Money laundering is the process of ‘cleaning’ illicit financial gain from criminal activity to make the funds appear legal. Typically, this involves three parts; the placement, layering and integration of tainted funds.
Placement of illicit funds entails criminals inserting funds into the financial system (i.e. opening a bank account).
The layering part of money laundering is where funds are sent through many various types of transactions (i.e. ‘layers’) to obfuscate the original source funds, the path/flow of funds and beneficiary. Loans, under/over invoices of goods/services, simple wire transfers, etc.
Finally, criminals will seek to integrate the ‘clean’ cash back into the economy so that the funds can be ‘legally’ spent on luxury items, asset/investment purchases, etc.
Anti-money laundering or ‘AML’ is a set of procedures aimed to ensure that the financial system is not used to facilitate money laundering.
Anti-money laundering procedures look to comply with multinational and national legislation that details what financial intermediaries’ requirements are to adhere to for internal processes. AML is typically overseen by the Money Laundering Reporting Officer (MLRO) in obliged entities.
Because the blockchain is auditable and traceable, it is easier to trace criminally obtained cryptocurrencies and money laundering activities leveraging the technology.
Tracing tainted money in the traditional economy is significantly harder as funds in the form of cash is far harder to trace. A bundle of $100 bills, unless especially marked, can be accepted for a plethora of goods and services around the world.
There are a number of notable Anti Money Laundering (AML) regulations that financial institutions and businesses doing cross-border transactions must bear in mind. The United States’ most prominent AML regulation is the Bank Secrecy Act whilst EU directives such as 4, 5 and 6AMLD are the AML guidelines for European Union member states.
As the crypto asset market has matured, regulators have crafted regulations around specifically combatting money laundering with Bitcoin and other cryptocurrencies to keep up with the privacy-focused innovation (i.e. CoinJoin wallets) to circumvent compliance in the industry.
The Financial Action Task Force (FATF) – the world’s Anti-Money Laundering watchdog founded by the G7 – regularly updates recommendations for Anti-Money Laundering and Combatting the Financing of Terrorism (CFT).
Obliged entities utilize specialized software to comply with various jurisdictions’ AML requirements. Companies like Coinfirm provide RegTech solutions to major enterprises and startups alike that keep them in control of risk with data-led intelligence.