AML (anti-money-laundering) procedures involve personnel, frameworks (like the EU Anti-Money Laundering Directives, the UK Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017), and branches being dedicated to monitoring and reporting suspicious transactions.
A part of AML is specific procedures like KYC (Know-Your-Customer) protocols, which require customers to provide documentation that will verify they are a law-abiding citizen.
The Know-Your-Client procedure involves multiple steps the point of which is to certify that the financial activity initiated by the client is not illegal.
During a KYC check a user (for example, at the point of registering at a cryptocurrency exchange) may, and highly likely will, be asked for (but not limited to) the following documents:
- A passport to certify they are a real person and not a PML/PMLO (Professional Money Laundering Organisation, described in the report by FATF)*.
- A mobile number to verify they are, in fact, the actual user and not someone impersonating the client (2FA checks).
- Proof that they live in a country that supports AML (at this point they will be asked for a bank statement or a recent (not older than 3 months) bill.
*Even if the KYC procedures are conducted for a company, and not for a private person, this company must first be associated with some kind of individual. Which should, in turn, send a selfie with a passport within the framework of KYC. A beneficiary of the company is then established in obligatory manner. These are referred to as UBO, Ultimate Beneficial Owner.
Organisations in charge of KYC will use the submitted documentation to run checks such as running users’ data against lists of sanctioned personnel, PEPs, terrorist-, blacklists, and watchlists, document integrity checks, face math checks, identity checks, and so on to ensure the documentation is valid and not expired, that the submitted data matches with the data in the documentation, that the customer is at the stated address, that they are not underage, and so on.
Around the world, at the very minimum trillions of dollars are estimated to be laundered every year according to FATF.
Various agencies like FinCEN (Financial Crimes Enforcement Network), SEC (The Securities and Exchange Commission), The Anti-Money Laundering Global Task Force (GTF-AML), The International Monetary Fund (IMF), The United Nations Office on Drugs and Crime (UNODC), Interpol, Europol, and numerous others work on reducing the magnitude of money laundering crimes associated with PMLs (Professional Money Launderers).
Due to cryptocurrencies’ lack of centralization, which means there is no regulating it any satisfactory way that was implemented so far, and its features that allow concealing payments origins and destinations, the niche of cryptocurrencies presents functionality that could be taken advantage of by malicious third parties for purposes of money laundering. With the rising number of cryptocurrency and blockchain-related crimes, there is an exponentially growing need for measures that could counteract this functionality and provide greater transparency and accountability.
AML/KYC frameworks around the world help stabilize and ensure safety and transparency of the upcoming cryptocurrency markets, which are in dire need of regulation and risk assessors (The Financial Action Task Force report).