AML (Anti-Money Laundering) procedures — are a set of measures taken by financial institutions and other market participants (including in the crypto world) to identify and prevent attempts to launder money obtained from illegal activities.
Over the past six years, about $60 billion has passed through cryptocurrency addresses associated with illegal activities. Some of these funds have been "laundered" through exchanges, mixers, or through regular user accounts.
Ordinary users often do not realize that the funds received from an exchanger or another participant may have a "dark" origin, which can lead to their blockage on the exchange or other service. To reduce these risks, it is important to know the history of the funds on your cryptowallet and assess the risk score of each of your counterparties. This approach is prescribed by AML regulations.
- What is AML verification of cryptocurrency
- AML principles in cryptocurrencies
- How criminals launder dirty cryptocurrency
- Applying AML on DEX
- How to minimize the risks of dealing with "dirty" cryptocurrency
- What to do if your money is stolen?
What is AML verification of cryptocurrency
Currently, the cryptocurrency market is impressive in its scale — there are 425 million users, and the market capitalization of tokens exceeds $1 trillion.
Governments of many countries recognize the need for regulating this significant market. They understand the importance of determining the legal status of cryptocurrencies, taxation, creating favorable conditions for blockchain specialists, stimulating the development of companies in this sector, and ensuring digital sovereignty.
However, along with the opportunities offered by blockchain technologies and cryptocurrencies, there are also certain risks. Cryptocurrencies can be used to launder illegally obtained funds due to their relative anonymity.
Using these services helps to be vigilant, reduce the risk of blocking funds or coming under suspicion, and also prevent the laundering of illegal funds through your account.
AML verification — is the analysis of the sources of funds received on the crypto address and the assessment of their risk. Risk-score — is a percentage risk assessment from 0 to 100, taking into account the history of receipts on the cryptocurrency address, the likelihood of its connection with illegal activities, user behavior patterns, and available information about the address itself, its associated clusters, and the owner.
AML principles in cryptocurrencies
There is an intergovernmental organization FATF (Financial Action Task Force) in the world, which deals with anti-money laundering. FATF issued a document called the "Travel Rule" for cryptocurrency companies. In addition, there are other international and local directives such as 6AMLD (Sixth Anti-Money Laundering Directive), AML/CFT (Anti-Money Laundering and Counter-Terrorism Financing), which professionals in the market must follow.
The main recommendations of these directives boil down to two key principles:
| Principle | Description |
|---|---|
| KYC (Know Your Customer) | "Know your customer". Requires exchanges and crypto exchangers to verify the identity of their users before providing services. This helps prevent the use of their platforms for illegal operations. |
| KYT (Know Your Transaction) | "Know your transaction". According to this principle, companies must know the origin of the funds on each wallet. This ensures that the cryptocurrency is not associated with illegal activities. |
Compliance with these principles helps cryptocurrency companies identify and prevent illegal financial operations, ensuring the safety and legality of their services.
How criminals launder «dirty» cryptocurrency
Criminals use many methods to "launder" suspicious cryptocurrency, and these methods are becoming more sophisticated every year. Here are some of the most popular:
- Using mixers and anonymity tools
Criminals introduce suspicious funds into mixers or wallets using technologies such as CoinJoin, for example, Tornado Cash, Wasabi, and Samourai. These services mix the funds of various users, making their origin difficult to trace. As a result, the funds are partially "cleaned" and easier to legalize.
- Using transit addresses and exchange accounts registered to straw men
Fraudsters create many intermediate addresses and conduct many transactions to complicate tracing. Often this includes transferring tokens from one network to another through decentralized exchanges. Then the funds are transferred to exchange accounts registered to straw men.
- Withdrawal through crypto exchangers without KYC and KYT
Despite tightening regulations, some crypto exchangers still do not comply with AML standards. Fraudsters find such platforms and convert funds through them, shifting all responsibility to the exchangers.
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Collateral operations through smart contracts
Smart contracts are software codes that outline all the terms of a deal. For example, a user can pledge Bitcoin and receive USDT or another cryptocurrency in return. In the event of financial fraud: the criminal assets are pledged, and in return, "clean" money is obtained, which can be freely used. Naturally, no one returns for the collateral.
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Issuance of NFTs
The criminal issues NFTs and buys them from himself for "dirty" crypto. Through this process, he receives "clean" income. If law enforcement agencies become interested, he can claim that he earned the funds from selling an NFT collection. Where the money came from — he has no idea.
Applying AML on DEX
Decentralized exchanges (DEX) allow users to conduct operations without intermediaries and centralized control. Due to concerns about money laundering and terrorist financing, some countries are considering applying AML rules (Anti-Money Laundering) to DEX. Unlike centralized platforms, DEX do not require KYC (Know Your Customer), making the implementation of AML procedures difficult. Although some countries are trying to introduce regulations for DEX, the decentralized nature of these platforms makes it challenging.
It is important to understand that criminals do not use DEX as an end point for laundering «dirty» cryptocurrency. Unlike centralized exchanges (CEX) and P2P deals, DEX do not allow direct exchange of cryptocurrency for fiat money. For criminals, DEX are just a tool for obfuscating transaction traces.
How to minimize the risks of dealing with “dirty” cryptocurrency
- Check the cryptocurrency addresses of your counterparties: Always check the addresses you interact with, whether they are senders or recipients. Before making transactions, use AML services to check the risk score of these addresses.
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Use new addresses to receive funds: If you cannot find out the cryptocurrency address of the counterparty in advance, receive the funds to a new, previously unused address. After receiving, analyze the origin of the funds. If they turn out to be "clean", transfer them to your main address or exchange. In case of a high risk score, gather all information about the transaction to be able to explain the origin of the funds.
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Regularly change your cryptocurrency addresses: The risk score of your counterparties may change over time, which can negatively affect your risk score as well. Regularly changing addresses will help reduce the likelihood of such consequences.
What to do if your money is stolen?
If your cryptocurrency is stolen, the first step is to confirm the fact of the theft. Check the history of transactions in your wallet or on the exchange to identify suspicious or unauthorized transfers. Make sure the issue is not related to technical failures or system errors.
If your cryptocurrency was stolen from an exchange, immediately report it to the exchange's support service. Request a temporary block of your account to prevent further transactions.
Use blockchain explorers such as Etherscan or Blockchain.com to track the movement of stolen funds. This can help identify which addresses your funds have been transferred to. Post information about the theft on forums and social media to warn other users and possibly get help in tracking the funds.
To enhance security, enable two-factor authentication for all your accounts related to cryptocurrency. Consider using hardware wallets such as Ledger or Trezor, which provide a high level of security.
Analyze how the theft occurred to avoid similar incidents in the future. It may be worth reviewing your methods of storing and protecting cryptocurrency. Increase your awareness of security in the cryptocurrency sphere by regularly studying current tips and recommendations.
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