What is KYC/AML?

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In the era of digital technologies and globalization where financial transactions can be conducted in seconds and across borders, issues of security and legitimacy of financial flows are becoming increasingly relevant. In the context of the growing need for transparency and accountability the terms KYC (Know Your Customer) and AML (Anti Money Laundering) gain special significance.

What is AML verification?​

AML which stands for "Anti-Money Laundering" is a set of international and national laws and regulations aimed at preventing money laundering, terrorist financing and other illegal financial activities. The primary goal of AML is to prevent actions related to money laundering which involves the process of converting funds earned through illegal means into "legitimate" assets that can be used without raising suspicions. To achieve this goal, companies and financial institutions must follow specific procedures and measures such as customer identification, monitoring their transactions and reporting any suspicious activity to competent authorities. This not only helps combat crime but also strengthens a country's stability by creating a transparent and reliable financial system. It's important to note that AML is not limited to the banking or financial sector; it's also applicable to other sectors of the economy where there is a risk of money laundering.

What difference between AML and KYC?​

Although the terms AML and KYC are often used in the same context and aimed at similar goals they have differences that are important to understand. The main task of AML services is to monitor financial transactions and analyze them for suspicious activity. If such activity is detected organizations are required to report it to the relevant regulatory bodies. AML rules can be quite complex and may require significant investments in software and analytical tools. KYC is a more specialized process that focuses on customer identification at the beginning of financial relationships. The procedure involves gathering information about the customer such as name, date of birth, address and even biometric data in some cases. This information is then used to assess the risks associated with each specific customer.

An important distinction is that KYC is usually the initial stage of customer relationships and is often conducted before any financial activity begins. AML is a longer and ongoing process that covers the entire duration of customer relationships and requires continuous monitoring. Both of these procedures are interconnected and successful AML implementation is often impossible without effective KYC. However, despite their similarity in goals and methods they address different tasks and use different approaches and tools for their work.

Why is it important to verify cryptocurrency?​

Cryptocurrencies provide underestimated freedom and flexibility in financial operations opening up new horizons of possibilities for users. However, this same factor makes them attractive to fraudsters seeking to bypass traditional regulations. In this context AML KYC Compliance becomes an essential tool to ensure security and legitimacy in the cryptocurrency sphere.

1. Anonymity vs. accountability: Anonymity is one of the key advantages of cryptocurrencies. However, it can also be a double-edged sword allowing participants to hide illegal activity. Conducting KYC and AML checks helps strike a balance between confidentiality and security.
2. Preventing terrorism financing: Cryptocurrencies can be used for instant cross-border transfers without banking supervision posing a risk in terms of financing terrorist organizations. KYC and AML can significantly reduce this risk.
3. Protecting users: In case of fund theft or other forms of fraud KYC and AML procedures facilitate the process of recovering lost funds and holding the perpetrators accountable.
4. Building trust: Having strict verification and regulation procedures makes cryptocurrency platforms more attractive to most users and investors who want to be confident in the platform's reliability and legality.
5. Compliance with legislation: Finally, conducting KYC and AML checks not only improves security but is also a mandatory condition for operations in many markets in accordance with international and national laws.

How is AML carried out on exchanges?​

Modern cryptocurrency exchanges are not just platforms for trading digital assets. They are complex ecosystems that must operate in compliance with various legislative and regulatory requirements. The first step in the AML procedure on an exchange is the process of user registration and verification. Basic information must be provided which is then confirmed with documentation. Every transaction passing through the exchange undergoes analysis. Systems automatically record suspicious or unusual operations which can then be manually reviewed. Depending on the verification level different restrictions may be imposed on accounts such as transaction amounts or types of available operations. This is done to reduce the risks of large illegal transactions. In case of detecting suspicious activity exchanges are required to report such operations to specialized regulatory bodies for further investigation. Regular audits and reviews of AML policies are also an important part of the process. This ensures the relevance of measures and their compliance with current legislation. The successful implementation of AML on cryptocurrency exchanges heavily depends on the technological foundation which may include artificial intelligence, machine learning and other modern technologies for effective monitoring.

How criminals launder "dirty" crypto?​

Criminals have various methods for laundering "dirty" cryptocurrency and each year these methods become more sophisticated. Here are some of the most popular methods:

1. Using mixers and anonymity tools: Suspicious funds are input into mixers or wallets that utilize technologies like CoinJoin such as Tornado Cash, Wasabi and Samourai. Funds are then withdrawn from a common pool making it difficult to link them back to the original user. As a result, the funds are partially laundered making them easier to legitimize.
2. Using transit addresses and exchange accounts set up on drop-offs: Criminals create multiple intermediary addresses and carry out numerous transactions to obfuscate tracking. This is often combined with token transfers between different networks via decentralized exchanges (DEX). Subsequently, the funds are moved to exchange accounts set up on drop-offs.
3. Cashing out through crypto exchanges without KYC, KYT: Despite tightening regulations some crypto exchanges still don't adhere to AML standards. Fraudsters identify such platforms and convert funds through them shifting all responsibility onto the exchanges.
4. Pledging operations through smart contracts: Smart contracts are programmed codes that define the terms of a transaction. For instance, deposit Bitcoin and receive USDT or another cryptocurrency according to the contract. In cases of financial fraud pledging criminal assets yields clean money that can be freely used. Naturally, nobody comes back for the pledge.
5. Issuing NFTs: Criminals release NFTs and purchase them with their own dirty cryptocurrency. Through this process they generate clean profits. If law enforcement becomes interested in the individual they can claim they earned the dirty cryptocurrency from selling the collection without disclosing its origin.

Conclusion.​

In a constantly evolving technological landscape and changing legislative environment the need for effective KYC and AML measures will only increase. Maintaining a balance between confidentiality and security will present an increasing challenge requiring collaborative efforts from all market participants. Ordinary users are strongly recommended to conduct AML checks on their counterparts and received transactions for any links to illegal activities. There are services for this purpose: Btrace, AMLbot, GetBlock. By doing so you not only demonstrate vigilance reducing the risk of your funds being blocked or coming under suspicion but also prevent the legalization of illegal funds through your account.

 

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