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Money Laundering Countermeasures: Definition, History, and Functions

Uncover techniques used by Anti-Money Laundering (AML) laws to thwart illicit financial transactions and shield the worldwide economy. Dive into crucial strategies such as Know Your Customer (KYC) and Customer Due Diligence (CDD).

Money Laundering Countermeasures: Understanding Their Origin, Evolution, and Mechanisms
Money Laundering Countermeasures: Understanding Their Origin, Evolution, and Mechanisms

Money Laundering Countermeasures: Definition, History, and Functions

The Financial Action Task Force (FATF), an intergovernmental body, is at the forefront of promoting international standards against money laundering and terrorism financing. These standards are now extending to the cryptocurrency industry, which was once largely unregulated.

Anti-money laundering (AML) regulations and practices like Know Your Customer (KYC) and Customer Due Diligence (CDD) are becoming increasingly prevalent in the cryptocurrency world. These measures require cryptocurrency exchanges and other non-traditional financial sectors to verify customer identities, monitor transactions, and report suspicious activities. The goal is to prevent illicit activities such as money laundering and terrorist financing.

Cryptocurrency exchanges, considered money services businesses, must conduct KYC checks to confirm the identities of their customers, often through photo ID verification and background screening. They also apply CDD measures to evaluate the risk profile of customers, track the source of funds, and screen against sanction lists and Politically Exposed Persons (PEPs). This may include continuous transaction monitoring and the use of automated AML screening tools to detect suspicious patterns or activities.

However, the decentralized and pseudonymous nature of cryptocurrencies, jurisdictional differences, and the evolving regulatory environment pose challenges to these AML regulations. Yet, enforcement and adoption of AML/KYC practices are strengthening. For instance, the Bank for International Settlements (BIS) recommends various compliance levels, from strict KYC checks to transaction blocking for addresses linked to illicit activities. Crypto exchanges may also employ technologies such as smart contracts for compliance and allow/deny lists to mitigate laundering risks.

Beyond exchanges, stablecoin issuers and wallet providers are adopting similar safeguards to ensure compliance. Regulatory changes like the U.S. IRS reporting requirements and the SEC's evolving stance further increase the scope and rigour of AML enforcement in the crypto space.

In the U.S., while cryptocurrencies remain largely unregulated, the Anti-Money Laundering Act of 2020 requires companies to comply with financial screening regulations that apply to fiat currencies and tangible assets. Individuals also have obligations under AML regulations, such as reporting receipts of multiple related payments totaling more than $10,000 to the Internal Revenue Service (IRS) on IRS Form 8300.

The FATF's 40 Recommendations provide a framework for AML and combating the financing of terrorism (CFT) regulations and policies in over 190 jurisdictions worldwide. The FATF Travel Rule, an international AML framework that would require collecting and sharing beneficiary information for cross-border cryptocurrency flows, is gaining traction among regulatory bodies worldwide.

The anonymity associated with cryptocurrency transactions has caught the attention of AML experts and regulators due to its potential to be exploited by criminals to move money. However, the increasing adoption of AML regulations and technologies is a promising step towards mitigating financial crime risks in the crypto space.

In 2022, addresses connected to illicit activity sent nearly $39.6 billion worth of cryptocurrency, up 141% from 2021. This underscores the importance of continued efforts to strengthen AML measures in the cryptocurrency sector.

[1] FATF, "Recommendations on Virtual Assets and Virtual Asset Service Providers," October 2019. [2] Financial Crimes Enforcement Network (FinCEN), "Application of FinCEN's Regulations to Certain Business Models Involving Convertible Virtual Currency," May 2013. [3] Internal Revenue Service (IRS), "Virtual Currency Guidance," March 2014. [4] Financial Action Task Force (FATF), "Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers," October 2020. [5] Financial Action Task Force (FATF), "Improving Global AML/CFT Compliance: On-going Process," June 2021.

  1. In light of the Financial Action Task Force (FATF), it is evident that AML regulations are expanding to the cryptocurrency industry, which was previously unregulated.
  2. Cryptocurrency exchanges, considered money services businesses, are now required to verify customer identities through KYC checks and apply CDD measures to assess the risk profile of customers.
  3. The decentralized and pseudonymous nature of cryptocurrencies, jurisdictional differences, and the evolving regulatory environment pose challenges to these AML regulations.
  4. Enforcement and adoption of AML/KYC practices are strengthening in the cryptocurrency world, with regulatory changes like the U.S. Anti-Money Laundering Act of 2020 and IRS reporting requirements increasing their scope and rigor.
  5. The FATF's 40 Recommendations offer a global framework for AML and CFT regulations, and the FATF Travel Rule is gaining traction among regulatory bodies, requiring the collection and sharing of beneficiary information for cross-border cryptocurrency flows.
  6. Beyond exchanges, stablecoin issuers and wallet providers are adopting similar AML safeguards to ensure compliance, protecting the cryptocurrency landscape from illicit activities.
  7. Despite the anonymity associated with cryptocurrency transactions, the increasing adoption of AML regulations and technologies hints towards a promising shift in mitigating financial crime risks within the crypto space, given the rise in illicit activity reported in 2022 (nearly $39.6 billion worth of cryptocurrency sent to addresses connected to illicit activity). [1][2][3][4][5]

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