Résumé

Anti-money laundering regulations attempt to stop the illegal laundering of illicit funds. Governments and multinational organizations like FATF legislate against money laundering activities.

Money laundering takes “dirty” money and turns it into clean money. To do this, you can disguise the origins of the funds, associate them with legitimate transactions or invest them in legal activities.

Crypto is an attractive way to launder money due to its privacy, difficulty in recovering funds, and underdeveloped legislation. Large-scale seizures of cryptocurrencies show that criminals regularly use them to launder considerable sums of money.

Binance and many other cryptocurrency exchanges track suspicious behavior as part of their AML compliance and report it to authorities.

Introduction

Anti-money laundering (AML) regulations help combat the laundering of illegal funds. This is a requirement for centralized cryptocurrency exchanges to contribute to customer security and the fight against financial crime. Due to the anonymous nature of cryptocurrencies, their regulation relies heavily on monitoring customer behavior and identity.

What is AML?

AML consists of regulations and laws that deter the movement and laundering of illegal funds. The AML is closely associated with the Financial Action Task Force (FATF) set up in 1989 to encourage international cooperation. For example, anti-money laundering measures target terrorist financing, tax evasion and international smuggling. The form of AML differs between countries, but there is a global effort to align with standards.

As technology has advanced, so have money laundering methods. Therefore, anti-money laundering software usually flags behavior that could be considered suspicious. These signals and measurements include large money transfers, repeated entries of funds into an account, and cross-checks with users on watchlists. The fight against money laundering does not only apply to cryptocurrencies. Any asset or fiat currency can be monitored in accordance with AML regulations.

It took time for regulation to catch up with cryptocurrencies. While blockchain technology is constantly innovating, anti-money laundering procedures change regularly, as do compliance measures. However, this is not always seen as positive. Many cryptocurrency enthusiasts appreciate the anonymity and decentralization of the asset. This is why increased regulation and documentation of user identities is sometimes considered unethical in crypto.

What makes AML and KYC different?

Know Your Customer (KYC) checks are a requirement for financial institutions and service providers under money laundering laws. KYC requires a user to submit personal information verifying their identity. This process creates accountability for all financial transactions made by the user. KYC is an integral part of the fight against money laundering and is subject to due diligence by customers. This contrasts with other anti-money laundering practices that involve reactively investigating suspicious behavior.

What is money laundering?

Money laundering involves making illegal funds such as legitimate money, investments or financial assets. Profits come from crimes such as drug trafficking, terrorism and fraud. Money laundering laws and regulations differ between countries. However, improving rule alignment is a goal of many jurisdictions and the FATF.

There are three steps to money laundering:

• Investment: introducing “dirty” money into the financial system, for example with a cash-based business.

• Shuffling: moving illegal funds around to make it harder to track them. The use of cryptocurrencies is a way of hiding the origin of “dirty” money.

• Mainstreaming: using legal investments and other financial channels to reintroduce “dirty” money into the economy.

How do people launder money?

There are several ways to accomplish the three steps above. A traditional method is to create fake invoices for cash services in stores, restaurants and other businesses. An individual or organization uses businesses as fronts for money laundering. Cybercriminals create fake invoices and pay them with “dirty” money, turning them into legitimate income. These feeds are then mixed with genuine transactions so that it is difficult to distinguish between the two.

However, it is now common for illegitimate funds to be digital rather than physical. This difference changes the methods used for money laundering. Today there are even more options than ever before for hiding and laundering “dirty” money. For example, you can transfer money directly without going through a bank. Payment networks such as Paypal or Venmo provide another layer for launderers and regulators to monitor.

Anonymizing technologies such as VPNs and cryptocurrencies make the situation even more difficult. It may be impossible to link a specific person to the laundering activity. One of the methods to combat this problem has been the tracking of “output” cryptocurrencies. By tracking blockchain transactions to an exchange, you can link laundered funds to a cryptocurrency exchange account or bank account under someone's name. However, purchasing cryptocurrencies with cash or through peer-to-peer services makes it difficult to track dirty money entering or leaving the financial system.

Another preferred method is to use online gambling sites. Criminals deposit the money they want to launder into an online gambling account. They will then proceed to make bets to make the account legitimate. Finally, they withdraw their funds and are left with money of their own. Usually this is done with multiple accounts so as not to arouse suspicion. A single account with large amounts of money can cause AML checks.

How do AML measures work?

You can break down the basic activities of a cryptocurrency regulator or exchange into three steps:

1. Suspicious activities, such as large cash inflows or outflows, are automatically flagged or reported. Another example of inconsistent behavior, such as an increase in the number of withdrawals from a generally low activity account.

2. During or after an investigation, the user's ability to deposit or withdraw funds is suspended. This action cuts short any possibility of laundering. The investigator then conducts a suspicious activity report (SAR).

3. If there is evidence of illegal activity, the relevant authorities are informed and the evidence is provided. If stolen funds were found, they would be returned to their original owners wherever possible.

Cryptocurrency exchanges generally take a proactive approach to AML. With the large amount of compliance pressure placed on the crypto industry, it is normal for exchanges like Binance to be more vigilant and cautious than necessary. Monitoring transactions and strengthening checks are the two main tools in the fight against money laundering.

What is FATF?

The FATF is an international organization founded by the G7 to combat terrorist financing and money laundering. By creating a set of standards that governments around the world would have to adhere to, money launderers are finding it increasingly difficult to find jurisdictions in which to operate.

Cooperation between governments also improves information sharing and tracking of money launderers. More than 200 jurisdictions have committed to complying with FATF standards. The FATF monitors all participants to ensure they are complying with regulations with regular peer reviews.

Why do we need AML in crypto?

Due to the pseudonymity of cryptocurrency, criminals use it to launder illicit funds and commit tax evasion. Regulating cryptocurrencies improves their overall reputation and helps ensure that appropriate taxes are collected. Improvements to AML efforts benefit legitimate cryptocurrency users, although they require more effort and time from all parties.

According to Reuters, criminals laundered approximately $1.3 billion (US) in “dirty” money through cryptos in 2020. Cryptocurrencies lend themselves to money laundering for several reasons:

1. Transactions are irreversible. Once you send funds through the blockchain, they cannot be sent back unless the new owner sends them back. The police and regulators cannot recover funds for you.

2. Cryptocurrencies enhance anonymity. Some currencies like Monero prioritize transaction privacy. There are also “mixing” services that mix cryptocurrencies across different wallets to make them difficult to track.

3. Regulation and taxation of cryptocurrencies remain uncertain. Tax authorities around the world are still struggling to effectively tax crypto, which criminals are taking advantage of.

Examples of cryptocurrency money laundering

Authorities have had several successes in tracking and catching criminals who launder their funds through cryptocurrencies. In July 2021, British police seized approximately US$250 million worth of cryptocurrencies used for money laundering. The seizure is the UK's largest to date of crypto funds, breaking a previous UK record of $158 million set just weeks before.

That same month, $33 million was seized by Brazilian authorities in a sophisticated money laundering operation. Two people and 17 companies were involved in purchasing cryptocurrencies to hide funds of illegal origin. The criminal organization involved had set up the businesses for this sole purpose. Cryptocurrency exchanges also knowingly cooperated with criminal organizations and did not follow correct anti-money laundering procedures.

How does Binance handle AML?

Binance has proactively implemented numerous anti-money laundering measures, including expanding its money laundering detection and analysis capabilities. These efforts fall under its AML compliance program. Binance also works closely with international agencies to help bring large cybercriminal organizations to justice.

For example, Binance played a role in providing evidence that led to the arrest of several members of the Cl0p ransomware group. Binance reported suspicious transactions and criminal activity which were subsequently investigated. Authorities have used this material in cooperation with international agencies to identify money launderers and ransomware attacks, including the Petya attack.

To conclude

Even though money laundering adds time to the cryptocurrency trading process, it is important to protect everyone. Unfortunately, governments and organizations will never be able to completely eradicate money laundering activities, but implementing regulations certainly helps. Technology is getting better at detecting potential money laundering, and major cryptocurrency exchanges are taking their role seriously in helping fight crime.