Understanding Anti-Money Laundering Protocols – How Does AML Assessment Work?

There is no doubt that the introduction of cryptocurrencies has taken the world by storm, providing cutting-edge payment solutions, trading instruments, and alternatives to traditional transaction methods.

These developments were coupled with major security and information concerns, where illicit activities emerged, taking advantage of the blockchain technology and capabilities.

Therefore, platforms and crypto businesses have taken significant steps to promote the security of blockchain and DeFi platforms, minimising the chances of cyber attacks and crypto hacks. 

Anti-money laundering practices have been widely adopted to prevent malicious programs from misusing cryptocurrencies and engaging in illegal activities. Let’s discuss how AML works and why it is important.

Understanding Anti-Money Laundering

Let’s start by understanding the nature of cryptos and why they open the door for suspicious activities to take place. Decentralised finance relies on shared control and distributed power, entailing that no central authority can monitor, govern and control funds and information. 

This results in the lack of a regulatory framework for blockchains, cryptocurrencies and DeFi projects. However, since crypto developers and enthusiasts advocate for decentralisation, they are expected to perform in good faith.

Also, crypto transactions and wallets do not require providing personal information or details in an effort to preserve identity. However, this creates a gap that many manipulate to carry out illegal transactions.

Money laundering is a common illicit practice for those misbehaving operators who exchange their illegally earned money for cryptocurrencies and create a legal clean slate for their business.

Therefore, local governments and regulations have started adopting anti-money laundering practices. Crypto exchanges and operators registered in different jurisdictions are required to adhere to these rules to combat illegal activities and promote a healthy DeFi ecosystem.

These practices entail not registering blacklisted personnel, monitoring transactions and flagging out any suspicious activity for further investigations. AML practices are usually coupled with KYC (Know Your Client) procedures, which require businesses to collect user information to ensure no malicious actors or fraudulents are registered.

AML Risk Assessment Steps

Anti-money laundering is a prevention-based approach that requires a comprehensive monitoring, evaluation and analysis of ongoing operations. 

Following the AML best practices, operators can flag and suspend suspicious activities to promote security. This framework works following these steps.

Collecting Data

Collecting data and information is the first step because, without data, it is almost impossible to analyse and categorise events. Thus, this step entails the collection, categorisation and structuring of data, including user information like origin, currencies, transaction volume, and date of registration.

The gathered information is later organised to create a pattern, which makes it easy to notice any outliers or anomalies in the data.

Identifying Risks

After collecting and analysing data, identifying risks entails a complex observation and evaluation of ongoing activities. These activities are compared against a number of pre-set parameters that determine the norms and what is considered “risky”.

Then, any abnormal activity or transaction is flagged as a potential risk that must be isolated for further investigation and analysis.

Analysing Risks

After discovering a potentially risky event in the server, it is critical to analyse and understand the nature of this activity, such as the transaction origin, amount, parties involved and currency used. 

This helps compare to industry norms and assess the dangers of this event. The outcome of this step dictates the course of action in the resolution step.

Mitigating Potential Risks

After discovering and analysing the nature of a certain transaction, it is important to set the resolution method that prevents this risk from completing its intention. 

Risk mitigation strategies are pre-determined by the server administrators, which include systematic action after a few criteria have been met. A proper course of action includes either holding the activity until further documentation is submitted, suspending the transaction or blocking the parties involved.

Documenting and Maintaining

Reporting all events and activities taken as part of the AML risk assessment is important to maintain the system. This step includes documenting the processes of risk identification, analysis and resolution, which aids in creating patterns to analyse and evaluate the overall performance.

Monitoring and Improving Continuously

The anti-money laundering risk assessment protocol is not a solution that is applicable only whenever needed. Instead, it is a system of ongoing monitoring and observation that ensures sustainable development of the service and promotes the overall security of transactions.

Final Thoughts

The increasing security concerns accompanying cryptocurrencies caused many to avoid using cryptos and decentralised platforms amid fears of compromised security and cyber threats.

However, developing anti-money laundering practices helps companies ensure a safer environment to transact with Bitcoin and other crypto coins. This practice entails the ongoing tracking of activities, identifying potential risks, and analysing and taking the necessary measures to prevent them.

These activities contribute to growing a reliable crypto business and promote the overall security of decentralised finance.