Crypto AML Guide: All You Need to Know in 2024

Everything you need to know about crypto AML compliance this year.

Alyssa Abrams

Senior Content Manager

Governments and institutions are intensifying their focus on Anti-Money Laundering (AML) compliance in crypto. There are a number of reasons for this. This includes

the anonymity and decentralized nature of crypto transactions, making them attractive to criminals and
the substantial losses they’ve incurred for users and businesses in recent years.

According to an FBI report, losses to crypto investment scams in the US alone totaled $3.94 billion in 2023—an increase of 53% over 2022.

Penalties for non-compliance and insufficient transaction monitoring are another pain point for businesses. In 2023, crypto companies faced over $5.8 billion in fines over inadequate AML programs. To mitigate this growing risk, crypto businesses should build robust AML policies and implement necessary compliance measures.

Let’s dive into the specifics of crypto AML compliance and how to get it done right.

Crypto money laundering: Key trends of 2024

Money laundering is an ongoing concern in crypto, as criminals seek to exploit its anonymity and decentralized nature for illicit purposes. Several key trends have emerged in the realm of crypto money laundering:

Mixing services and tumblers: These are increasingly used to obfuscate the origin of funds by mixing them with those of other users, making it difficult to trace transactions back to their source.
Privacy coins: Privacy-focused cryptocurrencies like Monero, Zcash, and Dash offer enhanced privacy features, making it more challenging for authorities to track transactions and identify the parties involved.
Decentralized exchanges (DEXs): These allow users to trade cryptocurrencies without the need for a centralized authority, making it easier for criminals to exchange illicit funds with reduced risk of detection and regulation.
Peer-to-Peer (P2P) platforms: These enable direct transactions between users, often bypassing traditional financial institutions. While P2P platforms offer convenience and privacy, they can also be exploited for money laundering purposes.
Layered transactions: Criminals may employ sophisticated techniques such as layering, where multiple transactions are conducted across various wallets and exchanges to obscure the trail of illicit funds.
Crypto ATMs: These provide a convenient way to convert cryptocurrencies into cash or vice versa. However, they can also be used to launder money with minimal KYC/AML requirements.
Complex wallet structures: This includes multi-signature wallets and wallet clustering techniques, which enable criminals to further obfuscate the flow of funds and conceal their activities.
Non-Fungible Tokens (NFTs): Criminals have started utilizing NFTs to launder money by transferring illicit funds through their purchase and sale.
Ransomware: Crypto is a mainstay in ransomware attacks, with criminals demanding ransom payments in crypto to avoid detection.
Anonymizing services: Criminals leverage anonymizing services such as VPNs, Tor networks, and encrypted messaging apps to obfuscate their identities and cover their tracks while laundering funds.

What are the red flags of crypto money laundering?

There are several common red flags that may indicate suspicious activity:

Unusually large transactions, particularly when they are inconsistent with a customer’s known financial profile or trading history.
Unusual transaction patterns, such as round-number transactions, repetitive patterns, or transactions with no apparent economic purpose.
Multiple transactions in quick succession and/or rapid movement of funds through multiple wallets or exchanges in a short period, especially if coupled with attempts to obfuscate the transaction trail.
Use of privacy coins like Monero, Zcash, or Dash and/or tumblers
Geographic anomalies involving jurisdictions known for weak crypto AML regulations or high levels of financial crime, especially if they involve counterparties or entities with a history of illicit activity.
Dealing with unregistered or unlicensed companies, particularly those operating in jurisdictions with lax regulatory oversight.
Inconsistent or false customer information provided during the KYC process
High-risk industries and sectors prone to money laundering, such as gambling, adult entertainment, or darknet marketplaces, should be subject to enhanced scrutiny.
Transactions involving PEPs or their associates, especially if they appear unrelated to their legitimate business activities

The presence of one or more of these red flags doesn’t necessarily imply illicit activity. However, they do require proper due diligence and ongoing monitoring, as well as timely submission of suspicious activity reports and cooperation with law enforcement.

What is crypto AML?

Anti-money laundering (AML) refers to the set of regulations, policies, and procedures designed to prevent and detect money laundering and other illicit activities. Crypto AML measures aim to ensure that cryptocurrency exchanges, wallet providers, and other virtual asset service providers (VASPs) comply with regulatory requirements. VASPs must therefore comply with applicable AML regulations and licensing requirements in the jurisdictions where they operate. This may include registering with regulatory authorities, obtaining licenses or approvals, and undergoing periodic audits or examinations to ensure compliance.

What are the AML requirements for crypto?

Risk assessment. Conducting a risk assessment is essential to identify and mitigate potential AML risks specific to the cryptocurrency business. Implementing risk-based AML measures allows companies to allocate resources effectively and address high-risk areas.
Know Your Customer (KYC) and Customer Due Diligence (CDD). KYC procedures involve verifying the identities of customers and collecting relevant information to establish their legitimacy. This typically includes collecting personal information such as government-issued ID, proof of address, and, in some cases, conducting enhanced due diligence for high-risk customers. CDD involves assessing the risk associated with each customer and implementing appropriate measures to mitigate those risks. This may include ongoing monitoring of customer accounts and transactions, as well as periodic reviews of customer information.
Cryptocurrency transaction monitoring. VASPs are required to monitor transactions on their platforms for suspicious activity, such as large or unusual transactions, transactions involving high-risk jurisdictions, or patterns indicative of money laundering or other illicit activities.
Reporting suspicious activity. VASPs are obligated to report any suspicious transactions or activities to the relevant authorities, such as financial intelligence units (FIUs), to aid in the investigation and prevention of money laundering and other financial crimes.

Compliance programs. VASPs are required to establish and maintain comprehensive AML compliance programs that outline their policies, procedures, and controls for preventing money laundering and complying with regulatory requirements.

Record-keeping. Cryptocurrency businesses are required to maintain accurate records of customer information, transactions, and AML compliance activities. These records may be subject to inspection by regulatory authorities.
Employee training. Cryptocurrency businesses must provide AML training to their employees to ensure they understand their obligations and are equipped to identify and report suspicious activity effectively.

What is a crypto KYC/AML policy?

Know Your Customer (KYC) and Anti-Money Laundering (AML) policies outline the procedures and requirements crypto businesses must follow to verify the identities of their customers and prevent illicit activities such as money laundering and terrorism financing. While specific policies may vary depending on the jurisdiction and the nature of the cryptocurrency business, here is a general overview:

Customer identification. Cryptocurrency businesses are required to collect personal information from their customers, including government-issued identification documents (e.g., passport, driver’s license) and proof of address (e.g., utility bills, bank statements).
Identity verification. Cryptocurrency businesses must verify the authenticity of the information provided by customers through various verification methods, such as identity document scans, biometric verification, or third-party identity verification services.
Risk assessment. Cryptocurrency businesses must conduct risk assessments to determine the level of risk associated with each customer and transaction. This may involve assessing factors such as the customer’s location, transaction volume, and source of funds.
Enhanced Due Diligence (EDD). For high-risk customers or transactions, cryptocurrency businesses are required to conduct enhanced due diligence, which may include additional verification steps, ongoing monitoring, and increased scrutiny of transactions.
Crypto transaction monitoring and ongoing monitoring. Cryptocurrency businesses must monitor transactions on their platforms for suspicious activity, such as large or unusual transactions, transactions involving high-risk jurisdictions, or patterns indicative of money laundering or other illicit activities.

Crypto Travel Rule and AML

The Travel Rule was implemented by the Financial Action Task Force (FATF) to set international standards for combating money laundering, terrorist financing, and other illicit financial activities. The FATF introduced an extension of the Travel Rule for Virtual Asset Service Providers (VASPs) to enhance transparency and regulatory oversight within the cryptocurrency industry.

The Travel Rule mandates that financial institutions, including cryptocurrency exchanges and wallet providers, must share certain customer information when conducting transactions above a certain threshold. The purpose of the Travel Rule is to enhance anti-money laundering (AML) efforts and combat illicit financial activities by ensuring that relevant information about parties involved in transactions is shared between financial institutions. This helps to facilitate the tracing and monitoring of funds and enhances transparency in the financial system.

Key aspects of the Travel Rule in the context of crypto include:

Thresholds: The Travel Rule typically applies to cryptocurrency transactions above a certain threshold (e.g., $1,000 or €1,000).
Information sharing: When a covered transaction occurs, the originating financial institution (e.g., cryptocurrency exchange) is required to transmit certain information about the transaction, including sender and receiver details, to the receiving financial institution (e.g., another exchange or wallet provider).
Compliance obligations: Financial institutions subject to the Travel Rule must implement appropriate systems and procedures to comply with its requirements, including establishing secure channels for information transmission, verifying the identity of counterparties, and maintaining records of transactions and associated information.
Security and privacy: VASPs are required to exchange customer data securely in a standardized format to ensure data privacy and protection while complying with the Travel Rule requirements.
Regulatory oversight: Regulatory authorities enforce compliance with the Travel Rule and may impose penalties or sanctions on financial institutions that fail to comply with its requirements.
Global implementation: The Travel Rule is being adopted by regulatory authorities worldwide. However, implementation approaches and timelines may vary by jurisdiction.

Sumsub Travel Rule Solution

Sumsub offers a six-month free trial of its Travel Rule compliance solution. The product facilitates secure information transfers between VASPs in accordance with compliance requirements, enabling crypto firms to both send and receive Travel Rule messages for corresponding transactions. The product ensures future-proof global compliance, including the EU’s Transfer of Funds Regulation (TFR) and Markets in Crypto-Asset (MiCA) regulations. Try our Travel Rule solution today to steer clear of huge regulatory fines, gain customer trust, and keep your reputation flawless.

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