In the previous blog, we discussed criminal activity regarding DLT assets and money laundering, primarily to avoid any type of crimes against digital assets.
What are KYC and AML?
KYC is a mandatory identification and verification process when customers are opening an account and over time. For making sure that the new client is authentic, the method can include:
- ID card and face verification;
- Driving license;
- Biometrics;
- Document verification, such as utility bills, tax letters, bank statements, etc. to prove the home address;
- And others.
Banks and other financial institutions must comply with these regulations to reduce illegal activities.
eKYC
eKYC is a process — extracting digital data from government-issued smart IDs (with a chip) or when digital identity and facial recognition are used for verification online. India eID system is created to ensure security and privacy; it is an example of how eKYC can make the KYC process more efficient.
AML is much broader — it is a pool of laws and regulations all financial institutions must follow to target possible criminal activities:
- market manipulation/insider dealing;
- corruption of public funds/bribery;
- tax evasion;
- terrorism financing and other illegal acts.
Financial institutions are monitoring the deposits and other transactions of their customers to spot these crimes. International organizations, such as the Financial Action Task Force (FATF) and Internation Monetary Fund (IMF), are keeping up the high standards.
Why do we need it?
Let’s look at one popular money-laundering scheme.
Country A has a high shadow economy index, and there is a significant amount of money is coming in from the illegal drug trade.
The drug money has to be laundered, and the gang leader finds someone in this country willing to sell DLT assets. The leader buys Monero (XMR), and it is transferred to a wallet. To “convert” the “illegal money” to legal, the gang leader chooses a platform to exchange half of XMR to Country B’s currency and withdraws it. The other half of XMR is used on the Darknet Market to buy weapons for gang dealers. Now, the illegal money flows around the world.
In this scenario, KYC & AML procedures, wallet check, and transaction verification would decrease the criminal financial activities.
Read about wallet validity check in one of our upcoming blogs.
