Crypto has long been criticised for facilitating illicit activities such as money laundering and tax evasion. However, the reality is more complicated than crypto opponents would like to make you think. Financial institutions have a lot of different tools at their disposal to uncover suspicious money flows – and the transparency of blockchains helps with that.
Why anti-money laundering compliance is so important
Basically, it’s the law and cryptocurrencies being new, don’t exempt payments received in crypto from being taxed. Banks and financial institutions have to comply with regulatory guidance regarding money laundering, terrorism financing and tax evasion. That hasn’t changed much since the appearance of crypto but has just opened another front where banks have to fight.
Understanding clients’ crypto activities
Information is power, and banks rely on information to manage potential risks when it comes to crypto transactions. Hence, banks impose all those pesky checks like know your customer, know your payments, know your partner, and other anti-money laundering checks. Clients may not be happy about those, and it might not even be in their best interest, but banks are just covering their bases with them. Especially with regard to daily transaction volumes, they have to automate as much of the monitoring process as possible to avoid suspicious activity escaping their attention.
To do that, the Financial Action Task Force has released a range of red-flag indicators that can help raise awareness about potentially illicit activity going on. Although many jurisdictions around the globe have been slow in adopting those because of technical obstacles, the long-term goal is to create a tight net to catch all potential wrongdoers.
Some of these indicators include repeated small transactions or transactions falling just short of a reporting threshold. Another potential red flag are funds sent to a recently-created or previously inactive account. Banks might also flag transactions where the origin of customer funds and the customer’s jurisdiction don’t match. Suspicious geographic circumstances often draw the attention of risk managers, especially if they differ from the customer’s profile.
The importance of practical solutions that limit crypto risk exposure
The market offers different providers, compliance software companies to be precise, to help financial institutions detect suspicious patterns and understand the sources of funds and wealth. That way, banks can also identify if stolen or fraudulent crypto is being used simply by assessing if the coins have been connected with mixers or P2P services.
In that fashion financial service providers can determine the risk associated with incoming and outgoing transactions and cover high value payments, as well as transfers involving multiple digital assets and/or accounts.
Even though many in the cryptocurrency space still see crypto as a free for all and an easy way to circumvent the taxman, they are doing crypto a disservice in the long run. For the desired changes in crypto regulation to happen, crypto folks will have to start playing by the existing rules, not least because that will give them more weight in shaping those same rules. At the end of the day, trading bans like in India aren’t going to help anyone. Better to play a game where the rules are fair and open to everyone.
