There has been a lot of talk about Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations in the last few years.
There’s no doubt that laws have tightened and regulations have increased. But have these changes actually made a difference? Have all of these efforts had any notable impact on money laundering and other illegal activities?
Is Money Laundering on the Rise?
In late 2022, the European Union Agency for Criminal Justice Cooperation (EuroJust) reported that money laundering cases had doubled over the last 6 years. Similar statistics are being reported by the governments of the United Kingdom and the United States, with the general consensus being that money laundering is on the rise.
On the surface, it doesn’t bode well for the efficacy of AML regulations. But there’s more to it than that.
During the same time period, we’ve seen war in Europe and have witnessed a fallout that includes global economic issues and countless sanctioned entities. Cryptocurrencies have also become more prevalent.
Bitcoin hit a market cap of $100 billion in 2017. Three years later, it passed $500 billion and then briefly passed $1 trillion in 2021.
The currency might be in somewhat of a slump right now (especially when compared to the highs of 2021 and 2022), but it’s being embraced by more users and accepted by more merchants.
Unlike credit cards, Bitcoin payments can’t be tracked. If someone sends $1 million to another individual using a bank transfer, the transaction will be tracked. It may also be flagged, with the sender/recipient then asked to confirm where the money came from.
The same transaction using Bitcoin won’t be tracked or flagged, making life difficult for regulators.
So, while money laundering has been on the increase, it likely has more to do with global economics and the rise of crypto than AML rules.
If AML rules didn’t exist, it would be easier for criminal organisations and fraudsters to launder money. Therefore, it would be reasonable to assume that money laundering would be even more prevalent if not for these tightening regulations.
KYC Seems to Be Making an Impact
KYC regulations task companies with verifying the identity of their customers. If someone wants to make a transfer, deposit, or anything of the sort, they must prove that they are who they say they are.
As with AML regulations, it’s partly about reducing money laundering. But it can also prevent the use of stolen credit cards and help regulators to cut back on underage gambling.
In recent years, it has been argued that underage gambling is on the rise in the UK, suggesting these regulations are a mere drop in the ocean. However, research suggests that while many youngsters are gambling, they are doing so in uncontrolled arenas.
The Young People and Gambling Report for 2022 noted that nearly a third of children aged between 11 and 16 had gambled in the last 12 months. However, many of these were placing bets among friends and family while others were using claw machines and penny pushers at their local arcades.
In other words, they’re gambling in areas that aren’t governed by regulations and aren’t as high risk.
Sticking with the UK gambling sector, the industry has also been criticised for not detecting problem gamblers. These companies are required to use KYC checks and regular monitoring to highlight, block, and assist problem gamblers. Regulators have taken huge steps toward implementing these social responsibility rules and while it’s hard to know whether they are working or not, we have seen an increase in the number of fines.
In March 2023, 32Red and Platinum Gaming were both fined for social responsibility and AML failings. InTouch Games, TonyBet, and William Hill have faced similar fines this year.
These fines suggest that not all companies are abiding by the regulations. But they also show that regulators are serious about them and will take whatever steps they need to ensure the changes are implemented.
What Does the Future Hold?
The war in Ukraine has led many governments to step up their AML efforts, thus preventing sanctioned entities from moving their money around.
In the coming months and years, we’ll likely see these efforts continue.
In Europe, for instance, new rules are being introduced to create a stranglehold on popular money laundering vehicles. It has even been suggested that they will try to regulate the cryptocurrency sector.
These new crypto rules mean that all crypto-asset service providers (CASPs) will be asked to perform due diligence on their customers when initiating transfers of €1,000 or more. There will also be more of a focus on cross-border transactions and financial relationships. Further regulations may be applied to those in the luxury goods sector, including watchmakers, jewellers, and anyone producing or selling precious metals.
If you’re worried about how current or future regulations will impact your business, take a look at our risk intelligence solutions. We can help you to stay compliant while mitigating certain financial and regulatory risks.
Summary: KYC and AML are (Probably) Working
It’s hard to know with 100% certainty whether KYC and AML regulations are working or not. What we do know, however, is that these rules make it harder for money launderers and fraudsters and can also protect against unauthorised use.
It’s important to remember, though, that the continued existence of money laundering and the ever-present threat of online fraud, underage gambling, and other such issues doesn’t mean that these regulations aren’t working.
Money launderers will always find a way. In recent years, they have been using popular money transfer apps, cryptocurrency, commodities, and even cash-based role-playing games. In years to come, they might find other ways, and if future regulations block those outlets, they’ll try something else.
It’s a cat-and-mouse game and the cats can never truly win, but they can make life harder for the mice, and that’s essentially where we are today.