Financial institutions around the world are required to put in place robust controls to detect and deter the flow of illicit funds through the financial system. Such controls include the need for financial institutions to identify and know their customers (including beneficial owners), to conduct regular account reviews, and to monitor and report any suspicious transaction. Financial institutions are advised to adopt good practices for combating money laundering and terrorism financing, as well as for information on high risk jurisdictions.
According to the Financial Action Task Force’s 2013 NPPS Guidance, virtual currencies are potentially vulnerable to money laundering and terrorist financing abuse. First, they may allow greater anonymity than traditional non-cash payment methods. Virtual currency systems can be traded on the internet, are generally characterised by non-face-to-face customer relationships, and may permit anonymous funding (cash funding or third-party funding through virtual exchangers that do not properly identify the funding source). They may also permit anonymous transfers, if sender and recipient are not adequately identified.
As such, Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) regulations have become a much larger burden for financial institutions and digital exchanges, and enforcement has stepped up significantly. In numerous jurisdictions, financial institutions and digital exchanges that fail or refuse to comply with the requirements of its applicable laws are guilty of an offence and will be liable on conviction.