How to mitigate your KYC / Anti Money Laundering (AML) compliance risks

Money laundering is not a misdemeanor: it enables criminals to hide the proceeds of their crimes (predicate offenses). Most often, the financial market and legitimate businesses are misused in the process of placing, layering and integrating ill-gotten gains into the traditional financial system.

For many years now, banks and other highly regulated financial intermediaries have become increasingly unattractive for money launderers. This is because compliance requirements imposed by regulators and international organizations, such as the Financial Action Task Force (FATF), have steadily increased. Nevertheless, money laundering risks seem to have shifted from banks to other less regulated services, such as small individual asset managers, dealers of precious metals and other high value goods, as well as financial intermediaries which engage with virtual assets.

The first step in mitigating risks associated with money laundering and terrorism financing (ML/TF) begins with the identification of potential risks. Common risk indicators include:

  • The business’ relationships and/or structure are unusually complex or difficult to understand, e.g. foreign domiciliary companies, trusts or foundations used to hide the ultimate beneficial owner, which might be a sanctioned or a Politically Exposed Person (e.g. Panama Papers);
  • A transaction’s beneficial owner and/or assets originate from emerging markets and the financial intermediary is not experienced with such business relationships;
  • A verification of historical transactions involving virtual assets reveals the involvement in, or proximity to illicit or high-risk activities, such as drugs and arms trafficking, human trafficking or even terrorism financing;
  • A customer cannot prove that he is the beneficial owner of virtual assets (i.e. controller of the assets) by various technical means.

How can these risks be mitigated?

As a second step in combating ML/TF, organizations that are at risk for being misused for ML/TF must observe national anti-money laundering regulations by (a) implementing internal compliance programs and policies that (b) make use of automated systems, contain clear processes to identify potential risks and (c) has internal control systems that are independent and avoid conflicts of interest.

5 Step Checklist

KYC: Ensure you have current, complete and documented knowledge of your customers and their relationships. For high risk customers, frequent contact and reviews are recommended (e.g. annual meetings, reassessments).

Ongoing Monitoring: Screening the contracting party, beneficial owner, controlling person or representatives on a periodic basis by use of public sources (e.g. Google) and data consolidators (e.g. KYC Spider, LexisNexis or World-Check) ensures that you continue to do business with trusted parties only.

Virtual Asset Origins: Wealth or funds originating from virtual wallets or addresses can benefit from enhanced due diligence in the form of risk rating the address and previous transaction (recommended 1 hop back only).

Beneficial Ownership of Virtual Assets: To ensure that an onboarded customer is the beneficial owner of a particular virtual wallet or address, implement a process to prove by technical means that assets are under the customer’s control (e.g. digital signatures requiring the private key for signature).

Transaction monitoring: Client profile and risk profile to identify when transactions deviate from normal activity or thresholds, or otherwise come into proximity with high-risk activities.


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