Banks and other financial institutions increasingly face the new cryptocurrency landscape. With the increasing expansion and popularity of digital assets such as Bitcoin, the question that naturally arises is how crypto transactions with unique anti-money laundering responsibilities should be dealt with.
In the absence of a solid crypto AML compliance program, firms are opening themselves up to financial crimes, including terrorist financing, tax avoidance, and others.
Compliance with AML/CFT laws and regulations is the least any financial institution dealing in cryptocurrencies can do.
Nevertheless, strong compliance goes much beyond just adhering to rules; it safeguards the reputation of the bank and tries to prevent the misuse of the institution for wrong ends.
Let’s discuss a seven-step framework for banks on how to ensure that their crypto AML policies.
- AML Obligations in the Crypto Space
Before Banks can develop specific AML in Crypto policies, it is necessary to understand how existing anti-money laundering regulations apply in this new domain.
Virtual assets such as Bitcoin introduce unique risks that require specially tailored compliance approaches.
Regulators in most significant jurisdictions have issued interpretive guidance on applying traditional AML/CFT rules to Cryptocurrencies.
Banks are expected to carefully read through this regulatory guidance on crypto-AML compliance and discuss with their supervisors for clarification of uncertainties surrounding their AML obligations in the crypto space.
- Development of customer due diligence procedures
Strong customer due diligence is the keystone of any AML for crypto program. Institutions have to comply with initial and ongoing due diligence concerning customers who are trading, making crypto exchanges, or making crypto payments.
This includes the collection of information on customers’ identity and information on sources of funds, as well as details on monitoring transactions of customers over time.
In enhanced due diligence, special care has to be taken with those customers connected with cryptocurrency who bear higher risks, such as exchanges and wealthy traders.
In 2023, the global cryptocurrency market increased institutional investors by 120%, hence the need for more stringent measures of AML.
- Monitoring Customer Activity continuously
Once customers transacting in cryptocurrencies are onboarded, banks have to monitor their activity continuously to identify suspicious behavior.
This forms an essential part of influential crypto and compliance programs. Real-time transaction surveillance technologies can trigger compliance teams to patterns indicative of money laundering or terrorist financing.
Key focus areas in crypto monitoring on an ongoing basis include large or complex transactions inconsistent with the risk profile of customers, frequent small transfers that may be indicative of smurfing, and cross-border payments.
According to reports in 2024, advanced analytics tools reduced false positive alerts by up to 40% by making monitoring systems more efficient.
- Screening Against Sanctions, PEPs, and Adverse Media Lists
Banks must ensure that their customers dealing with cryptocurrency have a manageable relationship, such as sanctions designations, PEPs status, or adverse media hits.
The periodic screening of new and existing crypto-related customers must be done at a minimum for any crypto AML compliance regime.
Sanction screening assumes particular importance because of jurisdictional puzzles over the application of sanctions to digital assets.
By the end of 2023, blockchain analytics had a sharp improvement in sanction screenings’ accuracy of 30%. Therefore, it is better to equip banks to navigate these complex regulatory landscapes.
Bonus: Deep dive into how to create an influential crypto AML strategy by visiting our full guide section today.
- Provide Compliant Transaction Monitoring Systems
As banks are subject to crypto AML regulation expectations, they need very advanced platforms capable of scaling up cryptographic analysis in cryptocurrency transaction data.
Rules-based scenarios then detect known money laundering typologies automatically and screen for other risks banks should consider, including those outlined in all crypto checks from regulatory bodies.
Testing ensures that such systems minimize false positives. These crypto and compliance for bank systems are very good at prioritizing alerts for manual review when combined with the ongoing monitoring of the profile of customers.
- Provision of Adequate Training to Employees
For crypto and programs to achieve their objectives, every employee needs to know how they can contribute to the implementation of an influential culture of compliance.
Such training needs to occur frequently and should cover evolving crypto regulations and specific fraud tactics or indicators that are relevant only to digital assets.
It means that customer-facing personnel require training regarding the performance of AML crypto check at customer onboarding.
Compliance teams should be trained to use transaction monitoring platforms, investigate alerts, report SARs by local filing thresholds, and perform document retention as required by the regulatory expectations.
- Audit, Review, and Continual Improvement of your AML Program
Since both cryptocurrency technologies and regulatory environments are fast-changing, banks can’t view their crypto AML compliance programs as static. The programs demand constant audits and reviews for adaptation to changing risks and regulatory feedback.
The internal and external audit functions have to assess the program periodically regarding effectiveness. It should include testing essential controls to be followed, onboarding customer due diligence, and monitoring alerts generated by transaction surveillance systems.
A review of the volume and quality of SAR reporting also ensures compliance with AML crypto regulation filing thresholds. Call on our experts to develop a program of crypto AML compliance for banks according to the latest regulatory requirements.
