What Institutional Bankers Need to Know About Cryptocurrency and Anti-Money Laundering Laws | JD Supra

Despite all its upheaval, cryptocurrency seems to be here to stay. This puts virtual currency businesses and institutional bankers in a dilemma: do they capitalize on the increasingly powerful trend, or do they wait for the law to catch up with them and clarify their legal obligations when dealing with cryptocurrencies?

Given the vast potential of cryptocurrency, many bankers are venturing into the field by processing transactions in at least the most common types of digital blockchain payments, like Bitcoin and Ethereum. However, this may open them up to scrutiny under federal anti-money laundering laws, which regulators and law enforcement use to crack down on illicit cryptocurrency transactions while lawmakers scramble to curb illicit cryptocurrency transactions. update financial rules and regulations.

Bankers cannot make an informed decision about processing cryptocurrency transactions without understanding their obligations under these laws and the steps they can take to meet them.

Law enforcement turned to anti-money laundering laws to track cryptocurrency

The cryptocurrency boasts of being difficult to trace due to the way it relies on decentralized blockchain technology to record transfers and transactions. Proponents of the technology say it makes it impossible for law enforcement to track the movement of digital currencies, making transactions virtually anonymous.

That’s not entirely true, however.

Law enforcement officials from a wide variety of government agencies – such as the Financial Crime Enforcement Network (FinCEN)the Internal Revenue Service Criminal Investigation Division (IRS CI)and the Federal Bureau of Investigation (FBI) – have found ways to track illicit transactions in the financial services industry, especially cryptocurrency. They then used anti-money laundering, or AML, enforcement mechanisms such as:

• Anti-money laundering law
• Bank Secrecy Act
• Anti-Money Laundering and Financial Crimes Strategy Act
• Money Laundering Suppression Act
• Anti-Money Laundering Act
• Annunzio-Wylie Anti-Money Laundering Act

These AML laws, however, are not specifically designed to track cryptocurrency. Most of them predate the creation of cryptocurrency by decades. This creates uncertainty, which law enforcement uses to pressure banking institutions to release information about bank customers. Even when the arguments used by law enforcement are flimsy at best, penalties for non-compliance may be enough to get banks to agree to provide documentation of cryptocurrency transactions made by their customers. When forced to choose between facing a money laundering investigation and turning over evidence of a customer’s cryptocurrency habits, many banks choose the latter, even though it may deter future clients.

But now law enforcement has become dependent on this compliance model. This has placed banking institutions in a delicate position between protecting their customers and exposing themselves to significant lawsuits for alleged money laundering.

4 Steps Banking Institutions Can Take

Banking institutions can protect their interests and avoid any civil or potentially criminal liability for money laundering on the use of cryptocurrency by their customers by taking the following 4 proactive measures:

1. Assess current cryptocurrency risks
2. Consider improving due diligence for cryptocurrency customers
3. Invest in compliance technologies
4. Provide more than is legally required at this time

Hiring outside lawyers with experience in money laundering defense can ensure that each of these measures is taken wisely and prudently in order to protect the interests of the institutions. Taking these steps is also important to protect the bottom line and future growth of the institution. As Dr. Nick Oberheiden, founding member of white-collar criminal defense firm Oberheiden PC, puts it, “Cryptocurrency is here to stay. If bankers choose to avoid risk by simply not dealing with digital currencies, they will lose business in the long run.

Determine Current Cryptocurrency Risks

Above all, banking and financial institutions should review their current positions on the cryptocurrency and money laundering fronts and determine the risks they currently face. Without a full understanding of the status quo, any change made by the institution will be blind.

As digital currencies develop, they change the best practices that institutions can adopt to comply with anti-money laundering laws. Since cryptocurrency is changing at a rapid pace, following these best practices requires regular internal review of the institution’s compliance strategy. The costs of not doing so can be significant: law enforcement agencies who see a financial institution handle cryptocurrency transactions while using pre-war anti-money laundering programs and rules advent of digital currency can take steps to hold the institution accountable.

Improve due diligence for customers using cryptocurrency

Not all banking and financial customers use virtual currencies or cryptocurrencies. Not everyone who does will use cryptocurrency for illicit purposes. Some see digital currencies only as an investment tool.

Separating good actors from bad actors who simply want an anonymous way to move money can be difficult. One way to show law enforcement that your banking institution is taking reasonable steps to do so is to improve the due diligence the institution performs for customers who express an intent to use cryptocurrencies. Updating or improving “know your customer” or “KYC” practices can go a long way, especially if the information gathered can be used for commercially available tracking tools that track cryptocurrency transactions.

Even stricter practices may be warranted for clients wishing to trade on cryptocurrency exchanges that have a reputation for relaxing money laundering rules.

Invest in compliance

Now that cryptocurrencies have started to go mainstream and major financial institutions include them in their services, now is the time to invest in cryptocurrency-related anti-money laundering compliance. Delaying any longer can put a financial institution in a position where it has to catch up to competitors and lose business until it does. There is no longer any reason to delay: the possibility of government regulators banning cryptocurrencies outright has become remote.

Do more than the current minimum

When investing in and updating these anti-money laundering compliance measures, banking institutions should look to a future where lawmakers have finally proposed relevant legislation to combat money laundering in digital currencies. . In the future, what is needed to achieve minimum compliance will likely require significantly more than what is currently required.

Going 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 are released.