Summary

The goal of anti-money laundering regulations is to curb illegal money laundering. Governments of various countries and transnational organizations (such as FATF) have adopted legislative means to combat money laundering activities.

Money laundering is the illegal practice of converting "dirty" money into legitimate funds. Specific methods include concealing the source of funds, mixing illegal funds into legitimate transactions, or investing them in legitimate assets.

Today, cryptocurrency is extremely private, difficult to recover funds, and has inadequate legislation, which has gradually become a hotbed for money laundering activities. Massive cryptocurrency seizures confirm that criminals often launder money through this method.

As part of their anti-money laundering compliance efforts, Binance and many other cryptocurrency exchanges track suspicious behavior and report it to law enforcement.

Introduction

Anti-money laundering (AML) regulations help to combat illegal money laundering. Centralized cryptocurrency trading platforms must strictly comply with such regulations to effectively protect customer security and combat financial crime. Given the anonymity of cryptocurrencies, their regulation relies heavily on monitoring the behavior and identities of customers.

What is Anti-Money Laundering (AML)?

AML consists of regulations and laws that prevent the flow of illegal funds and money laundering. In 1989, in order to deepen international cooperation, the Financial Action Task Force (FATF) was formally established to actively lead global anti-money laundering operations. For example, anti-money laundering operations actively combat terrorist financing, tax fraud and international smuggling. Specific means vary from country to country, but the world is working toward unified standards.

As technology continues to develop, money laundering methods are also "evolving and upgrading." Therefore, AML software often reports suspicious behavior that may be illegal. Related behavior includes large-scale fund transfers and repeated flows into the same account, and cross-checking of users on the watch list is a common crackdown. AML is not limited to cryptocurrencies. Any asset or fiat currency can be monitored and held according to AML regulations.

Currently, the regulation of cryptocurrency is not complete. As blockchain technology continues to evolve, anti-money laundering procedures change regularly along with compliance measures. However, this is not necessarily a positive sign. Many cryptocurrency enthusiasts value the anonymity and decentralization of their assets. Increased regulation and recording of user identities is sometimes seen as running counter to the ethos of cryptocurrencies.

What is the difference between anti-money laundering (AML) and identity verification (KYC)?

As an anti-money laundering legal requirement, identity verification (KYC) checks are an obligation of financial institutions and service providers. KYC requires users to submit personal information to verify their identity. This process creates accountability for all financial transactions conducted by users. KYC is a proactive anti-money laundering measure that falls under the umbrella of customer due diligence. This is in stark contrast to other AML operations that passively investigate suspicious behavior.

What is money laundering?

Money laundering is the practice of criminals disguising illegal funds as legitimate currency, investments or financial assets. The funds come from criminal activities such as drug trafficking, terrorism and fraud. Countries have different laws and regulations to combat money laundering. However, many jurisdictions and the Financial Action Task Force (FATF) have struggled to harmonize standards.

Money laundering is divided into three stages:

• Layout: introducing "dirty" money into the financial system (such as cash-based business).
• Layering: Transferring illegal funds makes tracking more difficult. Using cryptocurrencies is one way to hide the source of "dirty" money.
• Integration: Using legal investment and other financial channels to reintroduce "dirty" money into the economic system.

How do criminals launder money?

There are many ways to implement the above three steps. The traditional method is to issue fake receipts for cash services at stores, restaurants and other businesses. Individuals or organizations use these businesses to provide cover for money laundering. Criminals forge receipts and pay with physical "dirty" money, converting it into legitimate income. From then on, illicit financial flows will be mixed with real transactions, making it difficult to distinguish between good and evil.

Today, illegal funds usually flow into digital channels, gradually bidding farewell to physical funds. This difference changes the methods of money laundering. Nowadays, there are even more ways than ever to hide and clean “dirty” items. For example, you can skip the bank and transfer money directly. Payment networks such as Paypal or Venmo have opened up new avenues for money launderers and created new challenges for regulators to monitor.

Anonymity technologies such as VPNs and cryptocurrencies also create greater challenges for anti-money laundering. It is extremely difficult to identify individuals engaged in money laundering activities. But there is a way to try, and that is to "track the trend of cryptocurrency to the end." Following the blockchain's "paper trail" all the way to the trading platform can link the laundered funds to a cryptocurrency trading platform account or bank account in someone's name. However, if criminals purchase cryptocurrencies through cash or peer-to-peer services, it will be difficult to track the movement of "dirty" money in and out of the financial system.

Criminals also often use online gambling websites to deposit funds to be laundered into online gambling accounts, then place bets through seemingly legitimate accounts, and finally withdraw the funds to achieve the purpose of money laundering. This method usually uses multiple accounts to launder money to avoid raising suspicion. A single account with a large amount of money may draw the attention of an AML check.

How do anti-money laundering measures work?

The basic activities of a regulatory agency or cryptocurrency trading platform can be broken down into three major steps:

1. Automatically flag or report suspicious activity, such as large inflows or outflows of funds. Inconsistent behavior is equally problematic, such as a significant increase in withdrawals from low-activity accounts.

2. Users are prohibited from depositing and withdrawing funds during or after the investigation. This action cuts off any money laundering activity in progress. Investigators then prepare a Suspicious Activity Report (SAR).

3. If illegal activity is proven to exist, immediately notify the relevant authorities and submit evidence. If stolen funds are found, they will be returned to their original owners whenever possible.

Cryptocurrency trading platforms generally take a proactive approach to anti-money laundering. Today, the cryptocurrency industry faces tremendous compliance pressure. Trading platforms like Binance must act more cautiously and be vigilant. Transaction monitoring and enhanced due diligence are two "sharp tools" for combating money laundering programs.

What is FATF?

FATF is an international organization established by the Group of Seven (G7) to combat terrorist financing and money laundering. By establishing a set of standards that governments around the world strictly abide by, the number of jurisdictions with loopholes is reduced and the living space for money launderers is significantly reduced.

In addition, close cooperation between governments optimizes information sharing and tracking of money launderers. Currently, more than 200 jurisdictions have committed to follow FATF standards. FATF monitors all participants to ensure compliance through regular peer reviews.

Why is anti-money laundering needed in the cryptocurrency field?

The anonymity of cryptocurrency creates opportunities for criminals to launder illegal funds and evade taxes. Regulation of cryptocurrencies improves its overall reputation and ensures proper taxation. While it will require additional effort and time investment from all parties, anti-money laundering optimization and improvements will ultimately benefit law-abiding cryptocurrency users.

According to Reuters, criminals laundered approximately $1.3 billion in "dirty" money through cryptocurrency in 2020. The reasons why cryptocurrency has become a hotbed for money laundering include:

1. Transactions are irreversible. After funds are sent through the blockchain, the funds will never be returned unless the recipient actively refunds the money. Police and regulators are also helpless to recover the funds for the owners.

2. Cryptocurrency transactions can be anonymous. Tokens such as Monero prioritize transaction privacy. Additionally, the "Tumbler" service layers cryptocurrencies through different wallets, making them hard to trace.

3. Its regulatory and tax policies are still unclear. Effectively taxing cryptocurrencies continues to be a challenge for tax authorities around the world, leaving criminals with an opportunity to take advantage.

Cryptocurrency money laundering example

In the process of cracking down on cryptocurrency money laundering, tracking and catching criminals, law enforcement agencies It has indeed achieved certain results. In July 2021, British police seized a large amount of cryptocurrency used for money laundering, worth approximately US$250 million. It is the largest cryptocurrency seizure in the UK to date, beating the UK record of $158 million set a few weeks ago.

In the same month, Brazilian authorities successfully foiled an elaborate money laundering operation and seized a total of US$33 million. A total of two parties and 17 companies were involved in purchasing cryptocurrency and were suspected of hiding illegal funds. This is also the sole purpose of establishing these companies by the criminal organizations involved. Many cryptocurrency trading platforms also broke the law and chose to cooperate with criminal organizations, violating correct anti-money laundering procedures.

How does Binance support anti-money laundering?

Binance actively implements a number of anti-money laundering measures to help combat money laundering activities, including improving anti-money laundering detection and analysis capabilities. These efforts are integrated into the platform’s anti-money laundering compliance plan. In addition, Binance works closely with international agencies to help it uncover large cybercriminal organizations.

For example, Binance played an important role in dismantling the Cl0p ransomware gang. Many members involved were brought to justice through the evidence provided by Binance. Binance has flagged numerous suspicious transactions and criminal activity for law enforcement investigation. Using the findings, authorities work closely with international agencies to identify money launderers in ransomware attacks, including the Petya attack.

Summary

Although AML extends the Transaction times, but the security of each user is a key that cannot be ignored. It is true that governments and organizations cannot eradicate all money laundering activities, but the enforcement of regulations can certainly curb criminal behavior. The technology to detect potential money laundering is improving day by day, and cryptocurrency trading platforms that strictly adhere to the regulations are also taking their duties of helping to fight crime seriously. Technology and supervision are closely integrated, and criminals will eventually have no way to hide.