How can banks detect cryptocurrency laundering?

9 Feb 2024

Why is compliance with cryptocurrency anti-money laundering laws so important for financial institutions?
Long story short: That's the law.

To combat money laundering, terrorism financing and tax evasion, banks and financial institutions need to comply with laws and regulators' guidance and manage their risks against these illicit financial activities.

All legitimate banks and financial institutions are, by necessity, incorporating regulatory compliance and risk management into their short- and long-term business plans and strategies, so they must also observe crypto compliance when doing business with crypto.

How can financial institutions understand the nature of their customers' crypto activities?

Information is the power that will help organizations mitigate risks in indirect crypto investments.

When it comes to anti-money laundering in traditional finance, banks need to have a certain amount of knowledge to manage all possible risks associated with these transactions. The same goes for cryptocurrencies.

While a bank may encounter some difficulties when it deals directly with crypto, it may also deal indirectly if its customers transact using digital assets.

There are some controls that can help manage anti-money laundering risk: Know Your Customer, Know Your Payment, Know Your Customer Behavior, and Know Your Partner.

Considering the volume of transactions that banks can process daily, ensuring that the monitoring process is fully automated will reduce the likelihood of suspicious activity going unnoticed.
What processes do financial institutions need to limit risks related to cryptocurrencies?

Flexible but effective case management and control solutions are required.

Banks and financial institutions need to be able to monitor transactions and connections in real time and instantly assess risk levels.

Given the volume and speed of transactions, they also need an alert system that provides automatic updates on potentially illegal activity and data for further investigations.

Organizations need not be left ignorant about learning how to be compliant. The Financial Action Task Force (FATF) has published red flag indicators that can raise awareness of suspicious individuals. Many countries and exchanges around the world have been slow to follow the FATF guidelines due to technical hurdles, but there are tools aimed at making this possible.

What are the practical solutions available that can limit crypto risk exposure?

Following the money laundering red flag indicator guidelines published by the FATF is a good place to start.
Red flag indicators for transactions include payments made in small amounts and recurring transactions that fall below the reporting limit. Sending to a newly created or previously inactive account can also ring alarm bells.

Transaction models can also raise suspicion, especially when deposits are made that do not fit the customer profile.

Other indicators include indicators of senders and receivers, irregularities regarding the source of money or wealth, and questionable circumstances regarding geography. For example, if a customer receives a money transfer or sends money from an exchange that is not registered in the country where the customer or the exchange is located, it may be viewed as suspicious activity.

These detailed and comprehensive guidelines also include case studies that powerfully illustrate the types of scenarios financial institutions should consider.

How can blockchain analysis software help financial institutions involved in crypto?

They can enable 24/7 and real-time monitoring of transactions across all major blockchains.

Risks related to incoming and outgoing transactions can be identified, including high-value payments, transfers involving multiple digital assets or accounts, and transactions that appear to have no business rationale. By aggregating information from entities that frequently trade within a given time frame, a clearer idea can be gained over time.

Compliance software companies like Crystal Blockchain enable suspicious transaction patterns to be detected and organizations to understand the source of money and wealth. These companies can also detect suspicions that the cryptocurrencies used in transactions are stolen or obtained through fraud simply by assessing whether the cryptocurrencies are linked to mixers or P2P services.

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