Anti-money laundering (AML) is a term mainly used in the financial and legal industries. AML targets criminal activities including market manipulation, trade in illegal goods, drug trafficking, corruption of public funds, and tax evasion. It usually completed with Know Your Customer (KYC) procedures as the identity verification of customers is an integral element in financial regulations.

The nature of money laundering has evolved over the past few decades. Digital assets and electronic money opened more ways of transferring illicit funds. So, the legislation that aims to fight money laundering has been changed as well.

How does AML/KYC work

AML/KYC regulations require banks and other financial institutions (such as trust companies, insurance companies, and brokerage firms) to understand who their customers are and what type of transactions they perform.

Bad actors tend to pretend someone else when trying to transfer or hide illegally obtained money. So, any company that works with fiat funds must verify its customers to ensure they are who they say they are and have received their funds from the legit and clear sources.

Starting from 1970, the requirement to follow AML is fixed on the governmental and legal level. The Bank Secrecy Act (BSA) was the first official document in AML and became one of the most important tools in the fight against money laundering. Since then, numerous other laws have enhanced and amended the BSA to provide law enforcement and regulatory agencies with the most effective tools to combat money laundering.

Being widespread all over the world, banks and financial institutions have millions of customers. In order to prevent misusing of bank systems for money laundering and provide fast and efficient investigation, banks create profiles based on customer information such as:

  • Identifying and verifying the identity of customers;
  • Identifying and verifying the identity of beneficial owners of legal entity customers (i.e., the natural persons who own or control legal entities);
  • Understanding the nature and purpose of customer relationships;
  • Monitoring for suspicious transactions;
  • storing and regularly updating customer information.

Individual customers who visit a bank should bring some proof of identity. It can be a government-issued ID (e.g., driver’s license, passport) and proof of address. Sometimes, you need to provide additional documents required by your bank for making a transaction. The banker checks the documentation physically and determines if they belong to a person who uses it.

Nowadays, you can create a bank account and pass these checks by simply providing documents online. Many financial institutions are now using the online identity verification process. Once a banking customer’s identity has been confirmed, it is further verified with a selfie and certified liveness detection. This helps ensure that the transactions are initiated and confirmed by the real legitimate customer.

Why crypto platforms should follow AML/KYC?

Over the years, new AML/KYC laws and requirements were created. One of them, Money Laundering Suppression Act (1994), required each money services business (MSB) to be registered by an owner or controlling person. MSBs include any individual that deals in currency, cashes checks, or issues or cashes travelers’ checks or money orders. Thus, the crypto platform that works with fiat funds should follow the strict AML/KYC policy. If a platform supports card payments and bank transfers, it should verify every customer to ensure it is not involved in illegal activity.

One more reason for crypto platforms to follow AML/KYC regulations is the anonymous nature of cryptocurrencies. Crypto transactions are very attractive to those who want to hide proceeds or transfer them without being identified. Before implementing AML/KYC policies, it was almost impossible to track the sender and recipient of crypto transactions. That's why the European Union Anti-Money Laundering and Financing of Terrorism Directives obliged crypto platforms of any kind to follow the 5th Anti-money laundering directive.

5th Anti-money laundering directive

The European Union adopted the first anti-money laundering Directive in 1990. The main goal was to prevent the misuse of the financial system for money laundering. It states that obliged entities shall apply customer due diligence requirements when entering into a business relationship (i.e. identify and verify the identity of clients, monitor transactions, and report suspicious transactions). This legislation has been constantly revised in order to mitigate risks relating to money laundering and terrorist financing.

The Fifth Anti-Money Laundering Directive (5AMLD) was adopted on 30 May 2018. In fact, it was created to address possible gaps in the EU’s anti-money laundering (AML) and counter-terror funding (CFT) regime.

Under the 5AMLD:

  • cryptocurrency exchanges are now considered “obliged persons” and therefore required to comply with the AML/CFT requirements. This includes filing of suspicious activity reports and carrying out customer due diligence (CDD).
  • A legal definition of cryptocurrency may be regarded as “a digital representation of value that can be digitally transferred, stored or traded”.
  • Financial Intelligence Units (FIU) is allowed to obtain the addresses and identities of owners of virtual currency.
  • Providers of cryptocurrency exchanges and wallets must now be registered with the competent authorities in their domestic locations.

CEX.IO is a regulated platform and we follow the 5th AML directive. Our main goal is to provide you a safe trading environment while providing a range of payment options. By following AML/KYC we build and develop robust relationships with bank and payment providers. You can find more details in our AML/KYC policy or in Help Centre articles.

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