How crypto businesses prevent money laundering

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With the decentralised nature of blockchain technology, ensuring compliance with anti-money laundering (AML) regulations has become a priority for exchanges, custodial services, and other crypto-related platforms. An essential tool in this effort is the AML wallet check, which helps crypto businesses assess risks associated with digital transactions.

Let’s discuss how crypto is used by fraudsters and how to prevent it.

How Are Crypto Assets Used for Money Laundering?

Cryptocurrencies, by design, offer anonymity and a lack of central control, making them attractive to those looking to launder illicit funds. Criminals use several techniques to launder money through crypto assets. One standard method involves layering, where funds are split into smaller amounts and moved across multiple wallets and exchanges to obscure their origin. Using mixers or tumblers, which combine multiple transactions to mask the source of funds, is another tactic fraudsters employ.

Criminals often use crypto wallets to store and transfer funds anonymously. These wallets provide easy access to convert stolen or illegally obtained fiat currency into crypto and then transfer it across borders with minimal scrutiny. The nature of peer-to-peer transactions and the fact that cryptocurrencies are not subject to the same regulations as traditional financial institutions add layers of complexity to combating these schemes.

How Can Crypto Exchanges Protect Themselves and Their Clients from Crypto Misuse?

To address the challenges of money laundering in the cryptocurrency sector, crypto exchanges and other businesses implement robust AML measures:

- Customer risk assessments. These assessments involve gathering and verifying identity information through know-your-customer (KYC) protocols. By implementing stringent KYC checks, exchanges can reduce the risk of onboarding users who may engage in illicit activities.
- Transaction monitoring and reporting. Exchanges must also employ advanced transaction monitoring tools that track the flow of funds in real time. Suspicious activities, such as unusually large transfers or transactions that are structured to evade AML thresholds, should be flagged and reported to relevant authorities. These reports, known as Suspicious Activity Reports (SARs), are a standard requirement in most jurisdictions where crypto platforms operate.
- Blockchain analytics and enhanced due diligence. Blockchain technology itself can aid in the fight against money laundering. Analytics platforms can trace the movement of cryptocurrencies and identify patterns that suggest illicit activities. These tools allow exchanges to perform AML checks and determine if a wallet has been flagged for prior involvement in illegal transactions. This step helps businesses eliminate risks before allowing users to buy coins on crypto exchanges.

The impact of cryptocurrencies on the global financial landscape is undeniable, but with this innovation comes the challenge of preventing their misuse for illicit activities like money laundering. Crypto businesses, particularly exchanges, play an important role in ensuring the safety and legitimacy of the industry by adhering to AML regulations.