Anti-money laundering (AML) is a broad term for laws and regulations put in place to prevent criminals from making money illegally or moving illicit funds. While many illegal activities are targeted by AML laws, some of the most important are tax evasion, public corruption, and market manipulation through methods such as wash trading.
Many governmental institutions and pieces of legislation play roles in establishing AML requirements. In the US, agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) provide general information and resources for broker-dealers, and futures commission merchants to set AML standards.
Laws that have contributed to anti-money laundering requirements in the United States include the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986 and the USA PATRIOT Act of 2001.
Owing to the complexity of the relevant laws, many financial institutions use AML software to detect questionable activity. These software solutions perform functions that range from checking customer names against government lists of prohibited users to generating records that are necessary for maintaining compliance.
AML is tightly linked to Know Your Customer (KYC) requirements, which essentially involve verifying customers’ identities and the sources of their income. KYC also requires financial institutions to monitor their users’ activity on an ongoing basis. Like AML, modern KYC procedures are heavily automated, and many institutions use the client onboarding process as an opportunity to acquire proper identification from new customers.
AML programs are also relevant to the cryptocurrency space. Many cryptocurrency exchanges have made concerted efforts toward compliance with anti-money laundering laws as regulators started to place more focus on the cryptocurrency market. Still, there is some criticism toward KYC and AML requirements within the crypto space, as critics argue that compliance decreases their privacy and nullifies the benefits of decentralization by placing sensitive personal data in centralized databases. Proponents, however, argue that solutions can be devised that will meet regulatory requirements while still ensuring user privacy.
One interesting trend relating to AML and KYC compliance in the cryptocurrency ecosystem is the willingness of many exchanges to self-regulate, even when they do not fall within the purview of existing regulatory guidelines. In some cases, companies have even banded together to form industry bodies aimed at creating frameworks for self-regulation. This kind of voluntary compliance both minimizes future legal risks for the crypto-related businesses and also improves the likelihood of wider adoption of cryptocurrency.