In every anti-money laundering (AML) regulation, obliged entities are required to determine the source of funds or source of wealth in specific situations and always in the case of high-risk customers.
Things are even more challenging when we are talking about determining the source of funds or wealth in crypto.
Why?
Because blockchain is public ledger with pseudonymous addresses. Tracing the source of funds is more challenging than in traditional banking.
Here are some best practices on how to determine the source of funds in crypto:
Financial/Bank Statements:
Funds to be used for crypto purchase often originate from traditional financial institutions (FI) and go to centralized exchanges.
If this is what the customer says, you will be able to see the transaction in any financial/bank statement.
Cash purchases pose a greater challenge. In such cases, review cash withdrawal details on the statement.Service Provider Documentation:
Service providers like cryptocurrency exchanges and P2P platforms act as intermediaries. They keep detailed records of transactions, including the source of the funds deposited by their customers.
Such records can provide an explanation for the source of funds.Mining Activity:
Customers involved in mining pools can provide payout history for the establishment of the source of funds.
For solo miners, request equipment purchase receipts and utility bills reflecting high electricity consumption.
This can often justify the customer's claim that the funds are proceeds of mining.Employment Contracts:
Some professionals receive crypto payments for consulting or marketing services. Employment agreements typically outline payment details.
Such contracts or proof of payments may be sufficient in some cases.
How the source of funds may be concealed with the use of crypto
Unlike cash, transactions in cryptocurrency leave traces. Recorded on a public blockchain ledger, anyone can access and view these transactions, including financial crime investigators.
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