Anti-Money Laundering (AML) regulation is becoming more important every day. Not only for “traditional” obligated subjects of AML regulations such as the financial sector, real estate, lawyers etc but also for Virtual Asset Service Providers (VASPs). Related areas such as Counter Financing of Terrorism (CFT) regulations and sanctions regulations also have become more relevant lately.

What is Money Laundering?

FATF, a global policy-making body, defines AML as the processing of criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source. 

When a criminal activity (e.g. drug trafficking, prostitution, bribery, fraud, etc.)   generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

How does fighting Money Laundering help fight crime?

As FATF points out Money laundering is a threat to the good functioning of the economy and social structure. However, it can also be the Achilles heel of criminal activity. In law enforcement investigations into organized criminal activity, it is often the connections made through (financial) transaction records that allow hidden assets to be located and that establish the identity of the criminals and the criminal organization responsible. When criminal funds are derived from robbery, extortion, embezzlement, or fraud, a money-laundering investigation is frequently the only way to locate the stolen funds and restore them to the victims. Most importantly, however, targeting the money laundering aspect of criminal activity and depriving the criminal of his ill-gotten gains means hitting him where he/she is vulnerable. Without a usable profit, the criminal activity will not continue.

Money Laundering through VASPs?

Money laundering through VASPs can take place when advantage is taken from the anonymity or pseudonymity of virtual assets’ change of hands.  As not all VASPs identify their clients, it may only apply to a limited client due diligence, and specific regulation is still pending the risk of money laundering exists. 

AML regulation for VASPs 

Although the crypto sector and VASPs are still highly unregulated, in recent years countries like Spain, the U.S.A. and U.K. have implemented AML regulations applicable to VASPs. Please check out the following article published earlier this year for more details: LINK TO ARTICLE TWO “AML regulation of VASPs” 

Counter Financing of Terrorism

The terms terrorist organization and terrorist are defined by the FATF and refer to an organization or individual that commits, attempts, or is otherwise complicit in a terrorist act. Terrorist financing offenses should extend to any person who wilfully provides or collects funds or other assets by any means, directly or indirectly, with the unlawful intention that they should be used, or in the knowledge that they are to be used, in full or in part by a terrorist organization or by an individual terrorist. The laws to counter the financing of terrorism and money laundering have been unified in many countries around the world as both legislations focus con Know Your Customer (KYC) processes and due diligence.

Sanctions

Sanctions (economic and political sanctions) can apply to most of us. International organizations like the EU and the UN but also countries like the U.S.A., Switzerland, or Canada impose sanctions or other restrictive measures against other countries, organizations, groups, industries, governments, and entities controlled by governments, non-state entities, and individuals such as terrorist groups and terrorists, and list such entities, countries, groups, and individuals on sanctions lists. 

Persons or entities on sanctions lists may infringe internationally accepted behavior and norms, especially those who have been identified as involved in mass destruction weapons proliferation, as violators of human rights or cybercrime. 

Remember: Apply a Risk-Based Approach

A Risk-Based Approach (RBA) means that you are allowed to apply different levels of checks and controls depending on the risk. For instance, if your customer or counterparty is located in a high-risk country you may want to require him or her, to inquire and demonstrate where the affected funds are coming from. If he/she is located in a low-risk country, perhaps you only require an identity check, etc. It is recommended to also tailor your onboarding procedure depending on the amount of funds deposited/traded (more risk means more due diligence is required).

Conclusions

AML has gained importance over the last few years as criminals will continue trying to launder their dirty money.  Besides the “usual suspects” like the financial sector, real estate, etc new obligated entities have been designated like VASPs. Knowing closely related areas such as counter financing of terrorism and sanctions (like recent sanctions against Russian nationals and companies) is also a must. And please remember no one size fits all, apply a Risk-Based Approach to your activities and operations to ensure the required due diligence level.

This document was created by
Team Core