Crypto firms are operating in a grey regulatory area. They must navigate how to play within compliance requirements while innovating. These operations require Know Your Customer (KYC) and anti-money laundering (AML) processes, both for the businesses themselves and the users.
In 2021, crypto-fiat currency exchanges hit a new high in illicit trading at $14 billion. Helped by these new possibilities, regulators and law enforcement launched actions against crypto trading platforms, exchanges, Initial Coin Offerings (ICO), non-fungible tokens and stablecoins.
Know Your Customer (KYC)
KYC: businesses must perform identity checks on both their current and potential customers as part of performing due diligence to help avoid fraud and financial crime by ensuring that businesses are not dealing with who you may think they are. Here are two steps: 1. Businesses should perform these checks to reduce all instances of fraud and financial crimes; and, 2. When customers perform transactions, they should be sure that they are dealing with whom they think they are dealing with.
No matter how the information is collected, to fulfill these KYC requirements a company will need to assemble and verify customer personal information, including name, address, date of birth, national ID document number, and more. In some instances, the process of verification may even include using facial recognition software to make sure someone is who they claim to be or, even more disturbingly, checking the financial transactions of the customer to identify suspicious activity or to check if he or she may be a politically exposed person (PEP).
These procedures can be expensive, time-consuming and resource-intensive for larger financial institutions. With an eKYC, a financial institution can minimise these risks by eliminating physical reviews and providing faster, more accurate results, whilst also retaining a scalable compliance model that can be adapted to changes in regulations or emerging technological advancements, or both.
Know Your Transaction (KYT)
Know Your Transaction (KYT) is a transaction monitoring process that monitors origin, purpose and nature of transactions, to meet the AML and CTF (counterterrorist financing) compliance requirements of the banks and other financial institutions to maintain the AML regulations and avoid fraud and other criminal activities.
Cryptocurrency KYT is performed on sources, destinations and intent, and may ferret out traffic patterns common to terrorist funding, money laundering and other illicit activities. In essence, Cryptocurrency KYT helps businesses better identify and manage risk, lower operational costs and build customer trust.
Reliable data is crucial for KYT, that is why it is tied to the AML/CTF compliance, which means it has to be correct, fresh, timely and cover a wide range of transactions – that can become challenging for financial institutions with limited resources, as well as vastly increase the number of false positives that need to be manually investigated and reported. Our actively monitored crypto KYT solution comes with a real-time coverage of transactions, automated monitoring and compliance checks, and reliable data analytics – all these features will help hold institutions compliant to the AML/CTF regulations!
Know Your Business (KYB)
Meanwhile, ‘know your customer’ (KYB) checks are part and parcel of cross-border trade activity, and include double-checking that a business is legitimate by examining its incorporation certificates, business licences and other official documents to make sure it has the capacity to engage in international trade. It will also look for the ownership structures of the business, including any so-called ‘beneficial owners’, which is a way of trying to take the mystery out of the truly evil, if usually rare, scheme in which the ownership of an illicit business is hidden behind a dizzying nest of fraudulent ownership certificates to vanish into the ether, leaving the prosecutors scratching their heads.
KYB checks may be legally obliged of governments and regulators as part of anti-money laundering and countering the financing of terrorism (AML/CFT) controls, pursuant to the Fourth Anti-Money Laundering Directive of 2015 (AMLD4) or similar compliance obligations under the USA PATRIOT Act within the US, or under other sector-specific compliance requirements. KYB may also be done on a discretionary basis (or part-discretionary, part-regulatory) when companies assess their own risk management guidelines to ensure that the counterparties with whom they transact (from credit providers and lenders to crypto exchanges, gambling operators, auditors, tax advisors, asset managers or credit institutions) are not fraudulent or integrate into the apparatus of money laundering or the financing of terrorism or other international criminal activities.
Know Your Employees (KYE)
Know Your Employee (KYE) is the process by which business organisations ensure that their employees are verified. KYE is the process by which credentials, identity and history of an employee are confirmed. KYE is extremely important to the banking industry, as well as other branches of commerce, because criminals may exploit an insider to launder their money through a KYE employee with a sketchy background or behaviour.
All good KYE programmes contain pre-employment screening and monitoring, and designate a Money Laundering Reporting Officer (MLRO) to consolidate any compliance programmes that you will implement – such as KYE.
In remote work environments, KYE means establishing secure avenues for document submittals, deploying available technology tools to foster communication and collaborations, implementing data privacy mechanisms and training to marshal employees in understanding anti-money laundering standards and regulatory compliance directives. This all adds up to a greater compliance culture, in which red flags or suspicious activities are flagged out sooner as is the money doled out in fines from the regulator.
