KYC & AML Compliance For Crypto Exchange Services

Last year when the AML 5 directive took place, things got quite heated for most of the cryptocurrency exchanges. Some platforms decided to shut down completely and others did everything in their power to keep up with the new regulations. In this article, we will discuss everything there is to know about KYC & AML compliance and the risk faced by the crypto exchange. Here’s how crypto exchanges can ensure anti-money laundering and KYC compliance.

Why is the Crypto Industry Facing Money Laundering and Terrorist Financing Problem?

The crypto industry went through a sudden growth phase and it brought along some major issues with it. Criminal activities like money laundering and terrorist financing are major issues worldwide. Organizations try to hide the source of funds, other organizations and terrorist groups provide funds to the organization for the purpose of money laundering.

All efforts to detect and stop the process of money laundering is known as Anti-Money Laundering regulation. Regulators have to make sure the regulations are followed. As the crypto industry saw a rise in popularity, they failed to follow the KYC and AML obligations. Fraudsters and money launderers took advantage of the complex crypto systems that also offer anonymity. Tons of money laundering activities were done using cryptocurrencies until the AML regulations were implemented.

AML & KYC Compliance Process for Crypto Exchanges

After a lot of cases regarding money laundering faced by crypto exchanges, AML regulators decided to enforce AML regulation for crypto exchanges. To complete the process, some regulators have chosen to issue new AML regulations for crypto exchanges, while other exchanges decided to enforce the existing AML regulations. The work on the AML compliance for crypto exchanges is still not finished. As the requirement is more recent, exchanges have to work on anti-money laundering regulations for compliance.

FATF Recommendations for Virtual Currency Service Providers

FATF suggested the AML compliance be enforced on crypto exchanges. According to the FATF guideline, virtual asset service providers must follow a risk-based approach and follow compliance like any other business. Countries that are members of FATF are responsible to implement these measures. These regulations are expected to ensure a little bit of transparency in the anonymity of the whole cryptocurrency transactions.

Risk-Based Approach to Crypto Exchange

Virtual currencies such as Bitcoin, Ethereum, etc. are constantly growing and changing the financial environment. These virtual assets have some benefits, but along these benefits comes the risk of fraud. Its features like speed, global reach, and anonymity make them perfect for money launderers. This is the reason, a lot of money launderers and fraudsters decided to pick cryptocurrency as their means of moving money around.

After a lot of discussion and thoughts, several governments chose to regulate virtual currencies. However, countries who decided to regulate virtual currencies have been struggling for a long time to fill in the gaps in the regulations.

AML 5th Directive: Compliance for Virtual Currencies
Before the launch of the AML 5th directive, virtual currencies didn’t come under any sort of regulations. In 2018, it was decided that AML regulations will also be applied to crypto custodians and crypto wallet providers. This regulation of cryptocurrency is being strictly followed in European Union. Crypto exchanges that do not meet their regulations are being fined heavily.

AML Compliance Program of Cryptocurrency Exchanges

One legal obligation that crypto exchange services have to follow is to have Anti-Money Laundering compliance like all banks and financial institutions. The key to an effective AML compliance program in FATF and EU is to follow a “risk-based approach”. Additionally, to comply with AML and let it run successfully, crypto exchanges have to build a perfect compliance strategy. The compliance process must be run by a qualified AML compliance officer, it is another legal obligation. Failure to use a compliance officer can lead to fines and other losses due to financial fraud.

Customer Onboarding Process: KYC & AML

The first step of customer onboarding in any organization is to comply with the KYC regulation. This can’t happen with manual ID and document verification. That’s why businesses aim to open their accounts easily, quickly, and without as much friction as possible. This allows businesses to protect their financial health and prevent financial fraud. Crypto exchanges have to perform the customer account opening process under AML and KYC regulations.

KYC Requirements for Crypto Exchanges

The primary goal of the KYC process is for businesses to recognize the person with whom they are becoming a partner. Usually, the KYC process happens in person when a customer submits documents and their identity is cross-verified by the businesses. In the old days, documents were verified using manual methods which led to a lot of errors and anomalies. Although, today technologies like DIRO’s online document verification technology verifies customer document data in an instant. Some of the most common documents collected for the KYC process are: