How UK crypto-currency businesses can detect money-laundering

Paul Stokes explains how a recent proposal by the UK government to regulate digital currencies presents a huge opportunity for the UK to become a leader in the area.

Paul Stokes, COO of Wynyard Group
Paul Stokes, COO of Wynyard Group

In the UK's 2015 Budget, the Chancellor announced a number of policies in relation to digital currencies. These are intended to create the right environment for legitimate actors to flourish and to create a hostile environment for illicit users of digital currencies.

As part of the plans, the government will launch a new research initiative, which will bring together the Research Councils, Alan Turing Institute and Digital Catapult (a national centre responsible for accelerating the UK's digital economy) with industry in order to address the research opportunities and challenges for digital currency technology, increasing funding by £10 million to support this.

As to law enforcement, the UK government will look at increased training and the development of existing techniques to ensure they have effective skills and tools to identify and prosecute criminal activity relating to digital currencies.  Several users and digital currency firms have also suggested using trade bodies or other sources of expertise to improve understanding and awareness about digital currencies among police and intelligence agencies.

Most importantly, as part of its commitment to a healthy, regulated crypto-currency environment, the government plans to apply anti-money laundering (AML) and know your customer (KYC)  regulation to digital currency exchanges in the UK. If approved, all digital currency exchanges will be required to implement AML and KYC processes into their operations. AML and KYC are part of the framework in those countries that have already passed Bitcoin regulations and mark a huge turning point for digital currencies.

To date, digital currencies such as Bitcoins have been attractive to criminals because they offer additional “layering” – criminals can exchange one digital currency for another before converting them into real-world currency. Such activity leaves little or no trail for investigators in pursuit of those money launderers.

Applying AML and KYC regulation can help tackle these concerns and bring digital currencies into the mainstream. But given the anonymous nature of digital currencies and the fast turnaround of digital transactions, detecting money laundering can be a daunting task for many digital currency businesses.

Technology exists, however, that can help businesses comply with AML regulations in an efficient and cost-effective way.

There is software that can integrate AML controls into an organisation's structure, based in a hosted environment. This takes away the need for the organisation to run the system itself. AML software works by allowing the user to set transaction monitoring rules that are enforced automatically to detect money movements that could be associated with laundering activity.

AML solutions provide companies with a comprehensive system to detect and prevent illicit transactions.  With advanced KYC functionality, AML software can also integrate internal client lists with third-party lists which include sanctioned or politically exposed persons (PEPs) and generate automatic alerts where a customer appears on either internal or external lists. This coupled with effective due diligence and preventative measures can go a long way in helping businesses curb potential misuse of their platforms.

By adopting AML and KYC measures, digital currency exchanges can ensure they are well prepared for upcoming regulatory changes. More importantly, only by taking action to prevent potential misuse of their platforms can businesses build the right environment for digital currencies to flourish.

Contributed by Paul Stokes, COO of Wynyard Group.