Bitgo on Providing Secure AML/KYC Compliance for Cryptocurrency

DECEMBER 2020 FEATURE STORY — 7 BitGo On Providing Secure AML/KYC Compliance For Cryptocurrency NEWS & TRENDS — 11 56 percent of cryptocurrency exchanges have weak or nonexistent KYC guidelines DEEP DIVE — 19 Tamping down on cryptocurrency exchange cybercrime with AML/ KYC compliance Table Of CONTENTS WHAT’S INSIDE DEEP DIVE A look at recent AML and KYC An in-depth examination of the developments, including $2.8 billion skyrocketing cybercrime on 3 laundered through cryptocurrency 19 cryptocurrency exchanges and the exchanges and the government and pressures they are facing from world private efforts intended to stop it governments and regulators to step up their AML and KYC processes FEATURE STORY ABOUT An interview with Anthony Botticella, Information on PYMNTS.com 7 CEO of BitGo Trust, about how the 22 and Trulioo company deploys a multilayered AML/ KYC system to prevent and monitor for suspicious activity on its platform NEWS & TRENDS ACKNOWLEDGMENT The AML/KYC Tracker® was done in collaboration The latest headlines from the with Trulioo, and PYMNTS is grateful for the space, including Metal Pay’s recent company’s support and insight. PYMNTS.com 11 retains full editorial control over the following partnership with Trulioo to help root findings, methodology and data analysis. out money launderers and why 56 percent of cryptocurrency exchanges don’t follow KYC guidelines WHAT’S INSIDE What’s INSIDE oney laundering is a global however, with experts predicting that plague, with the estimated cryptocurrency-related crimes totaled $4.3 bil- amount in a given year ranging lion in 2019, including $2.8 billion in laundered from $800 billion to $2 trillion money. This is up from just $1 billion laundered M— or anywhere from 2 percent to 5 percent in 2018, and the problem is expected to con- of the global gross domestic product (GDP). tinue its rise as cryptocurrencies become more The growing popularity of online banking popular, valuable and commonly accepted has also pushed money laundering into the among merchants. digital realm as drug dealers, terrorists or human traffickers who might once have set Governments around the world are crack- up brick-and-mortar businesses to launder ing down on cryptocurrency exchanges’ lax their ill-gotten funds can conduct the same anti-money laundering (AML) and know your operations today completely virtually, even customer (KYC) procedures, both of which establishing multiple websites as backups in could result in a serious dent in money launder- case authorities catch on. ing activities if they were deployed effectively. One particularly common avenue for money Many cryptocurrency exchanges are deny- laundering is through cryptocurrency — a bur- ing that such a problem exists at all — and are geoning market expected to be valued at $1.4 subsequently reaping harsh fines and even jail billion by 2024. Its skyrocketing popularity time for their owners as a result — but others obscures an ever-expanding web of money are working on improving their AML procedures laundering schemes and other cybercrimes, with the help of third-party partners. 3 © 2020 PYMNTS.com All Rights Reserved WHAT’S INSIDE The very nature of cryptocurrencies means 56 percent of these professionals saying that that they will likely always be a viable avenue money laundering is a significant issue and for money laundering, but risk levels could 48 percent opining that it is being sufficiently potentially be reduced with diligence on the fought at exchanges. parts of both government regulators and the The cryptocurrency industry is not the only exchanges themselves. one facing AML/KYC difficulties, however, with traditional financial institutions (FIs) also Around the AML and KYC world reporting struggles with these processes. Part of what is fueling money laundering Forty-seven percent of American banks and and other cybercrime on cryptocurrency 40 percent of European banks declared in exchanges is that the majority of these another recent study that regulatory compli- exchanges have few methods in place for ver- ance is their primary challenge in 2020. This is ifying their users. One recent study found that chiefly due to the fact that customer onboard- 56 percent of cryptocurrency exchanges have ing is done by a large number of smaller, weak or nonexistent KYC systems that do little fragmented teams rather than a single dedi- to prevent money laundering. Many exchanges cated workforce. deliberately obfuscate their country of origin to avoid having to comply with any sort of KYC For more on these stories and other AML and guidelines at all, exacerbating the money laun- KYC developments, read the Tracker’s News dering problem. and Trends section (p. 11). This lack of sufficient KYC processes at many How BitGo’s AML/KYC protocols detect cryptocurrency exchanges is generating an and prevent suspicious activity absence of trust from banks and government Protection of client assets is just as para- regulators. A recent joint survey revealed that mount in the cryptocurrency industry as it is 88 percent of financial experts say that cryp- in traditional finance. Digital asset financial tocurrencies aid in money laundering and only services providers like BitGo Trust have devel- 9 percent feel that the sector is combating this oped multilayered protocols for AML/KYC to the best of its ability. Players in the crypto- compliance as a single layer of security is not currency market disagree, however, with only © 2020 PYMNTS.com All Rights Reserved 4 May 2019 WHAT’S INSIDE nearly adequate. In this month’s Feature Story (p. 7), PYMNTS talked with Anthony Botticella, CEO of BitGo Trust, about how the company leverages ID verification and behind-the- scenes transaction analysis to stop bad actors in their tracks. Deep Dive: Enforcing AML/KYC compliance at cryptocurrency exchanges Billions of dollars flow around the world in cryptocurrency transactions, with their anon- ymous nature making them a prime way for money launderers to conduct their crimes. The cryptocurrency exchanges themselves are often reluctant to step up their AML procedures to prevent this, but government oversight authorities are cracking down on noncompliant marketplaces. This month’s Deep Dive (p. 19) explores the various ways that money launderers exploit cryptocurrencies and examines the actions that regulators are taking to reduce the spread of cybercrime on these platforms. © 2020 PYMNTS.com All Rights Reserved 5 WHAT’S INSIDE FIVE VERIFICATION Less than half of all FAST cryptocurrency exchanges have FACTS functional KYC systems. REGULATION DISTRUST FinCEN has fined the owner of Banks are growing increasingly two cryptocurrency websites $60 distrustful of cryptocurrency million for AML violations. exchanges’ AML procedures, while the exchanges maintain they are used for valid reasons. TEAMWORK COMPLIANCE The EU is forming a new regulatory Bank compliance staff are finding agency to monitor member states’ it progressively more difficult to AML procedures and ensure they meet AML/KYC regulations due to are up to continent-wide standards. the distribution of this work among multiple unsynchronized teams. © 2020 PYMNTS.com All Rights Reserved 6 Feature STORY 7 FEATURE STORY “Crypto is still a very new industry,” Anthony BITGO ON Botticella, CEO of BitGo Trust, said in a recent PROTECTING interview with PYMNTS. “Some of the players CRYPTOCURRENCY that are coming up may not understand all the requirements. So, we take a very educational EXCHANGES FROM approach when dealing with clients and we MONEY LAUNDERERS have to explain what we’re asking for, why we’re doing it and how we’re going to be compliant with U.S. regulations.” There are currently more than 5,500 different BitGo’s AML procedures incorporate both a cli- cryptocurrencies in circulation, but the biggest ent authentication system at the point of sign-up name in the business — and often a metonym and a back-end analysis system that identifies for the industry itself — is bitcoin. The year and flags suspicious transactions that could 2020 saw 18.42 billion bitcoins in circulation, indicate money laundering. with a market capitalization of $117.81 billion and an individual coin valued at $19,463 as of Verification at the point of entry December. These coins often change hands, The first step to detecting and preventing either through cryptocurrency exchanges or money laundering begins at the point of entry, via digital asset financial services providers when new customers sign up for accounts with like BitGo Trust. BitGo. All new customers must undergo a rigor- Many cryptocurrency exchanges have faced ous KYC process to ensure they are not known challenges for suspicious activities, such as money launderers by cross-referencing several money laundering, but BitGo Trust, a division of points of personal information. BitGo Holdings, is regulated by the South Dakota “We run [new customers] through our screening Division of Banking and leverages the same tool to make sure that they don’t hit any [Office onboarding protocols for AML/KYC practices as of Foreign Assets Control] or other sanctions traditional financial institutions. lists as well as background searches and veri- fying their identities using a government-issued © 2020 PYMNTS.com All Rights Reserved 8 FEATURE STORY ID, like a driver’s license, [along with] proof of Transaction monitoring behind the residency,” Botticella said. “Then we also require scenes our clients to do an onboarding call, so it’s an The second step of BitGo’s AML procedure is actual person versus somebody doing it anony- a transaction monitoring algorithm that reviews mously on the internet and having documents. the funds moving in and out of accounts to Everybody does a video verification as well.” determine if they are received from or sent to All customers are subject to a pre-KYC call to any suspicious destinations, such as dark web ensure they understand the requirements for marketplaces. This is supplemented by peri- opening up an account before this process odic reviews of all transactions to check for even begins.

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