforms are expected to follow the U.K. crypto regulations. As part of its AML-CFT measures, the FCA focuses on Identity Verifications of the crypto users and guides the exchanges against negligence while detecting anonymity in crypto transactions. The regulatory body puts unrelenting measures on Know Your Customer (KYC) and Customer Due Diligence (CDD) activities for combating terrorism as terrorists increasingly adopt new channels for the proliferation of weapons. Especially for those involved in high-risk crypto trading activities must be screened against sanctions, PEP, and adverse media lists.

All crypto-trading taxable earnings as defined by the Her Majesty’s Revenue and Customs (HMRC) in the U.K. Whether in the form of trading, investments, or Initial Coin Offerings (ICOs), all crypto activities in the U.K. come under the scope of AML-CFT regulations and are subject to transaction monitoring and record keeping.

International Regulations on Cryptocurrencies

The Financial Action Task Force (FATF) Recommendation 16 on DeFi cryptocurrencies has introduced stringent identity verification measures for crypto users and beneficiaries.  The FATF Crypto Travel Rule for the VASPs emphasizes maintaining the correct identification of the crypto users, including originators and beneficiaries. The FATF Recommendation 16 asks the VASPs to maintain and update the user’s Personally Identifiable Information (PII). The user database should be easily retrieved while investigating the Suspicious Activity Report (SAR) in any transaction exceeding the 1000 USD threshold. The FATF also propagates well-established subpoena laws while examining Suspicious Transactions Reports (SARs) for cryptos. An important FATF measure includes blocking crypto payments from sanctioned nations, individuals, or groups.

The 5th European Directive on Money Laundering 2015 mentions video-based identification, biometric authentication, and KYC verifications of crypto users. The 5AMLD says VASPs and crypto wallets follow the same AML-CFT measures as other regulated institutions. The Financial Intelligence Units (FIUs) of the member nations hold the right to authenticate the KYC documents of the crypto users from the crypto exchanges and crypto wallet companies.

How cryptocurrency can disrupt the fiat mode of trading and payments

• With easy conversions from fiat-to-crypto and crypto-to-fiat on popular exchanges, users are spared from exorbitant trading and transaction fees to buy popular cryptos. Buyers can also easily access cryptos on crypto POS terminals, pay cash and buy cryptos with much lesser transaction fees.
• The cryptocurrency debit card has amplified crypto potential in the trading system and has brought a revolutionary change in breaking the ‘asset-like’ image of these virtual currencies. eCommerce platforms have welcomed this disruption in payment systems for online shopping and utility and restaurant bill payments.
• There has been a significant decrease in crypto trading fees, with easy wallet-to-exchange syncing. Buying and trading on cryptocurrencies have been made super easy with these new technologies in the digital currency industry.
• With multiple authentication methods, holding crypto wallets for investors/traders has become more secure. Trading on exchanges and syncing the account with wallets is no longer time-consuming. It doesn’t require extra trading/transfer fees or excessive loading charges.
• For off-chain and on-chain transactions, the exchanges have buyer-seller agreements to meet the risk regulations. Crypto payment exchanges offer instant, fraud and chargeback-free transactions.
• Today’s payment gateways offer B2C crypto transactions with relatively less recurrent fees. The gateways support fiat and crypto payment modes, integrated with multiple cryptocurrency coins and tokens.

AML Transaction Monitoring in the Crypto Industry

There are various intricacies involved with Crypto AML Regulations; the biggest and the most difficult to address is the traceability of the transactions, as customer onboarding and customer relationships are completely non-face-to-face; digital currency promotes anonymous funding and anonymous cross-border transfers.  However, recently major crypto exchanges have fortified their onboarding identity verification security process of the users and their risk-based due diligence and continuous monitoring to withhold unverified suspicious transactions.

The non-face-to-face methods for VASPs and crypto wallet onboarding make cryptocurrencies a considerable high-risk business. Regulated businesses are advised to operate crypto AML Transaction Monitoring Software to combat money laundering and terrorism financing-related threats.

IDMerit extends state-of-art crypto AML Transaction Monitoring Solutions to crypto exchanges worldwide. Contact our Crypto AML Regulations Expert today to discuss an end-to-end Crypto AML-CFT software for your business.

The post A Guide to Anti-Money Laundering (AML) for Crypto Firms appeared first on IDMERIT.

Currently, there are approximately 250 watchlists in 195+ nations worldwide for regulated financial and non-financial institutions to monitor individuals and entities. The watchlists continuously change and update various formats, languages, and data structures. The blog discusses major sanctioning bodies that comprise nations, unions, and international bodies, each mentioning their distinct sanctions list, which does not always align with one another.

Sanctions List Monitoring

At present, the most renowned and powerful sanctions are those professed by the European Union (EU), Office of Foreign Asset Control (OFAC), United Nations Security Council (UNSC), and Her Majesty’s Treasury (HMT). Regulated and obliged entities must consider multiple watchlists to comply with comprehensive industry and region-specific sanctions screening guidelines. Sanctions list or AML watchlist is a multi-source ML-TF potential risk compiling of banned individuals or entities, regulatory and due diligence listings for the regulated financial and non-financial institutions. All the Consolidated Lists mentioned below get continually updated. Hence the firms and financial entities are required to operate sanctions screening solutions to remain AML-CFT compliant.

The U.S. Office Of Foreign Assets Control (OFAC) Sanctions List

Administered by the U.S. Department of Treasury (DoT), the OFAC sanctions list aims at the worldwide individuals and entities that raise potential threats to the security and integrity of the United States.

The OFAC Specially Designated Nationals List (SDN) is the most sought-after global watchlist encapsulating “individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries” and terrorists and drug traffickers of the non-targeted countries; the second one is the Consolidated Sanctions List (CSL) comprising non-SDN data sources.

The European Union (EU) Sanctions List

The EU sanctions list is part of a comprehensive EU Common Foreign and Security Policy (CFSP). Similar to other sanctions, economic and trade restrictions exist on individuals, businesses, governments, and external groups. The European Union states must comply with the EU sanctions policies to jointly and effectively combat money laundering and terrorism threats.

Office of Financial Sanctions Implementation (OFSI), UK sanctions list

THE OFSI regulations apply to all business entities and financial institutions, either located or established in the U.K. The United Kingdom’s financial sanctions list, a division of Her Majesty’s (HM)Treasury, OFSI, mentions sanctioned investments and freezing of assets. The Office of Financial Sanctions imposes sanctions and checks on AML Compliance for businesses and organizations.

Canada Sanctions

The United Nations Act (UNA), the Special Economic Measures Act (SEMA), and the Justice for Victims of Corrupt Foreign Officials Act (JVCFOA) are the three main acts under which the Canadian government can impose sanctions. To check on the Politically Exposed Persons (PEPs) connected to corruption practices, there is a special Freezing Assets of Corrupt Foreign Officials Act enforced by the government.

United Nations Sanctions

United Nations Security Council (UNSC) imposed sanctions is a consolidated watchlist of individuals and entities followed by regulated and obliged entities worldwide. United Nations sanctions include freezing assets, market access restrictions, travel bans, trade embargoes of specific products, etc. The UN sanctions are listed for both individuals and entities. The UN sanctions are the most important financial sanctions, and global industries must comply with them. There are countries and groups on the UN sanctions list, including Afghanistan, Central Africa, The Republic of the Democratic Republic of the Congo, Democratic People’s Republic of Korea, Iran, ISIL and Al-Qaida, Libya, Mali, Somalia, Sudan, and Yemen.

Why a Sanction Screening Software is Important

A sanctions screening software performs real-time batch screening, identity checks, and transaction monitoring. It simultaneously performs regulatory checks to produce a comprehensive AML-CFT report. In an end-to-end AML sanctions screening software, there are other important Interpol sanctions, Politically Exposed Persons (PEPs) watchlists from the security commission, and specific reputation plus negative news checks such as Adverse Media screening.

IDMerit’s IDMaml solutions assure frictionless sanctions screening against unverified AML reports that may result in reputational damage to your business and losing valuable customers affecting your bottom line. We offer a complete AML watchlist and sanctions screening guidelines to global financial and non-financial businesses.

For client onboarding, transaction monitoring, sanctions screening, and KYC solutions contact the IDMerit AML watchlist expert today.

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Trade-Based Money Laundering (TBML) exploits international trade and trade finance systems for laundering illicit proceeds. It involves a series of schemes for TBML, including falsifying invoices, commodity misclassification, forming shell companies, forging trade documents, etc., for illegally moving funds across the continents.

Currently, international financial institutions estimate $2 trillion worth of trade, out of around $20 trillion, to get laundered annually in the form of Trade-Based Money Laundering. Customs fraud is mainly synonymous with Trade-Based Money Laundering. Customs manipulations like price, quantity, and quality alterations in the import/export of the goods are involved in the TBML of illicit bulk cash across nations. This blog sheds light on the TBML methodologies, TBML red-flag indicators, and its regulatory compliance policies.

Widespread TBML Methodologies Exploited by Money Launderers

Over Invoicing, Under Invoicing – When an exporter receives more money than the value of goods sold to an importer, it’s over-invoicing. On the other side, when an importer receives more money while selling the goods in the local market after buying them at an unvalued price from an exporter, it’s under-invoicing. Both the instances trigger an extra value transferred via trade between the parties as money laundering.

Multiple Invoicing or Carousel Transactions – A money launderer misuses the legal system to produce multiple invoices for the same shipment by complicating the payments with more than one financial institution. It’s a typical multiple-invoicing method for legitimizing one payment more than once and integrating illicit money into the financial system.

Over Shipment, Under Shipment – The trade involves misrepresenting the number of goods; the over and understatement of items give the money launderers a scope to process excessive payments of illicit money.

Inferior Shipment – It involves exporting cheaper quality goods with falsified invoices and submitting bills for relatively costly goods to customs.

Front Fake Commodities – The shipment of commodities does not match with the business classification, and the trade is made to transfer the illicit money value rather than the actual goods.

Shell Companies – Offshore companies, acting as front or shell companies for organizations involved in sending excessive funds across the continents. For years, law-breakers have preferred shell companies as camouflage to facilitate TBML activities. At times, it may so happen that established companies make their foray into an entirely distinct market segment to divert their income via shell operations.

Phantom Shipment – There may be no shipment at times, and the invoices are still generated and bills passed in the customs.

Major TBML Red-Flag Checks for Customs and Financial Institutions

A joint effort of Egmont Group and Financial Action Task Force (FATF) to combat the worldwide TBML activities has set-forth imperative red-flag checks on this trade-based financial crime.

Common Anomalies – International trade-related activities involve a lot of paperwork. All the more challenging is that the financial institutions are only exposed to the official documents and not the commodities in trade. So, on the face of it, common TBML red flags involve finding anomalies in product pricing, irregular product description, and price matching with the product quantity and quality standards.

Unnatural Transactions – Financial institutions must keep a regular Transaction Monitoring on the trade activities of the parties involved; the monitoring includes the nature of transactions, business locations, background checks, the characteristics of the traded goods, etc. Unusual transactions also consist of substantial below-threshold cash payments and inexplicable third-party payments.

High-Risk Jurisdictions – Businesses set up in jurisdictions with weak AML-CFT regulations, suspicious addresses, with an indistinct online presence. All the mentioned red flags give a clear indication of out-of-sync business activity. Such entities generally have unstructured business operations with no proper payroll, marketing, advertisement, or accounting reports.

Free-Trade-Zones (FTZs) – The customs-free nature for bringing liberalization in global economic activities has paved the way for acceleration in the TBML activities as criminals are continually exploiting the eased-up trade barriers in around 3500 ports worldwide. Trade activities at the FTZs are more vulnerable to being misused for laundering money.

How Regulated Institutions Must Remain AML-CFT Complaint

Risk-Based Model – Financial Institutions (FI) must follow regulatory Customer Due Diligence (CDD) and keep their Know-Your-Customer (KYC) records updated. It is on the part of the FI to conduct proactive Enhanced Due Diligence (EDD) on the potential high-risk clients with stringent identity checks and transaction monitoring. In addition, the records must be kept updated and presented to the Financial Intelligence Unit (FIU) authorities on suspecting unusual trade activities.

Transaction Monitoring – The financial institutions that handle large trade-related activities must monitor their clients in real-time. All Suspicious Transaction Reports (STRs) and Suspicious Activity Reports (SARs) must put the financial authorities to alarm. A series of SARs and STRs trade datasets also help establish emerging TBML typologies for predictive analysis.

AI-Based Machine Learning Algorithms – All leading financial institutions utilize the best-in-class data analytics technology to monitor transactions. The Artificial Intelligence-based rule engine algorithms instantly trigger unusual events to discover trade-related suspicious activities occurring across the businesses in real-time.

Know-Your-Business (KYB) – The financial and other regulated institutions must regularly check on the businesses they are doing business with. Know-Your-Business (KYB) involves business identity verifications for genuine business onboarding. At the same time, the regulated financial institutions must authenticate the Ultimate Beneficial Ownership (UBO) for both individuals and businesses involved in trade transactions.

Sanctions, PEPs and Adverse Media – The compliance officers must screen businesses and individuals against Sanctions and PEP lists. In addition, adverse news about the owners and entities across the press and online media indicates brewing illicit activities somewhere down the line.

Conclusion 

Given the scope plus volume of today’s trade, masking illicit gains with trade-based activities has become easier for the launderers. Furthermore, there are fewer initiatives taken in the TBML AML-CFT methods than in other money laundering methods. It has been believed that the global trade system is so complex – involving many deterrents and regulatory sluggishness – that it has made laundering money for criminals and terrorists more convenient via global merchandising activities.

The unrestrained threat of Trade-Based Money Laundering has given this financial crime an Advanced Persistent Threats (APTs) risk status, which is otherwise mostly used for cybercrimes. If you are a financial or regulated institution seeking AI-Based client behavior tracking, document verification, and suspicious transaction reporting solutions to fulfil your business compliance, schedule a call with the IDMerit AML solution advisor. We offer best-in-class Fraud Protection and KYC-KYB Compliance solutions to businesses worldwide.

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