AML screening is an important measure for every cryptocurrency service provider. It aims to mitigate the risk that cryptocurrencies of customer are not coming from illegal sources such as the darknet, fraud, unlicensed gambling, terrorist financing, etc. For that, many crypto exchanges, OTC traders, and brokers have deployed services that analyze cryptocurrency addresses and reveal the history behind them.
Cryptocurrency has been around since 2008, but specific regulation over this new technology only started in 2018, when the European Union adopted the 5th AML Directive.It required every member state to bring their cryptocurrency service providers in compliance with legislation by enforcing registration or licensing with the financial supervisory authority and undertaking KYC/AML measures of every customer. The deadline for transposition of the Directive was January this year. Therefore, starting from January 2020, all EU member states were required to transpose these new requirements into national laws.
Cryptocurrency service providers are bringing also new risks to the financial industry. Consequently, countries that are following AML international best standards, besides the obligation f to be licensed and to have a standard procedure for customer identification, require to have in place a system to identify and manage the risks relating to new and emerging technologies. Cryptocurrency is a relative new technology that favours anonymity and it must be sufficiently mitigated. The first step for every financial institution is to identify and verify the customer’s identity, check against the sanctions, and Politically Exposed Persons lists and negative information, etc. However, this might not be sufficient for a company operating in the cryptocurrency industry. Therefore, a cryptocurrency company should go the extra mile.
The second step for a cryptocurrency company is to check a customer not only in a “real” physical world, but also in the virtual one, such as inside the blockchain. Blockchain is a public ledger where all transactions are recorded and can be tracked down history. AML screening solutions are able to identify the level of a cryptocurrency’s “pollution”, its affiliation to criminal activity, the country of origin of the transfer, and even IP address of the sender.
This gives valuable information to compliance officers. The compliance officer has proof that the customer’s cryptocurrencies were not involved in any illegal activities in the past. This is an additional measure for the company to address the risk of cryptocurrency and to be compliant with the anti-money laundering regulations.
Therefore, AML screening of clients’ cryptocurrency on the blockchain is an essential element of the monitoring procedure for a cryptocurrency company.