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.

Anti-money laundering regulations become more stringent every year as do the associated fines. On January 1, 2021, Congress passed the National Defense Authorization Act for Fiscal Year 2021 (the NDAA), which includes the most substantial and sweeping improvements surrounding AML legislation. This omnibus bill includes amendments to the USA Patriot Act which address a wide range of gaps in previous legislation.  The US’ AML Act 2020 (AMLA) was designed to address changes in the technological landscape and the lack of motivation (monetary or otherwise) for whistleblowers to share AML information with authorities.

Key Provisions of the AMLA 2020

The AMLA 2020 brought forth major changes and amendments which strengthened the penalties for non-compliant banks and financial service organizations. Major changes include:

• Stringent AML Enforcement Through Improved Compensation For Whistleblowers
•  AMLA 2020 Expands Existing BSA/AML Violation Penalties
• AMLA 2020 Legislation Allocates More Government Resources Committed to Address Money Laundering 
• AMLA Provides Additional Statutory Authority for DOJ to Seek Documents from Foreign Banks & Financial Institutions
• The AMLA References a Pilot Program To Share SAR (Suspicious Activity Report) Data Across International Borders
• The AMLA Extends the BSA’s Reach To Cryptocurrency (Nontraditional Value Transfers)

7 Anti-money laundering Compliance Fines You May Have Missed

“Financial institutions have been hit with $10.4 billion in global fines and penalties related to Anti-money laundering (AML), Know Your Customer (KYC), data privacy, and MiFID (Markets in Financial Instruments Directive) regulations in 2020, bringing the total to $46.4 billion for those types of breaches since 2008,” ComplianceWeek reports. Failure to comply with Anti-money laundering laws and regulations brought heavy fines in 2020 and continues to increase. Below are seven of the largest fines levied on banking & financial institutions:  

1. 2019 Data Breach leads to Capital One fine of $80 Million 

The US Office of the Comptroller of the Currency (OCC) levied an $80 million civil fine against Capital One in August for its mismanagement and inadequate security systems. According to Fortune Magazine, “the bank’s own internal audit failed to identify “numerous weaknesses” in its management of the cloud environment and ‘engaged in unsafe or unsound practices that were part of a pattern of misconduct.’”  The breach compromised over 140,000 Social Security numbers and 80,000 bank account numbers. Paige Thompson, a former Amazon Software Engineer, stands accused of stealing personal identifiable information (PII). Charges include computer fraud and “abuse for an intrusion on the stored data.”

Large gaps in information security and Anti-money laundering regulations influenced the adoption of the most recent AML legislation which helps support previous computer security and fraud legislation. While Thompson’s motives may still be under investigation, proper employee vetting through background checks and PII security policies are paramount to ensuring these types of breaches do not occur. Banks and corporations are required to follow stringent information security guidelines to avoid large fines and public scrutiny. 

2. OCC Issues $85 Million Penalty To Usaa Federal Savings Bank

The OCC slapped USAA Federal Savings Bank with an $85 million fine for risk management inadequacies in October. This is the second fine this San Antonio bank has been levied with. According to the Office of the Comptroller of the Currency (OCC), “bank’s failure to implement and maintain an effective compliance risk management program and an effective information technology risk governance program.”

Risk management and compliance programs including Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are mandated by the Bank Secrecy Act and recently passed Anti-money laundering (AML) legislation. Large fines and penalties are being levied around the globe as banks and covered financial institutions (and cryptocurrency exchanges) fail to build proper compliance programs.  

3. Swedish Bank SEB Fined $107 Million by Regulator For Baltic AML Failures

Skandinaviska Enskilda Banken (SEB) received a $107 million fine in June for Anti-money laundering (AML) failures. SEB, the second largest bank in Sweden, has been fined for failing to  , Swedish Financial Supervisory Authority (FSA), the regulatory authority, charged the bank in early June of 2020 and levied the fine which highlights the global issues revolving around Anti-money laundering compliance in the financial services industry, “Despite the elevated risk of money laundering in the Baltics, the bank has done too little, too late,” says FSA director general Erik Thedéen.

Basic AML due diligence includes identity verification, validation, and age verification (to name a few). Not only are AML violations on the rise, victims of complex schemes and fraud are rampant within money service provider industries. 

4. Western Union Refunds $153 Million For Scam Victims

“Western Union turned a blind eye to the fraudulent payments made through its money transfer system,” says Andrew Smith, director of the FTC’s Bureau of Consumer Protection. Western Union began refunding defrauded customers in March after they were ordered to by theFederal Trade Commission (FTC). The lack of Know Your Customer (KYC) compliance can severely damage an organization and harm millions of account holders. 

According to the United States Federal Bureau of Investigations, “The FTC’s complaint against Western Union alleged that for many years, Western Union was aware that fraudsters around the world used the company’s money transfer system to bilk consumers, and that some Western Union agents were complicit in the frauds. The FTC’s complaint alleged that Western Union failed to put in place effective anti-fraud policies and procedures and to act promptly against problem agents.” While in this case, Western Union is said by Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, to have “turned a blind eye,” more banks and Money Service Providers (MSP’s) are unaware of the mandatory KYC/AML regulations that can protect them from these types of horrible situations.  

5. Citi To Pay $400 Million Occ Fine For Risk Management Failures

One of the world’s largest financial institutions, Citi Bank, has been ordered to pay $400M in a case that brings to light severe risk management issues. The South Dakota bank was found to have been lacking internal controls and financial safeguards including those relating to AML and data governance. According to the consent order, Citibank needs to complete a “thorough redesign of data architecture, re-engineering of processes, and modernisation of system applications and information technology infrastructure.” This is the second fine in which Citi has been hit with in recent years showing its glaring need to update and comply with regulatory mandates and internal financial controls. 

6. Westpac Agrees To Record Aud 1.3 Billion Fine For Aml Failures

Westpac, one of Australia’s largest banks, agreed to pay a record AUD 1.3 billion ($959m) fine for money laundering breaches in September. According to court filings and Fintech Futures, the financial institution, “failed to keep records related to the origin of the transactions, or carry out “appropriate customer due diligence.” These are major lapses in AML compliance procedures and this underscores the need for both proper, and timely, Know Your Customer compliance as well as ongoing transaction monitoring. 

Westpac admitted to 76,000 additional violations including, “failures to reasonably monitor customers for transactions related to possible child exploitation”, and “further failures to assess money laundering and terrorism financing risks.” Compliance officers should take note of the challenges that exist for large banks and reevaluate their preparedness in order to avoid fines and penalties such as those seen in the above cases. 

7. Compliance Lapses & Fraudulent Accounts Generate Billions In FInes For Wells Fargo

Wells Fargo bank, the fourth-largest in the US, will pay a hefty fine of $3 billion for its failure in security procedures. The Security and Exchange Commission will receive $500 million of the total and plans to use the funds to offer restitution to those customers who were defrauded by Wells Fargo. According to Fintech Futures, the bank “pressured employees to cross-sell products and services, leading them to create millions of fake accounts using forged and fraudulent customer signatures.” Proper Know Your Customer compliance procedures and fraud weren’t incorporated into the account opening process as internal documents showed that, “[e]mployees of the bank were found to be using their own contact details on application forms, so as to ensure that the real customer was never informed about the accounts opened in their name.” 

Follow our LinkedIn and Facebook pages for Anti-money laundering news and significant regulatory changes. 

About IDMERIT: Headquartered in San Diego, California, IDMERIT provides an ecosystem of identity verification solutions designed to help its customers prevent fraud, meet regulatory compliance and deliver frictionless user experiences. The company is committed to the on-going development and delivery of offerings that are more cost-effective and comprehensive than other solution providers. IDMERIT was funded by experts who have been sourcing data on personal and business identities across the globe for over a decade. This access to official and trusted data throughout the world has become increasingly important as companies find themselves completing transactions across borders as a standard course of business. www.idmerit.com

The post 7 Anti-Money Laundering Fines You May Have Missed: Multinational Banks Held Accountable By Regulators For Compliance Missteps appeared first on IDMERIT.

KYC is the term for the series of due diligence activities performed by regulated financial companies that are designed to check for the relevant information required to safely do business with their clients. At a higher level, KYC also forms part of the banking regulations which govern the financial sector.

AML is a much more recent development, introduced during the 1989 G7 Summit in Paris, as response to concerns about criminal activity across borders. In the US, AML automatically applies to transactions over $10,000, which is still comfortably below where the price of BitCoin and Ethereum, the two premier cryptocurrencies, currently sit. Consequently, having a strong AML system in place to prevent exposure to illegal activity – in particular, the use of cryptocurrency to launder money, is extremely important.

The presence of these two protocols has both positive and negative effects on investors looking to convert their cryptocurrency into fiat. The obvious negatives are that it creates a barrier to easily withdrawing cryptocurrency and using it to buy goods and services in the real world – arguably the single greatest failure for major cryptocurrencies in this day and age.

The positives however, are more considerable. The potential danger of an unregulated global currency should be obvious – one need only look at the corruption of DEA agents in the Ross Ulbricht trial to see that the opportunity to own large amounts of anonymous currency presents a great deal of temptation. Hundreds of millions of dollars of Bitcoin alone have been stolen since 2013, and proper security checks on who is handling what are paramount in today’s global financial climate.

What exactly constitutes sufficient AML and KYC checks, however, is open to some debate. AML, arguably the most important of the two protocols, is not globally binding, so BitCoin wallets located in less salubrious nations can be populated by clients who are deliberately seeking to use their cryptocurrency for nefarious purposes. It is not difficult for a simple Google search to bring up lists of wallets that have poor (or almost non-existent) AML protocols in place. While much of this information is designed to help investors know which companies to avoid (for the security of their own currency), it serves equally as a means to identify which wallets may be beneficial to criminals looking to either store their ill-gotten gains, or to exploit the finances of others.

Should cryptocurrency grow, especially in light of the BitCoin Cash developments, the need for AML and KYC checks to head off the possibility of using cryptocurrency as a form of tax evasion is clearly going to be necessary.

For a wallet (or other cryptocurrency service) looking to prove high quality service to users, it is important to prove to potential investors that the AML and KYC protocols are robust – would you put your money in bank that did not know who was on site at any given time? It is unlikely.

IDMERIT’s solutions for Anti-Money Laundering allows businesses to quickly and easily identity high-risk applicants and manage them in an appropriate manner. Our data identifies and focuses on key markets across the world, while staying current on some of the most stringent identity management models. Our document image validation management allows businesses to approve the credibility of more than 520 global record formats, including national ID cards.

A financial services provider does not have to be deliberately complicit in order to assist in money laundering, it simply needs to be lax on rules – for whatever reason.

The post Why AML & KYC is crucial for Bitcoin & other cryptocurrency transactions appeared first on IDMERIT.