KYC Money Laundering: Combating Financial Crimes Through Verification

The development of innovative technologies has given those benefits that were considered a dream some decades ago, video calling is an example. The businesses and associating operations have modified over the years, and customers are provided with seamless services. Customer satisfaction level and ease have increased because of remote services. Customers can perform all the necessary activities anywhere and anytime.

This article will be covering KYC money laundering and how to combat it through customer AML due diligence.

In old times, a bank account required customers to visit the branch multiple times, either for opening accounts or transferring funds, but not now. The banks have shifted to online mediums, for example, mobile banking apps. Customers can send funds, see balance details and the transaction history using cell phones. Customers’ personal and financial information is stored in soft form instead of using writing it on paper or files.

But the fact that criminals are also beneficiaries of the digital system can’t be neglected. Digital money laundering and online financial scams are the terms that have entered the system in past years. Illegal funds can be transferred to some other country using digital financial channels, instead of doing the same through airplanes or ships.

How is the Financial System Affected by Crypto Money Laundering?

If we look into history, we will come to know that money was laundered physically in the form of smuggling. Smurfs carry it in their luggage and then move to another state, or it was hidden in the planes. It was done with the involvement of crew staff, and they were paid accordingly. Because of the constant efforts of law enforcement authorities, cash-based money laundering is nearly diminished. Cash is hard to carry, and the vulnerability is very high; these factors helped the police departments in anti-money laundering.

Then the criminals target digital channels for money laundering. The illegal concealing and transfer of funds using digital channels are known as digital money laundering. It also has entered the virtual currency industry or crypto market. The reason is cryptocurrency is not that much regulated and there is high ambiguity in the laws. Although laundering money through cryptocurrency is difficult, it can cover a huge amount. Here is how crypto money laundering works.

Placement: Criminals buy crypto coins using fiat money or other variants of crypto. Those crypto exchanges are chosen that have weak AML/ KYC regulations and the coins are exchanged there. The crypto accounts have anonymity, which is kind of an ideal situation for money launderers as they can achieve their objective with the least exposure. If the regulatory authorities can’t reach the owner, the illegal money can’t be traced.

Layering: The anonymity gives ease in hiding and circulation of money. The crypto coins are bought and sold, creating a cycle of financial transactions.

Integration: At this stage, the money is whitened and does not have any connection with the sources. The criminals create an online company that accepts crypto coins and turns the crypto into fiat money.

How AML and KYC work for Cryptocurrency?

Financial institutions can stay one step ahead of criminals by using state-of-the-art technologies. They can go for KYC (Know Your Customer) verification and AML (Anti Money Laundering) screening. These practices have helped the banking sector to curb money laundering, the crypto market can also use it for the same purpose. Here is an overview of how it works;

Know Your Customer: This service is used during user onboarding, the customers’ information should be verified through government-approved IDs. They have to upload the image of ID along with a live selfie and the required data is extracted from the image. Then it is cross-matched with the customer-provided data and the selfie is compared with the photo ID. If all the information is matched then the customer is marked as a KYC verified customer, otherwise not.

AML Screening: This is done to check that the customer is not a criminal or does have any association with the terrorist organization. The verified customer names are screened against the global and native database of criminals and high-risk entities.

In a Nutshell

The first step for combating money laundering in the crypto market is regulations. It should have a complete set of KYC and AML regulations and laws like other sectors, also anonymity should be eradicated.

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