The state of anti-money laundering (AML) is becoming an increasingly significant issue for businesses and regulators alike. Compliance costs to businesses are growing, with costs to United States financial services firms estimated to be over $25 billion, and costs to European financial services firms estimated to be over $83 billion. Regulators are also having difficulty cracking down on cases of money laundering. Several high-profile scandals taking place over the past few years have highlighted the limitations of the current regulatory landscape. The scandals have included banks under the direct supervision of the European Central Bank (ECB).
ABLV Latvia, Versobank in Estonia, Pilatus Bank in Malta, Danske Bank's Estonian branch, and ING were all high-profile European cases that breached AML regulations only recently. Of these banks, both ABLV Latvia and ING were directly supervised by the ECB.
The fact that these banks breached AML policies despite being directly supervised by the ECB highlights both the shortcoming of the current regulatory landscape and the struggle of regulators to apply oversight to these businesses. Danske Bank is the most recent significant case although the bank was not directly supervised by the ECB due to Denmark not being part of the European banking union. It was only recently that HSBC also paid over $1.9 billion in fines for laundering drug money in Mexico showing that this problem extends way beyond Europe.
The challenges of AML affect both larger businesses and smaller businesses alike. AML is becoming increasingly relevant to cryptocurrency-related businesses with different regulatory authorities applying more stringent policies. Many businesses have had to shut down or relocate operations from Asian jurisdictions such as China, Japan, and Singapore due to increasingly difficult stances from authorities.
Top cryptocurrency exchange business Huobi recently acquired BitTrade to reenter the Japanese market and comply with strict Japanese regulations set by the Financial Services Agency. Europe is also tightening their stance, applying AML regulations that must be complied with by 2020.
Cryptocurrency businesses that deal with custodianship and movement of client’s money such as exchanges and crypto-backed loan providers need to be particularly prudent regarding operations to ensure compliance. We can see an increased focus on compliance from the top cryptocurrency businesses so far in 2019. Cryptocurrency exchange and custodianship service provider Gemini kicked off 2019 with an advertisement campaign taking place around Manhattan emphasizing their compliance with regulations.
Cryptocurrency businesses operate on the cusp of technological disruption. It will not be surprising if we see them tackle the problem of compliance costs and regulatory struggles with innovative solutions. Distributed ledger technology (DLT) offers promise when it comes to providing solutions to the problems of complying with AML policies.
“Detailed information at the transaction level” is provided by blockchain technology and the analysis of this detailed information has resulted in blockchain analysis companies such as Chainalysis thriving in the current ecosystem and working with governments as their main clients. Firms such as Chainalysis have solutions to highlight in real-time potential breaches of compliance.
There is also evidence of a high number of false positives being signalled when analysing potential AML cases. With this contributing to the high compliance costs and also slowing down processes within businesses, a drive towards automation of these processes through technologies such as machine learning algorithms will continue generating a lot of discussions.
Following the suite of traditional financial institutions, cryptocurrency exchanges, digital lenders and other businesses have embraced AML regulations and the know your customer (KYC) rules. The greatest difference between traditional and crypto AML is technological. Unlike the traditional financial sector, compliance officers can track almost the whole history of cryptocurrency movement. In this respect, blockchain is an important source of data for a compliance officer that the traditional financial sector fails to deliver.
Nonetheless, there are and probably will be some ‘bad actors’ in the field failing to follow any rules either because of lack of knowledge or a lack of will. Both the market and regulators will take their part in fighting these actors.
Mass adoption of compliance standards would also take away the argument altogether from bankers, some regulators, and sceptics who claim that ‘cryptocurrency lacks transparency and is prevailed by fraudsters’.
Combining the self-regulation with more established practices of trust and accountability could be enough to reinvigorate the market. Many experts, observers and investors, including myself, believe already that ‘smart regulation’ and most importantly compliance standards, particularly AML and KYC, will be sufficient to drive traditional investment and capital in the market. Once this happens, recovery of the market will be just a side effect some so desperately await.
Recent AML breaches
ABLV Latvia, Versobank in Estonia, Pilatus Bank in Malta, Danske Bank's Estonian branch, and ING were all high-profile European cases that breached AML regulations only recently. Of these banks, both ABLV Latvia and ING were directly supervised by the ECB.
The fact that these banks breached AML policies despite being directly supervised by the ECB highlights both the shortcoming of the current regulatory landscape and the struggle of regulators to apply oversight to these businesses. Danske Bank is the most recent significant case although the bank was not directly supervised by the ECB due to Denmark not being part of the European banking union. It was only recently that HSBC also paid over $1.9 billion in fines for laundering drug money in Mexico showing that this problem extends way beyond Europe.
Challenges posed by AML
The challenges of AML affect both larger businesses and smaller businesses alike. AML is becoming increasingly relevant to cryptocurrency-related businesses with different regulatory authorities applying more stringent policies. Many businesses have had to shut down or relocate operations from Asian jurisdictions such as China, Japan, and Singapore due to increasingly difficult stances from authorities.
Top cryptocurrency exchange business Huobi recently acquired BitTrade to reenter the Japanese market and comply with strict Japanese regulations set by the Financial Services Agency. Europe is also tightening their stance, applying AML regulations that must be complied with by 2020.
Cryptocurrency businesses that deal with custodianship and movement of client’s money such as exchanges and crypto-backed loan providers need to be particularly prudent regarding operations to ensure compliance. We can see an increased focus on compliance from the top cryptocurrency businesses so far in 2019. Cryptocurrency exchange and custodianship service provider Gemini kicked off 2019 with an advertisement campaign taking place around Manhattan emphasizing their compliance with regulations.
Cryptocurrency businesses operate on the cusp of technological disruption. It will not be surprising if we see them tackle the problem of compliance costs and regulatory struggles with innovative solutions. Distributed ledger technology (DLT) offers promise when it comes to providing solutions to the problems of complying with AML policies.
How does DLT aid AML compliance?
“Detailed information at the transaction level” is provided by blockchain technology and the analysis of this detailed information has resulted in blockchain analysis companies such as Chainalysis thriving in the current ecosystem and working with governments as their main clients. Firms such as Chainalysis have solutions to highlight in real-time potential breaches of compliance.
There is also evidence of a high number of false positives being signalled when analysing potential AML cases. With this contributing to the high compliance costs and also slowing down processes within businesses, a drive towards automation of these processes through technologies such as machine learning algorithms will continue generating a lot of discussions.
Following the suite of traditional financial institutions, cryptocurrency exchanges, digital lenders and other businesses have embraced AML regulations and the know your customer (KYC) rules. The greatest difference between traditional and crypto AML is technological. Unlike the traditional financial sector, compliance officers can track almost the whole history of cryptocurrency movement. In this respect, blockchain is an important source of data for a compliance officer that the traditional financial sector fails to deliver.
The market and regulators must work together
Nonetheless, there are and probably will be some ‘bad actors’ in the field failing to follow any rules either because of lack of knowledge or a lack of will. Both the market and regulators will take their part in fighting these actors.
Mass adoption of compliance standards would also take away the argument altogether from bankers, some regulators, and sceptics who claim that ‘cryptocurrency lacks transparency and is prevailed by fraudsters’.
Combining the self-regulation with more established practices of trust and accountability could be enough to reinvigorate the market. Many experts, observers and investors, including myself, believe already that ‘smart regulation’ and most importantly compliance standards, particularly AML and KYC, will be sufficient to drive traditional investment and capital in the market. Once this happens, recovery of the market will be just a side effect some so desperately await.