Written by Shivashish Yadav on   -  9 min read

How is Blockchain helping with Anti-money laundering tracking systems? Explained.


If you’re a newcomer to crypto business ownership, you may wonder why so much emphasis is placed on Anti-Money Laundering, or “AML”, compliance. See, many criminals assume transacting with popular cryptocurrencies like bitcoin makes it easier to commit financial crimes and get away with them. Thanks to its various inherent features, the cryptocurrency looks like easy opportunity to the bad guys. The rise of crypto-targeted rules and regulations in many countries is helping to turn these assumptions into misconceptions.

But what exactly is Bitcoin money laundering, and how does it work?

When criminals make illegal funds appear as legitimate money and investments or financial assets, the proceeds come from crimes such as drug trafficking, terrorism, and fraud laws and regulation.

In short, money laundering is making "dirty" money, funds gained from illegal activities, appear "clean" or legitimate.

They attempt to do this through a three-step process:

1) Placement

It’s dangerous for criminals to spend a large amount of ill-gotten money due to the possibility that it could link them to their crimes. So they attempt to trade it for something just as valuable, such as Bitcoin.

2) Layering

Once the money is converted, the criminals then move it through a series of different financial institutions, accounts, and other assets. The idea here is to put as much space between themselves and the illegal money as possible, while still keeping assets of the same value.

3) Integration

After they’ve exchanged their illegal funds for what appear to be legal or “clean” funds, they are free to spend them.

AML compliance laws were made to help prevent criminals from using your company to launder their ill-gotten gains. When you institute an AML program, you’re building a wall of protection around your business with a variety of different tools, such as

  • Know Your Customer or “KYC” Enhanced Due Diligence or “EDD”
  • Transaction screening systems Suspicious Activity Reports or “SARs”

Services like BitAML is designed to serve as a helping hand that can guide you through the ins and outs of AML compliance and regulation.

How do people launder money?

There are multiple ways to achieve the three steps above, a traditional method has been to create fake receipts for cash-based service in shops, restaurants, and other businesses.

An individual organization uses the businesses as fronts for money laundry, criminals create counterfeit receipts and pay for them with dirty physical cash, turning them into legitimate income. This in-flow is done mixed in with changing transactions to make it difficult to track between these two, however, it's now common for illegitimate funds to be digital rather than physical cash, this difference changes the methods used to launder money.

There are now even more options to hide and worship dirty money than before, for example, you can directly transfer money without the use of a bank payment network like PayPal or VMware provide another layer for loaders to use and regulators to monitor anonymizing technologies such as VPNs and cryptocurrencies make the situation even more challenging pinning down a specific individual to laundering activity can be impossible.

one method to file this has been tracking created to the edge by following a blockchain paper trail to an exchange you can tie the laundry funds to your crypto exchange account or bank account under someone's name however purchasing crypto in cash or through peer-to-peer services make tracking the Interest or exit or dirty money into the financial system is difficult.

Another favorite method is to use online gambling sites criminals deposit the money and they want to launder in an online gambling account they then place but to make the account look legitimate, finally, they remove their funds and end up with clean money, typically this is done with multiple accounts as known to arrow suspicion, a single account with large amounts of Funds might flag up an AML check.

What is anti-money laundering?

AML regulations attempt to stop the illegal laundering of illicit funds individual governments and multinational organizations like the FATF legislate against money laundering activities money laundering takes dirty money and turns it into clean money, this can be done by disguising their origins of the funds, mixing them with legitimate transactions or investing them into legal asset's crypto is an attractive way to launder money because of its privacy difficulty in retrieving funds and underdeveloped legislation large-scale seizures of creatures show criminals regularly use it to launder huge sums anti-money laundering regulations help combat the washing of illegal funds there are requirements for centralized cryptocurrency exchanges to help keep customers safe and combat financial Crime because of the unused nature of cryptocurrency, its regulation relies heavily on monitoring customer behavior and identities

What is AML comprises?

It comprises regulations and laws that deter the movement and washing of legal funds AML is closely associated with the Financial Action Task Force set up in 1898 to encourage international cooperation, for example

AML measures target terrorist financing tax fraud and international smuggling AML differs by country, but there is a global effort to align on standards as technology has progressed, so have methods for money laundering as a result, AML software typically flags behavior that may be seen as suspicious. These flags and measures include large transfers of money, repeated inflows of funds into an account, and cruise checks against users on the watch list AML doesn't just apply to cryptocurrencies, any asset or fiat currency can be monitored and how to email regulations it's taken some time for regulation to catch up with cryptocurrencies as blockchain technology is constantly innovating AML procedure changed regularly along with compliance measures, however, this isn't always seen as positive. Many enthusiasts value that asset’s unanimity and decentralization. For this reason, increased regulation and documentation of users identities are sometimes seen as contrary to cryptos ethos.

What is the FATF

the FATF is an international organization founded by the G72 to combat the financing of terrorism and money laundering by creating a set of standards that governments worldwide should adhere to Londoners find it increasingly difficult to find jurisdictions to operate in cooperation between governments also improved the sharing of information and tracking of launders over 200 jurisdictions have committed to following the FATF standards the FATF monitors all participants to make sure they are sticking to the regulations with regular peer reviews

What's the difference between AML and KYC?

No, your customer checks are an obligation for financial institutions and service providers as part of AML laws. KYC requires users to submit personal information verifying their identity. This process creates accountability for any financial transactions made by the user. KYC is a proactive part of AML and falls under customary due diligence This contrasts with other animal properties that reactively investigate suspicious behavior.

How do AML measures work?

You can break down the basic activities of regular or cryptocurrency exchange into three steps. Suspicious activities such as large inflows or outlaws of funds are automatically flagged or reported. Inconsistent behaviors, such as an increase in the number of withdrawals from a typically low activity account are another example. During or after an investigation, the user's ability to deposit or withdraw funds is stopped this action cuts off any more possible laundering activities the investigator then makes a suspicious activity report. If there is evidence of illegal activity, the relevant authorities are informed and the evidence is supplied. If stolen funds were, found they would be returned to their original owners.

When possible cryptocurrency exchanges typically take a proactive approach to AML with the vast amount of compliance pressure placed on the crypto industry it's standard for exchanges like Binance to be more vigilant and cursed than required, transaction monitoring and enhanced due diligence are the two key tools in fighting money laundering schemes

Why do we need AML in crypto?

Because of cryptocurrencies, pseudonymous nature, criminals use it to launder illicit funds and commit tax evasion the regulation of cryptocurrency improves its overall reputation and makes sure that appropriate taxes are collected improvements in AML benefits legitimate crypto users also It does require extra effort and time investment by all parties, according to realtors criminals laundered an estimated $1.3 billion of dirty money through crypto in 2020. Crypto is suited to money laundering for several reasons

  1. All transactions are irreversible, once you've sent funds via the blockchain they cannot be returned unless the new owners send them back the police and regulatory agencies cannot retrieve funds for you.
  2. Cryptocurrency offers anonymity some coins like Monero prioritize the privacy of transactions, there are also Tumblr services that were created through different wallets to make its trial difficult to track the number.
  3. Its regulation and taxation are still uncertain tax authorities globally still struggle to text crypto efficiently and criminals exploit these

Crypto money laundering examples

Authorities have some success in tracking and catching criminals who wash their funds via crypto. ***In July 2021 UK police seized truthfully $250 million of crypto used for money laundering this laundering was the largest deed in the UK of crypto funds, beating a previous UK record of $158 million set just weeks before in the same month's $33 million was staged by Brazilian authorities ***

In a sophisticated money-laundering operation, **two individuals and 17 companies were involved in purchasing crypto to hide allegedly sourced funds the criminal organization involved set up two companies with the sole purpose in mind **** The cryptocurrency exchanges also cooperate with the criminal organization knowingly and did not follow correct AML procedures.