What is Anti-Money Laundering (AML)?

What is “fight against money laundering” (AML Crypto), how does it work, is AML verification of a wallet on the blockchain possible, what AML services are there - we will discuss all these and not only questions in this article. Considering our name “AML Crypto”, we could not ignore this topic and not cover it in detail.
Legislation aimed at combating money laundering aims to suppress the legalization of illegal funds. These standards are adopted both by individual governments and international organizations, including the FATF.
Money laundering is the process of transforming illegally acquired funds into legal ones. This is achieved by concealing the origin of funds, mixing them with legitimate financial transactions, or investing in legitimate assets.
Due to its confidentiality, difficulty of tracking and lack of clear legal framework, cryptocurrency represents an attractive mechanism for money laundering. Criminals often take advantage of this to launder significant amounts of money.

Anti-money laundering (AML) regulations play a key role in preventing the circulation of illicit funds. These laws oblige representatives of the financial and cryptocurrency market to ensure the safety of clients and combat financial crimes.
What is AML?
AML is a set of rules and laws that prevent the movement and laundering of illegal funds.
They are closely related to the activities of the FATF (Financial Action Task Force), an international organization created in 1989 to promote cooperation in the field of combating money laundering. The measures taken are aimed at combating the financing of terrorism, tax fraud and international smuggling. Although AML procedures may vary from country to country, many states are seeking to harmonize standards in this area.

With the advent of new technologies, new methods of money laundering appear. AML software is developed to identify behavior that may be suspicious. Examples of this behavior include large money transfers, multiple receipts of funds into an account, and matches of user data with wanted lists. AML rules apply not only to cryptocurrencies, but also to any asset or fiat currency that can be traced and verified in accordance with these rules.

The implementation of AML laws in the cryptocurrency sector took a lot of time to work effectively. The rapid development of blockchain technologies leads to constant changes in AML procedures, in accordance with regulatory measures. However, these changes do not always have a positive impact. Cryptocurrency owners value anonymity and decentralization of their assets, so increased regulation and requirements for documenting the identity of users are perceived as contrary to the ethos of cryptocurrencies.
What is the difference between AML and KYC?
Know Your Customer (KYC) practices are an obligation of financial institutions and service providers to comply with anti-money laundering (AML) regulations. The KYC procedure requires users to provide personal data to verify their identity and makes them responsible for all financial transactions.
KYC is an active part of AML, including due diligence of clients. This distinguishes it from other AML mechanisms, which focus on identifying suspicious behavior.
What is money laundering?
Money laundering is the process of laundering illegally obtained funds, such as proceeds from drug trafficking, terrorism or fraud, through investments or financial schemes.
Anti-money laundering legislation and regulations vary from country to country, but harmonization of these measures is the endeavor of many jurisdictions and the FATF.
There is a legend about the origin of the term “money laundering,” which appeared during the Prohibition period in the United States, when the Chicago mafia made huge profits from the illegal trade in alcohol and other illegal sources of income. According to this legend, criminal groups developed a scheme in which they disguised their illegal income as proceeds from automatic laundries. Because customers of these laundries paid in cash, it was extremely difficult to determine how many people actually used the laundries, allowing criminals to launder their illegal income through these businesses.
The money laundering process usually involves three steps:
Insertion: Involves the entry of dirty funds into the financial system, for example through a cash-based business.
Layering: Represents the movement of illicit funds to make them more difficult to track. The use of cryptocurrency is often used to make it more difficult to determine the origin of dirty money.
Integration: Involves the use of legal investments and other financial channels to introduce dirty funds back into the economy.
These steps help criminals avoid detection and prosecution for illegal actions.
How is money laundered?
There are many ways to launder money. One traditional method is to create counterfeit receipts for services provided in stores, restaurants and other establishments.

Criminals create fake receipts and pay them using dirty money, thereby converting them into legitimate income. These funds are then mixed with actual transactions, making them difficult to identify and track.

Currently, most illicit funds are in digital format rather than physical money. Consequently, laundering methods are becoming more modern and adapting to new realities. For example, with the advent of the ability to make direct money transfers without the participation of a bank, a new area has emerged for use in the laundering process. We talked about how funds are laundered through NFTs in this article.

Anonymity technologies such as virtual private networks (VPNs) and cryptocurrencies increase the problem of money laundering. However, the main method of combating such activities is consistent tracking. By following the “paper trail” of transactions on the blockchain to the exchange, it is possible to link laundered funds to another person’s crypto exchange account or bank account. However, buying cryptocurrency with cash or through P2P services makes it difficult to track the flow of dirty money.

Using the gambling industry to launder money is another common method. Criminals deposit the money they want to launder into online casino accounts. They then place bets to create the appearance of legitimate activity on their accounts. After that, they withdraw their funds, ultimately receiving “clean” money.
How do anti-money laundering measures work?
Regulators generally follow three main steps in their activities:
Suspicious activity detection: Automated funds monitoring allows you to identify suspicious transactions, such as large fund flows or unusual account behavior. For example, if an account experiences an unrelated increase in withdrawals, this may come to attention as potentially suspicious activity.
Transaction Suspension and Reporting: When suspicious activity is detected, users' ability to deposit or withdraw funds is temporarily blocked. This is done to prevent possible money laundering. A Suspicious Activity Report (SAR) is then generated and can be submitted to the appropriate authorities for further investigation.
Referral to Law Enforcement: If evidence of illegal activity is discovered, the relevant information is forwarded to law enforcement for further investigation. If stolen funds are found, they may be returned to their rightful owners, if possible.
Representatives of the financial and cryptocurrency market often take a proactive approach to combating money laundering. High levels of regulation and stringent regulatory requirements require increased vigilance and caution. Transaction monitoring and verification and enhanced due diligence are two key tools in the fight against money laundering.
Thanks to the use of modern technologies and analytical tools like our Bholder and Btrace, it has become possible to actively identify and stop suspicious transactions, minimizing risks for users and complying with regulatory requirements.
Why is AML needed in cryptocurrency?
The use of cryptocurrency by criminals to launder illegal funds and evade taxes is due to its anonymous nature and the ability to conduct transactions without involving third parties.
The development of AML procedures benefits honest cryptocurrency users, but it requires significant effort and time.

In 2023, criminals laundered more than $22 billion using cryptocurrency.

For a number of reasons, blockchain is convenient for money laundering:
Irreversibility of transactions: The key feature of cryptocurrency transactions is their irreversibility. Once funds are sent via the blockchain, they cannot be returned. This means that the police and regulators have no way of recovering lost funds on your behalf.
Anonymity of cryptocurrencies: Cryptocurrency provides a certain degree of anonymity. Some tokens, such as Monero or services known as “mixers,” are designed specifically to make cryptocurrencies difficult to track.
Taxation and Regulation: Taxation and regulation of cryptocurrency remain poorly defined and standardized. Despite the global efforts of tax authorities, the cryptocurrency tax system is still not properly developed, which leaves room for manipulation and abuse by criminals.
While AML procedures may slow down some of the process for crypto users, they play an important role in ensuring security for everyone involved. Although governments and organizations cannot completely eliminate the problem of money laundering, implementing regulations can definitely help mitigate its effects. Technologies for detecting potential money laundering continue to improve, and companies like AML Crypto take their role in the fight against crime seriously.

Our solutions are aimed at improving AML procedures in the blockchain world. Check your crypto wallet for purity, AML address verification, track a transaction - this and more you can do in our solution Btrace. Free AML wallet check for each new user.
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