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Key Components of an Anti-Money Laundering Program

Because the crypto industry is still developing, its regulations are also evolving. Working directly with crypto exchanges and custodians, anti-money laundering (AML) regulators and watchdogs try to minimize and halt money-laundering activities with cryptocurrencies.

Gemini-Key Components of an Anti-Money Laundering Program

Summary

Money laundering is an illegal practice that occurs worldwide. Recently, regulators have specifically applied existing anti-money laundering (AML) legislation to cryptocurrencies. Working directly with crypto exchanges and custodians, AML regulators and watchdogs try to minimize and halt money-laundering activities. Because the crypto industry is still developing, its regulations are also evolving. A strong AML program in the cryptocurrency sector is designed to protect individuals, businesses, and governments from bad actors.

Contents

AML: The Basics

Anti-money laundering refers to the set of processes, regulations, and rules that combat money laundering, terrorist financing, theft, and other financial fraud. Some of the notable illegal activities that AML programs target include tax evasion, market manipulation, public fund misappropriation, and trading in illicit goods. While global AML regulators have fought money laundering operations for decades, this now encompasses  the fintech sector and cryptocurrencies. 

Individual jurisdictions, led by AML watchdogs like the Financial Action Task Force (FATF), develop their own measures to combat domestic money laundering. Policies can vary greatly from country to country. A key facet of most anti-money laundering compliance programs is the know your customer (KYC) process for verifying customers’ identities in the financial services industry and financial technology (fintech) sector. AML is the broader umbrella program that denotes the other measures money service businesses take to prevent and combat money laundering and other financial crimes. 

In general, a financial institution’s AML program should adhere to its local anti-money laundering laws, but the following employees generally all play a role in the creation and execution of an AML program:

  • Boards of Directors: Building strong channels of communication necessitates buy-in from senior leaders — and ultimately the board of directors — who set the tone from the top. These executive decisions can have major implications for the effectiveness of a firm’s AML program. 

  • Management: Managerial vigilance is a critical component of any institution, but it’s especially important in financial services. While boards set the tone at the top, it’s management that ultimately determines policies and practices within a company.

  • Legal and Compliance: Accurately identifying and evaluating the risks that a company needs to address and manage is crucial for ensuring a firm’s health and safety. A strong internal legal and compliance team can help to identify risks and guide the anti-money laundering compliance program. The compliance department can also help create training activities and programs that management teams administer to employees.

  • Employee Initiatives: Workforce-wide programs for monitoring suspicious activities are critical because it’s possible for leadership to miss some details. All employees become part of a risk-monitoring process, individuals acting as a collective to counter potential criminal activities and adding an extra layer of protection. 

Combined, these pieces form a network that can go a long way toward eradicating many sorts of illegal financial activity.  

What Is the FATF?

The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. This intergovernmental body helps to craft rules, applicable worldwide, that seek to limit financial crimes. FATF’s main mandate is to investigate money laundering and terrorist financing activities. Since the advent of cryptocurrencies, FATF has worked to address new potential risks within the asset class. FATF conducts periodic audits of countries and their financial institutions to check on their AML programs and holds governments accountable when they do not comply with FATF recommendations. 

Who Oversees Anti-Money Laundering Compliance? 

It depends on the jurisdiction. In the United States, the Financial Industry Regulatory Authority (FINRA) oversees AML integration and reviews a firm’s compliance. FINRA Rule 3310 sets the minimum standards for a firm’s written AML compliance program. Although FINRA’s AML rules are intended to help U.S. firms detect suspicious activity, in most cases it’s up to financial institutions themselves to administer AML training to company employees. In other parts of the world, similar bodies, including the European Securities and Markets Authority (ESMA) and a variety of oversight entities across Asia administer AML legislation. 

Anti-Money Laundering Laws and Cryptocurrency

Because the crypto industry is still developing, regulations and crypto compliance software solutions are also constantly changing. A number of regulated and compliant firms within the cryptocurrency space have implemented KYC policies to combat financial crimes, but many institutions still have a lot of work to do. As more companies move into the crypto space and develop AML processes, their regional regulators will begin to get a clearer picture about recurring pain points in the AML process. As with any complex process or solution, testing will be key to improvement. Policies and procedures will mature based on experience, and crypto compliance software solutions will evolve to create a more cohesive approach to AML.

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