Over-Reliance on KYT Tools Without Comprehensive AML Controls
A critical flaw in certain VASPs’ AML practices is the over-reliance on KYT blockchain tracking tools. While KYT solutions help identify suspicious blockchain transactions, they do not replace CDD, EDD, transaction monitoring (TM) and comprehensive investigation methodologies. Some VASPs assume that transactions without KYT alerts require no further queries. This misconception creates compliance gaps, allowing criminals to circumvent additional due diligence.
Unlike banks, which scrutinize the source of funds (SoF) and source of wealth (SoW) of customers, some VASPs fail to verify whether the transaction volume aligns with a customer’s financial strength and business profile. This weakness has made certain VASPs attractive to money launderers, who can conduct large crypto transactions under minimal scrutiny.
Insufficient Investigation and Risk-Based Monitoring
VASPs, if lacking investigative capabilities, can further exacerbate AML risks. In traditional financial institutions, requests for information (RFIs), transaction justifications, and background checks are routine. These processes help identify shell companies, illicit funds, and high-risk transactions.
However, if a VASP does not effectively integrate blockchain tracking alerts with investigative efforts, missed red flags will result. A risk-based approach should require VASPs to assess whether transaction patterns align with customers’ backgrounds. Without this critical oversight, criminals can exploit the pseudonymity of blockchain transactions to obscure illicit activities.
High-Risk Industries and Crypto’s Vulnerability to Financial Crime
Cryptocurrency adoption in high-risk industries such as online gambling, precious metals trading, and offshore financial services adds another layer of complexity. These industries have long been associated with money laundering risks, and their integration with crypto transactions intensifies concerns.
Regulatory Gaps Between VASPs and Traditional Financial Institutions
Despite increasing regulatory oversight, VASPs in general still lag behind banks and traditional regulated FIs in holistic AML capabilities. While most jurisdictions require VASPs to register with regulatory authorities, enforcement may still be inconsistent. Some regulators may still lack sophisticated crypto-specific expertise, leading to uneven implementation of AML measures.
Additionally, regulatory fragmentation across jurisdictions allows criminals to exploit weaker compliance standards by moving funds through VASPs in regions with lax regulations. This regulatory arbitrage undermines global AML efforts and creates significant risks for the financial system.
