Currency exchanges and cryptocurrency trading platforms play a pivotal role in the global financial system. These platforms facilitate currency conversions, cross-border transactions, and international business operations. However, their rapid transaction capabilities and often large transaction volumes also attract individuals and criminal syndicates seeking to exploit loopholes in Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance frameworks. Cases of misuse, negligence, and outright criminal activities have prompted heightened scrutiny from regulators and law enforcement worldwide.
The Mechanics of Currency and Crypto Exchanges
Traditional currency exchanges allow individuals and businesses to buy and sell foreign currencies based on prevailing rates. Similarly, cryptocurrency exchanges provide platforms for trading digital assets like Bitcoin and Tether (USDT). These services offer convenience for global transactions but pose unique risks due to:
High transaction speeds: Instantaneous transfers make it difficult to flag and halt suspicious transactions.
Anonymity features: Cryptocurrency’s decentralized nature may hinder identity verification.
Cross-border complexity: Transactions often bypass traditional banking systems, complicating jurisdictional oversight.
These characteristics create opportunities for money launderers to disguise the origins of illicit funds through various tactics.
How Money Launderers Exploit Exchanges
Common money laundering methods include:
Smurfing and Structuring: Breaking down large sums into smaller transactions to avoid triggering AML reporting thresholds.
Layering: Moving funds through multiple accounts and transactions to obscure the audit trail.
Use of Shell Companies: Over- or under-invoicing trade transactions to justify large money movements.
Identity Fraud: Using stolen or falsified identity documents to evade detection.
These techniques are evident in real-world cases, such as currency traders in Southeast Asia who knowingly facilitated high-value transactions for criminal networks while claiming ignorance of AML laws. This deliberate disregard, known as "willful blindness," holds traders legally accountable under financial crime statutes.
Know Your Customer (KYC): The Foundation of AML Compliance
KYC procedures are essential for preventing financial institutions from inadvertently enabling money laundering, terrorist financing, and other illicit activities. The KYC process typically includes:
Identity Verification: Collecting and verifying official documents such as passports and ID cards.
Address Verification: Confirming a customer's residence using utility bills or other official records.
Source of Funds Checks: Requesting evidence of where large sums of money originate (e.g., business earnings, inheritance).
Ongoing Transaction Monitoring: Continuously assessing transaction patterns to detect and report suspicious activities.
Failure to implement KYC can expose institutions and individuals to criminal charges, regulatory fines, and business closure.
Case Study: Ignoring AML Protocols
In one case, Malaysian and Thailand currency traders facilitated large cash conversions from 11mill to 100 over million for a criminal syndicate linked to operations in "KK Park." The traders argued that their role was limited to exchanging currency and that they were unaware of the funds’ criminal origins.
Despite these claims, authorities charged them with aiding and abetting money laundering. The court found that:
The traders ignored obvious red flags such as unusually large cash inflows.
Their failure to investigate or report suspicious activity constituted reckless facilitation of financial crime.
This case underscores the legal risks of neglecting AML obligations, even when dealing solely with currency or crypto transactions.
Licsensed Currency Exchange, Personal Names As Their Defense
An individual cannot legally operate a licensed currency exchange and simultaneously conduct large volume USDT trading under their personal name without complying with strict regulations. The license applies to business operations, not personal transactions. Large trades under a personal account may be viewed as unauthorized activity. Even if you are licensed for currency exchange, large personal transactions could be categorized as unlicensed money transmission if conducted outside of the business. Regulatory bodies expect both businesses and individuals engaging in financial activities to comply with AML laws. This includes verifying transaction counterparties, reporting suspicious transactions, and adhering to transaction thresholds (e.g., $10,000 USD).
Trading Under Another Person’s Identity: Legal Implications
Using another person's identity to trade, especially for cryptocurrency transactions, is illegal in most jurisdictions. Offenses include:
Identity Fraud: Trading under another person’s name without consent constitutes identity theft.
AML Violations: Authorities may suspect efforts to evade compliance by using third-party identities.
Platform Non-Compliance: Cryptocurrency platforms that detect fraudulent identities may freeze accounts and report users to regulators.
Case Study 1: Involves a Cambodian woman whose passport was misused by a relative to conduct crypto trades. Although she claimed ignorance, regulators held her accountable for failing to secure her identity documents and report the misuse. She claimed that it was her brother in law who did all the illcicit activity and claim innocence.
Case Study 2: A Thailand national trader who was already flagged for laundering monies and had his account closed, then use his girlfriend ID to cont to help trade without proper KYC.
Case Study 3: Ms Tan, Malaysian woman who previously worked for her boss's currency exchange was implicated in laundering $11 million. She reportedly set up over five bank accounts and involved a friend in Singapore to facilitate currency exchanges. She claimed she received no commission and was merely assisting her boss with the transfers.
Later that week, she confessed that a large trading community in Malaysia was aware the exchanges were involved in illicit activities but continued trading to capitalize on high exchange rates from large transactions. At one point, two currency exchanges were shut down after a trader took the funds and failed to exchange them back. The affected exchanges could not report the incident out of fear of being implicated in the investigation. When asked if they were afraid of the legal consequences, the traders stated that financial crimes are minor offenses, believing they could bribe law enforcement or use the excuse, "I didn’t know; I’m just a trader," to avoid prosecution.
International KYC and AML Guidelines
Many countries adhere to AML and KYC standards issued by the Financial Action Task Force (FATF). These guidelines require financial institutions to:
Identify Customers: Verify names, birthdates, and nationalities using official documentation.
Apply Enhanced Due Diligence (EDD): For high-risk transactions or customers, institutions must collect additional information, such as proof of the source of funds.
Report Suspicious Transactions (STRs): Institutions must flag and report any transactions that raise red flags.
Maintain Records: Transaction and KYC records must be kept for 5 to 10 years, depending on jurisdiction.
Regional Regulatory Frameworks
United States:
Under the Bank Secrecy Act (BSA), crypto exchanges must register with FinCEN and comply with KYC and AML protocols.
Transactions above $10,000 trigger Suspicious Activity Reports (SARs).
European Union:
The 5th Anti-Money Laundering Directive (5AMLD) mandates KYC compliance for cryptocurrency exchanges and wallet providers.
Singapore:
The Payment Services Act (PSA) requires crypto platforms to adhere to AML guidelines set by the Monetary Authority of Singapore (MAS).