Examining the AML Risks and Red Flags of Crypto Exchanges

Blog / AML Risks and Red Flags in Crypto Exchanges

Bitcoin has been growing so fast since its launch in 2009. The crypto exchanges are growing in market size day by day. Today, banks are more welcoming to crypto-assets than ever. Criminals might use crypto exchanges to launder money. Therefore institutions that work closely with the crypto industry have to protect themselves. You'll learn more about crypto laundering in this reading. 

AML Risks in The Crypto Industry

The cryptocurrency industry is relatively new and popular at the same time. It keeps growing rapidly and is not regulated enough like mature industries. Criminals take advantage of the industry to launder money. It's the organizations' responsibility to detect and report suspicious crypto transfers. There are still serious unanswered questions about money laundering risks in the sector, and regulators have begun to take measures against money laundering in the crypto industry.

Cryptocurrencies are an example of decentralized finance, and criminals take advantage of it to cover themselves and move black money between countries easier. Some of the reasons explain why the crypto industry is vulnerable to financial crimes are:

  • Decentralized Finance
  • Malicious Software (Ransomware)
  • Security Vulnerabilities
  • The Anonymity of Transactions

Esksit case study to demonstrate how sanction scanner transforms AML and KYC compliance

Red Flags for The Crypto Industry

Companies doing business in the crypto industry struggle with anti-money laundering regulations more than ever as more people become interested in crypto exchanges. Criminals benefit from the gaps in the industry, but they get caught more easily as the regulators keep developing regulations. The amount of money laundered through the crypto industry is estimated to be 2.8 Billion USD in 2019. Therefore, companies must understand red flags in the crypto industry to keep the industry safe. Financial Action Task (FATF) prepared a report paper to help companies in the crypto industry develop AML programs. The report focused on the following indicators:

  • Technological features that allow users to cover their personal information
  • Geographical risks
  • Transaction size
  • Transaction patterns
  • The suspicious sender or recipient profiles
  • Source of funds

Technological Features That Allow Users to Cover

Criminals use technologies covering their personal information and underpin VAs (Virtual Assets) to move money without getting caught. Companies should start an investigation when they catch one of their users using it. Such technologies are not illegal to use, but companies should be on the safe side. 

Companies can develop hardware or paper wallets to protect VAs from criminals. 

Geographical Risks in The Crypto Industry

AML regulations for the crypto industry are still developing. As a result, there are countries with little to no AML regulations. Criminals take advantage of this situation to move their virtual assets easier between countries and launder money through Virtual Asset Service Providers. Companies in the crypto industry should investigate the transactions coming from countries that don't have the regulations the FATF recommends.

AML crypto regulation gaps enable financial crimes such as money laundering, terrorist financing, bribery, fraud.

Transaction Size, Frequency, and Patterns in The Crypto Industry

The size, frequency, and patterns of transactions are important red flags for the crypto industry. Some of the red flags are:

  • Frequent transactions below the reporting thresholds
  • Making several high-value transactions in a short time
  • Transactions from/to wallet with detected stolen funds
  • Transactions from countries with no advanced AML regulations
  • Instant withdrawal of crypto assets after transaction
  • Multiple transactions without a commercial explanation
  • Cryptocurrency accounts that don't match the customer profile.

The Sender or Recipient Profiles

Some movements of senders and receivers in crypto exchanges are red flag alerts for money laundering. For this reason, the movements of shipments and buyers should be understood in crypto exchanges, and measures should be taken where necessary. Examples of these red flags are Users who frequently try to open an account using the same IP address to overcome the limits existing in the crypto exchange—transactions originating from untrusted addresses or high-risk jurisdictions.

Users who do not accept KYC procedures and information should be done in exchanges. Inconsistencies in the customers' account IP addresses, the frequent change of personal IP, e-mail, and customers' personal information. If the same person tries to process with different IPs on the same day, these factors are defined as an indicator of the AML red flag.

Cryptocurrency Sample Regulations in The World

Source of Funds

The source of crypto assets might be tied to financial crimes. Red Flag Indicators help organizations recognize suspicious activities such as:

  • Transfers from organizations with insufficient AML / CFT controls
  • Transfers from a single cryptocurrency wallet that is tied to multiple bank accounts. 
  • Transfers from a single cryptocurrency wallet that is tied to a bank account that withdraws larger amounts of money.
  • Withdrawing large amounts of money right after the crypto exchange.

Regulator's Crypto Exchanges' Response to Existing AML Risk

Regulators are aware of the risks the crypto industry faces, and they develop more regulations to address the industry's vulnerability against financial crimes. Financial Action Task Force (FATF) is an institution working for the exact reason. FATF member states must implement the relevant measures FATF recommends by virtual asset service providers (VASP). Countries must support VASPs with their data to help them detect suspicious activities easier using a risk-based approach, monitor their Anti-Money Laundering Compliance, and take necessary steps to prevent money laundering offenses. 

Institutions in the crypto industry must fulfill their AML and KYC obligations during the customer onboarding process. Organizations can scan their customers on sanctions, Peps, and Adverse Media lists from more than 220 countries using Sanction Scanner's AML Screening Software. You can request a demo for detailed information. Don't hesitate to contact us and request a demo.

Sanction Scanner Request Demo

You Might Also Like