How AI Can Help Cryptocurrency Firms Avoid AML Regulatory Crosshairs

Republished By Plato

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The following is a guest post by Arthur Mueller, Vice President of Financial Crime at WorkFusion.

Today, cryptocurrency firms face increased regulatory scrutiny.

This year we saw the crypto explosion coupled with the FTX implosion.

From an anti-money laundering (AML) perspective, these organizations had significant increases in new customers and transactions over a very short period, coupled with staffing challenges creating a perfect storm.

For example, the New York State Department of Financial Services (NYDFS) Coinbase Consent Order indicated that alert backlogs exceeded 100,000. Similarly, Know Your Customer (KYC) EDD backlogs were over 10,000.

Regulators are now stepping up enforcement and cracking down on crypto exchanges.

The Digital Asset Anti-Money Laundering Act of 2022 is a proposed bill that helps bring the digital asset ecosystem into compliance with the existing worldwide financial system’s AML efforts “to mitigate the risks that digital assets pose to our national security by closing loopholes and bringing the digital asset ecosystem into greater compliance with the anti-money laundering and countering the financing of terrorism frameworks governing the greater financial system.”

Three cryptocurrency Challenges with AML/KYC

Compliance programs are in their nascent stage

Cryptocurrency organizations spent a lot of their technology investment on the front end, putting compliance on the back burner. As a result, their FinCrime compliance programs lack the maturity and scalability needed in a sector with significant increases in customers and the volume of transactions.

Unlike large, established banks, many crypto firms have only been operating for a few years. As a result, they may lack the maturity and operational and knowledge-based expertise required to run efficient and effective AML/KYC and sanctions processes.

Regulators now demand immediate compliance results, and failure to comply may result in hefty fines. In January 2023, The White House urged regulators to “ramp up enforcement,” as published in The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks.

Cyclicality is another challenge

Fluctuations in transaction monitoring, sanctions alerts, and KYC volumes can occur rapidly. For example, launching a new coin offering can result in 10,000 or more new customer sign-ups.

In contrast, a single event like the Russian invasion of Ukraine can result in an immediate tranche of new sanctions. Compliance teams are far from elastic, and the training required to gain competence in AML/KYC and sanctions alerts analysis and due diligence can take months.

Organizations across the financial industry struggle to find qualified people to fill AML/KYC and sanctions analyst roles

Plus, the cost of hiring during peak periods and carrying additional workers during slower times is far from ideal. Consider technology solutions that streamline and scale compliance operations and fit better with their digital-first DNA.

AI can automate entire roles and help alleviate staffing challenges in crypto AML/KYC and sanctions compliance operations.

It can also augment compliance knowledge workers by completing tasks that involve reviewing false positives (screening, fraud, monitoring, etc.) and other due diligence work, including reporting and identifying red flags.

AI and machine learning can automate many manual, rote tasks and decision-making. This allows analysts to focus on true risk analysis and lead to more robust assessments across the AML/KYC value chain.

Imagine scaling quickly, resolving sanctions alerts expertly, and addressing and alleviating regulatory burdens without hiring armies of analysts, whose work may also be inconsistent.

As the crypto industry continues to increase, it is becoming increasingly clear that it’s time for it to grow up to address security, regulations, and accountability.

Arthur is Vice President of Financial Crime for WorkFusion. Before WorkFusion, Art, who is skilled in the USA PATRIOT Act, Bank Secrecy Act, sanctions, risk management, and financial services, spent more than 20 years in anti–financial crime programs across multiple financial institutions, including UBS, American Express, and Rabobank. Art earned a J.D. from Albany Law School of Union University and a B.S. from St. John's University.

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