How banks can identify money laundering involving crypto, explained

To cut a long story short: It’s the law.

Banks and financial institutions are legally required to adhere to laws and regulatory guidance to combat money laundering, terrorism financing and tax evasion — as well as manage their risk against these illicit financial activities.

Every legitimate bank and FI incorporates regulatory compliance and risk management into their short and long-term business plan and strategy as a matter of necessity, so when dealing with cryptocurrencies they would also need to incorporate crypto compliance.

Information is power to help organizations mitigate risks for indirect exposure to crypto.

When it comes to preventing money laundering in traditional fiat, banks need a certain amount of information to ensure they can manage any potential risks involved in facilitating these transactions. The same applies with cryptocurrencies.

A bank can face challenges if it faces direct exposure to crypto — but they can also be exposed indirectly if one of their customers is transacting using digital assets.

There are a series of checks that can help manage AML risk: Know Your Customer, Know Your Payments, Know Customer Behavior, and Know Your Partner.

Given the volume of transactions that banks can process on a daily basis, ensuring the monitoring process is fully automated is essential to reduce the likelihood that suspicious activity falls through the net.

Flexible but efficient case management and auditing solutions are required.

Banks and financial institutions need the ability to trace transactions and connections in real time — and the capacity to assess their levels of risk in a heartbeat.

Considering the volume and speed of transactions involved, they also need to have an alert system that provides automated updates on potentially illicit activities, providing data for further investigation. 

Organizations don’t need to be in the dark when it comes to learning how to be compliant. The Financial Action Task Force has released a range of red-flag indicators that can help raise awareness that someone is wrong. Many worldwide jurisdictions and exchanges have been slow to adopt the FATF guidelines because technical hurdles stand in the way, but tools do exist that aim to make this achievable.

Following the money laundering red flag indicator guidelines set out by the FATF is a good place to start.

Red flag indicators related to transactions can involve payments that are made in small amounts, or in repeated quantities that fall under a reporting threshold. Alarm bells can also be raised if funds are sent to a newly created or previously inactive account.

Transaction patterns can also rouse suspicion — especially if the deposits made are inconsistent with a customer’s profile.

Other indicators can concern senders and recipients, irregularities when it comes to the source of funds or wealth, and suspicious circumstances related to geography — such as if a customer’s funds originate from, or are sent to, an exchange “that is not registered in the jurisdiction where either the customer or the exchange is located.”

These guidelines are detailed and comprehensive — and come complete with case studies that powerfully illustrate the types of scenarios that financial institutions should be looking for.

They enable transactions to be monitored on all major blockchains — 24/7 and in real time.

The risk associated with incoming and outgoing transactions can be determined — covering high value payments, transfers involving multiple digital assets and/or accounts, as well as transactions that appear to have no logical business explanation. A clearer picture can also be gathered over time by piecing together intelligence from entities making frequent transfers over a specific timeframe.

Compliance software companies like Crystal Blockchain enable suspicious patterns to be detected, and for financial institutions to understand the sources of funds and wealth. Crucially, they can also identify whether the crypto used in transactions is suspected to be stolen or fraudulent, all by assessing if the coins transferred to or from wallets have been connected with mixers or P2P services.