Money laundering is perhaps one of the most pervasive types of financial crimes. With the rise of cryptocurrency, it’s garnering even more attention as criminals turn to new methods for stealing or laundering money through digital platforms. Money laundering is the process of disguising the source of money or assets to make it appear as though it comes from a legal origin, when in reality it comes from illegal or illegitimate sources. Through money laundering, criminals can legally own, invest in, and even sell property and assets that they originally would not have access to.
As financial crimes become digitized and more sophisticated, even the most experienced fintech companies and financial institutions can be vulnerable to cyber criminals. To protect your company and its customers from money laundering, you must understand the risks and strategies to prevent money laundering. For most companies, this means investing in money laundering prevention and detection software, employee training, implementing KYC processes, having multi-factor authentication embedded in systems, and/or other tactics to increase compliance with anti-money laundering laws. This further reduces your company’s risk. In this guide, you will learn some of the best money laundering prevention tips for crypto and fintech businesses.
How to Prevent Money Laundering
Though money laundering is a notoriously difficult crime to detect, it still is possible to prevent. If the crypto or fintech space is to be a safe one, money laundering must be taken seriously and considered a risk to financial integrity. Many fintech executives are tasked with asking their organizations, “How do we prevent money laundering?” That’s why fintech companies must understand the basics of money laundering and how to prevent it.
Regulations to Prevent Fraud and Money Laundering
Anti-money laundering (AML) regulations aim to prevent the crime by putting the responsibility for monitoring and reporting on financial institutions- and more recently, crypto exchange platforms . Since 1970, the Bank Secrecy Act in the United States requires institutions to disclose information about suspicious transactions over $10,000. Under Title III of the USA PATRIOT Act in 2001, the U.S. enacted additional measures to prevent and potentially prosecute money laundering related to terrorism. This legislation created additional scrutiny for international transactions and certain account types known for exploitation in money laundering schemes.
What Can Businesses Do to Prevent Money Laundering?
Ultimately, the prevention of money laundering comes down to the customer due diligence - CDD process. This is a process used by companies that are exposed to money laundering, for assessing customers and transactions to determine where money comes from and what it is used for. This helps identify potential money laundering.
CDD processes include:
- Establishing stricter policies for collecting and verifying customer information
- Adhering to beneficial ownership regulations
- Having clear thresholds for risk profiles for each organization
- Retaining necessary information to prove proper due diligence on the institution’s part in the event that money laundering occurs
- Monitoring and updating customer information
The more information collected about a customer, the less likely it is that they can launder money through business transactions. Every company with an ongoing relationship with a customer that routinely processes large amounts of money through that company should have a CDD process in place. Otherwise, they become susceptible to being used for money laundering.
Steps to Money Laundering Prevention
With the right KYC, AML and CDD process in place, it is entirely possible to reduce a company’s exposure to money laundering. It requires a detailed look at the customer and individual transactions. There are several ways to prevent money laundering, and companies can take action to prevent fraudulent transactions that will get them in trouble with regulators or even their customers.
While no one can prevent money laundering 100 percent of the time, there are steps that all fintech businesses can take to minimize risk. Here are some of the most effective money laundering prevention steps:
Know your Customer (KYC)
Before any transactions take place, know your customer. KYC is also a service we offer at Passbase. Find as much detailed information as you need to understand who they are and what their motivations are. For example, your company should have:
- Names: legal and commonly used names
- Origin: where the customer currently is and where they are from
- Connections and Affiliations: who the customer is connected with
- Criminal Records: the customer’s criminal background for every place applicable
- Financial History: does the customer have problems in their financial history?
- Political Affiliations: is the customer active in politics and are they highly motivated to participate in politics in some way, and are the politically exposed persons (PEPs)?
These are just a few things to know during KYC. Look for connections with groups, such as criminal organizations, that may be involved in money laundering. When done with the investigation, you should be able to confidently say that your customer is not connected to or motivated to help any group that would benefit from money laundering.
Vet the Transaction
Vet the transactions that your customer wants to complete. For example, a single large transaction with no history of making such transactions can be a red flag. This is especially true when there is not a clear reason why the customer would make that transaction. Buying $500,000 in bitcoin when the customer says they are a chicken farmer does not make sense and deserves further scrutiny. This can also lead to ongoing monitoring of customer transactions and personality.
Check With Financial Institutions and Governments
Let your search involve the help of government institutions and other financial institutions. If your customer has a history of being involved in potential money laundering and other problems, these institutions will know. Check with government watch lists and financial institution black lists to see whether your customer has been identified as a problem.
Strategies to Prevent Money Laundering
There are several methods to prevent money laundering. These include:
- Knowing your customer or involving a KYC service provider
- Implementing AML & Identity verification solutions
- Limiting transactions
- Partnering with government and financial institutions
One of the most effective money laundering prevention tips is to invest in identity verification solutions, such as Passbase that include AML checks. This helps you identify and confirm customer identities, as well as monitor accounts for suspicious activity. These tools can help you achieve compliance with internal and government-mandated policies.
How to Prevent Money Laundering for Crypto
Crypto is one area where money laundering is a major risk. Online platforms on the other hand invest in security systems to vet their players, carry out age verification, ID validation and more to ensure age-restricted products are not accessed by minors. It is easy to lie online, but the right solution can see through those lies and create suspicious activity reports for unusual transactions.
By using these tactics to prevent money laundering, crypto and fintech businesses can reduce their risk significantly. Use online identity verification systems to ensure that your customers are who they say they are. That way, they cannot use a false identity to fool vetting processes.
Money laundering and its prevention are the responsibility of your organization’s leadership. There must be a method and system in place that adequately addresses potential money laundering situations. Otherwise, AML laws will have a significant impact on your company. Failing to take action could mean the end of your business and even severe penalties for company executives. Therefore, it is imperative to ensure that your company or platform meets all requirements for setting up AML systems and also adhere to regulations. Keep in mind that Passbase is always ready to partner with you to ensure a seamless KYC and AML solution.
Passbase provides a convenient way for crypto businesses to perform KYC and AML checks through identity verification. You can integrate Passbase into your platform via the Passbase API or with SDKs for iOS, Android, and web.