For all of its upheaval, cryptocurrency seems like it is here to stay. This presents virtual currency businesses and institutional bankers with a dilemma: Do they capitalize on the increasingly powerful trend, or do they wait for the law to catch up and clarify their legal obligations when processing cryptocurrencies?
Given cryptocurrency’s vast potential, many bankers are venturing into the field by handling transactions in at least the most common types of digital blockchain payments, like Bitcoin and Ethereum. However, doing so can open them up to scrutiny under federal anti-money laundering laws, which regulators and law enforcement have been using to crack down on illicit cryptocurrency transactions while lawmakers struggle to update financial rules and regulations.
Bankers can't make an informed decision about handling cryptocurrency transactions without understanding their obligations under these laws and the measures they can take to satisfy them.
Law Enforcement Has Turned to Anti-Money Laundering Laws to Track Cryptocurrency
Cryptocurrency boasts about how difficult it is to trace because of how it relies on decentralized blockchain technology to record transfers and transactions. Advocates of the technology claim that this makes it impossible for law enforcement to track the movement of digital currencies, making transactions virtually anonymous.
This is not entirely true, though.
Law enforcement officials from a wide variety of government agencies – like the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service’s Criminal Investigation Division (IRS CI), and the Federal Bureau of Investigation (FBI) – have found ways to track illicit transactions in the financial services industry, specifically cryptocurrency. They have then utilized enforcement mechanisms in anti-money laundering, or AML, laws like the:
- Anti-Money Laundering Act
- Bank Secrecy Act
- Money Laundering and Financial Crimes Strategy Act
- Money Laundering Suppression Act
- Money Laundering Control Act
- Annunzio-Wylie Anti-Money Laundering Act
These AML laws, though, are not specifically designed to track cryptocurrency. Most of them predate the creation of cryptocurrency by decades. This creates uncertainty, which law enforcement agents use to pressure banking institutions into divulging information about the bank’s clients. Even when the arguments used by law enforcement are flimsy, at best, the penalties of non-compliance can be enough to make banking institutions agree to provide documentation about cryptocurrency transactions made by their customers. When forced to choose between facing a money-laundering investigation and handing over evidence about a customer’s cryptocurrency habits, many banks choose the latter, even if it may deter future customers.
But now law enforcement agencies have become reliant on this pattern of compliance. This has put banking institutions in a tricky position between protecting their clients and exposing themselves to significant legal action for alleged money laundering.
4 Steps that Banking Institutions Can Take
Banking institutions can protect their interests and avoid civil or potentially criminal liability for money laundering over their customers’ cryptocurrency use by taking the following 4 proactive steps:
- Gauge current cryptocurrency risks
- Consider enhancing due diligence for cryptocurrency customers
- Invest in compliance technologies
- Provide more than what is legally required at the moment
Hiring outside counsel with experience in anti-money laundering defense can ensure that each of these steps is taken wisely and prudently that protects the institutions’ interests. Taking these steps is also important to protect the institution’s bottom line and future growth. As Dr. Nick Oberheiden, founding member of the white-collar criminal defense firm Oberheiden P.C., says, “Cryptocurrency is here to stay. If bankers choose to avoid the risks by simply not dealing in digital currencies, they will lose business in the long run.”
Ascertain Current Cryptocurrency Risks
First and foremost, banking and financial institutions should review their current positions on the cryptocurrency and money laundering fronts and determine what risks they are facing at the current moment. Without a complete understanding of the status quo, any changes that the institution makes will be a blind one.
As digital currencies develop, they change the best practices that institutions can take to comply with anti-money laundering laws. Because cryptocurrency is evolving at a rapid pace, keeping up with these best practices requires a regular internal review of the institution’s compliance strategy. The costs of not doing it can be significant: Law enforcement agencies that see a financial institution handling cryptocurrency transactions while using anti-money laundering programs and rules that predate the advent of digital currency may take steps to hold the institution accountable.
Enhance Due Diligence for Customers Using Cryptocurrency
Not all banking and financial customers use virtual currencies or cryptocurrencies. Not all of those who do will use cryptocurrency for illicit means. Some see digital currencies solely as an investment tool.
Separating the good actors from the bad actors who merely want an anonymous way to move money around can be difficult. One way to show law enforcement that your banking institution is taking reasonable steps to do it is to enhance the due diligence that the institution performs for customers who express an intent to use cryptocurrencies. Updating or enhancing the “know your customer” or “KYC” practices can go a long way, especially if the information gathered can be used for commercially-available tracing tools that track cryptocurrency transactions.
Even more stringent practices may be warranted for customers who want to trade on cryptocurrency exchanges that have a reputation for relaxed money laundering rules.
Invest in Compliance
Now that cryptocurrencies have begun to go mainstream and major financial institutions are including them in their services provided, the time has come to invest in cryptocurrency-related anti-money laundering compliance. Delaying any longer can put a financial institution in a position where they have to catch up to their competitors and lose business until they do. There is also little reason to delay, anymore: The possibility that government regulators will outright ban cryptocurrencies has become remote.
Do More Than the Current Minimum
When investing and updating these anti-money laundering compliance measures, banking institutions should look forward to a future where lawmakers will have finally come up with relevant legislation to combat money laundering in digital currencies. In the future, what is needed to attain minimal compliance will likely require far more than what is required, now.
Going above and beyond what is required at this stage can pay significant dividends in the future, as institutions that do more than the minimum may find that they are already in compliance with future regulations when they come out.
