AML Crypto: An AML Checklist for Cryptocurrency Exchanges


In the early years of cryptocurrencies and crypto exchanges, anti-money laundering regulations were of little concern. But, as the crypto industry grew rapidly, it began to attract the attention of regulators who, although more familiar with traditional financial institutions, were increasingly aware of the money laundering and financial crime risks associated with crypto assets.


Today, the Securities and Exchange Commission (SEC), the Financial Crimes Enforcement Network (FinCEN), and state regulators consider anti-money laundering regulations to apply to crypto exchanges in the same way they apply to money services businesses.


All crypto exchanges operating in the U.S. must comply with crypto AML regulations intended to prevent money laundering, tax evasion, terrorist financing, and other financial crimes.


In this article, we take a look at the impact of cryptocurrencies on money laundering, provide an overview of U.S. money laundering regulations, and offer a straightforward anti-money laundering checklist for crypto firms.




The Impact of Cryptocurrencies on Money Laundering

Money laundering is when you obscure the origin of money gained from illegal activity. The goal is to take money generated by, for example, the sale of illegal narcotics, and make it seem as though it was earned by legitimate means.


Criminals use many money laundering techniques, but they almost always involve the three stages of money laundering. These stages are layering, placement, and integration:


  • Layering passes the money through multiple transactions, making it difficult to discover its origin.
  • Placement injects money into the legitimate financial system.
  • Integration involves withdrawing the now laundered money so it can be used for legitimate purchases and investments.


It’s easy to see how crypto assets and crypto exchanges can be used for money laundering, particularly if they allow anonymous trading. For instance:


  • Crypto can be moved through many different crypto wallets very quickly.
  • It can be split into multiple chunks,  mixed with other funds, and run through numerous transactions before being recombined in a process known as tumbling.
  • Blockchains do not require a verified identity, just a blockchain address.
  • The value of crypto assets like NFTs is subjective, which makes them a useful alternative to physical art for money launderers. 


A money launderer could use the proceeds of financial crimes to buy coins on crypto exchanges. They can move these virtual assets between wallets and exchanges to obscure their origin. Then they can use an exchange to swap their crypto for a fiat currency like dollars.


AML rules impose requirements on crypto firms to prevent criminals from using them to launder their illicit funds.




An Overview of U.S. AML Crypto Regulations

The Bank Secrecy Act is the primary legal framework governing AML regulations in the U.S. It requires financial institutions, including crypto exchanges, to assist government agencies to identify and stop money laundering.


Law enforcement agencies working with FinCEN enforce anti-money laundering compliance. FinCEN creates and implements regulatory standards. It also collects information to aid law enforcement agencies, including via the currency transaction reports (CTRs) and suspicious activity reports financial institutions must submit.


It was FinCEN’s 2013 guidance that first defined virtual currency exchanges as money services businesses, bringing the crypto industry under the aegis of anti-money laundering and financial crime regulations.


FinCEN cooperates with international anti-money laundering efforts via the Financial Action Task Force (FATF), an intergovernmental organization that sets global policies. FinCEN is responsible for implementing regulations that follow FATF guidance, including the ‘Travel Rule for Crypto, which requires Virtual Asset Service Providers (VASPs) to collect and transfer customer information during transactions involving digital currencies. 


It should be noted that in addition to federal AML regulations, the crypto market may also be subject to regional and state-level regulatory requirements. Crypto AML regulations are being actively developed, so the crypto industry should monitor the regulatory environment for changing requirements.




AML Compliance Checklist for Crypto Exchanges

The following AML checklist provides actionable steps crypto firms can take to reduce risk and comply with regulatory requirements.



FinCEN Registration

Cryptocurrency exchanges operating in the U.S. are required to register with FinCEN, and registration should be renewed every two years.



AML Identity Verification and Crypto KYC

Know Your Customer (KYC) processes are among the most critical aspects of the due diligence necessary to comply with AML rules. Exchanges must collect customer information, such as names and addresses, and verify their customers’ identity with official documents.


Effective KYC is essential if crypto firms are to comply with other AML regulatory requirements, including the Travel Rule and suspicious activity reporting. These processes can be streamlined through the use of identity verification and KYC software for crypto businesses



Crypto Customer Risk Assessments

Under some circumstances, crypto businesses are required to carry out enhanced due diligence (EDD) on their customers. EDD demands greater scrutiny of customer identity and behavior. Because EDD requirements are based on risk, exchanges must be able to identify high-risk customers.


High-risk customers include Politically Exposed Persons (PEPS), customers who engage in frequent, high-value transactions, and customers from high-risk jurisdictions, among other criteria.



Report Suspicious Activity

Cryptocurrency exchanges must implement FinCEN reporting processes for CTRs and Suspicious Activity Reports (SARs):


  • CTRs should be filed when a customer’s transactions exceed $10,000 on a single business day.
  • SARs should be filed when transactions appear suspicious, including if the customer appears to be trying to evade CTR reporting requirements.



Transaction Monitoring

Exchanges are required to monitor cryptocurrency transactions for evidence of money laundering and other financial crimes. Transaction monitoring aims to identify suspicious transactions and behavior patterns that may indicate illicit activities.


Transaction monitoring is one of the most labor- and time-intensive aspects of compliance, so many exchanges use AML transaction monitoring software to streamline and automate the process.



AML Compliance Training

Financial institutions are required to provide ongoing training for anti-money laundering processes. Personnel should be trained on the AML aspects that apply to their role and be made aware of the exchange’s policies and procedures for minimizing the risk of money laundering and financial crime.



AML Personnel Designation

As part of an effective compliance program, businesses are required to designate a person to assume responsibility for day-to-day compliance with AML regulations. Their role is to ensure that reports are correctly filed, employees are properly trained, and compliance policies are updated.


This individual does not have to be a C-Suite executive, although many companies choose to appoint a Chief Compliance Officer (CCO). Whatever their position in the company, they should be compliance professionals with sufficient expertise to oversee AML policy implementation.



Crypto AML Automation

You may be looking at this checklist and thinking that implementing an effective AML compliance program is enormously expensive and time-consuming. Compliance is indeed expensive, and compliance budgets have been forced upwards in recent years. However, compliance automation tools can significantly reduce the workload.


AML compliance tools can analyze large quantities of data faster, more accurately, and more thoroughly than human compliance professionals. That’s why many crypto exchanges have chosen to augment their compliance teams with crypto AML software solutions.




Compliance for Cryptocurrency Exchanges with Alessa

Alessa’s integrated AML platform can help your cryptocurrency exchange comply with evolving crypto regulations. We provide a comprehensive range of compliance capabilities, including:



To learn how Alessa can help your crypto exchange to streamline and automate compliance, schedule a free demonstration of our cloud anti-money laundering compliance solution.

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