Step-by-Step Guide to Creating Effective AML Policies for Your Crypto Startup

aml policy development for a crypto startup

Creating effective AML policies for crypto startups may not be the most exciting part of opening a new business, but it's critical to your company's success. People often criticize crypto firms for operating outside of regulations. However, most legitimate crypto companies face similar requirements as other financial service organizations. Writing and implementing anti-money laundering (AML) policies is essential to maintaining compliance.

Strong policies also protect your startup's reputation and help you steer clear of illicit activity. This guide walks you through every aspect of creating your AML documents. You'll learn about key regulations and the central elements of AML policies, and you'll explore the importance of promoting compliance and training employees internally.

Step One: Understand AML Regulations

To develop your company's policies, you'll need in-depth knowledge of relevant AML regulations. Some factors are universal, but others differ depending on where your business operates.

The Essentials of Regulatory Frameworks

Financial crimes, such as money laundering and terrorist financing, place everyone at risk. They devastate financial institutions and rob citizens of their life savings. Worst of all, they empower violent groups. Government agencies and regulatory bodies have developed AML regulations to reduce these crimes.

Cryptocurrency businesses have experienced rapid growth in the financial marketplace. This has left regulators racing to catch up and explain how their policies apply to virtual assets. The Financial Action Task Force (FATF) has been the driving force behind many of the laws that exist. Most significantly, the FATF released recommendations for regulators that oversee AML compliance with crypto firms, including:

  • Licensing and registration
  • Supervision
  • Screening with know-your-customer (KYC) and customer due diligence (CDD) checks
  • Travel Rule

Many governments have followed FATF recommendations and developed local frameworks that businesses are required to follow.

Consequences of Non-Compliance

Failing to maintain AML compliance can destroy your business before it even has the chance to grow. The potential consequences of violations include:

  • Penalties and fines
  • Civil lawsuits
  • Revenue losses
  • Reputational damage and lower customer trust and confidence

These outcomes are a greater possibility than ever before. The regulatory spotlight has gotten brighter in recent years, resulting in increased enforcement. According to a recent report from Cornerstone Research, the number of crypto regulation enforcement actions by the U.S. Securities Exchange Commission (SEC) increased by 50% in 2022 compared to the previous year.

For instance, recent news reported that the U.S. Justice Department sought more than $4 billion from Binance Holdings as part of a proposed resolution for a years-long investigation into alleged AML violations. Negotiations included the possibility of Binance's founder, Changpeng Zhao, facing criminal charges in the United States, indicating the serious repercussions of non-compliance.

Step Two: Develop AML Policies and Procedures

Once you have a solid understanding of the regulations for your area, it's time to draft your AML documents. Your policy should include information about many processes, including but not limited to these areas:

  • Customer due diligence: Explain how you use KYC and other CDD processes to collect customer information, including names, addresses, and official documents.
  • Transaction monitoring: Describe your startup's process of continuously monitoring transactions for signs of money laundering or other criminal activity.
  • Suspicious activity reporting: Detail the steps to complete and submit Suspicious Activity Reports (SARs) if your employees flag questionable transactions.

When these procedures are clear, your employees can standardize their onboarding, monitoring, and reporting processes. You can further strengthen your compliance with additional internal controls. For example, segregation of duties reduces errors and questionable behavior by employees. Additionally, an independent audit is an excellent way to measure your company's current level of compliance. Your auditor will provide insights and feedback that you can use to adjust your policies moving forward.

Step Three: Conduct a Risk Assessment

Leaders of crypto startups have to be vigilant from the very beginning, and a risk assessment is an important early step. It offers valuable information that helps you identify red flags, reducing the chances that your organization will become a hotbed of criminal activity.

conduct a risk assessment

Design your assessment for the needs and structure of your business, but be sure to include these essential elements:

  • Customer profiles: The client ID data, profession, address, etc.
  • Transaction patterns: Target unusual patterns, such as a series of transactions that involve various accounts or assets with no reasonable explanation.
  • Jurisdictional risks: Consider known threats and criminal groups that are present in certain geographical areas.

Completing a thorough risk assessment can be challenging, particularly if you're new to the market. Partnering with AML experts or using reputable risk assessment tools, such as sanctions screening, can simplify the process.

Step Four: Implement AML Technologies

implement aml technologies

Consider deploying a range of solutions, including:

  • Transaction monitoring systems: Constantly monitor transactions and flag suspicious activity.
  • Identity verification tools: Complete KYC processes and confirm identities by checking addresses, documents, and facial recognition.
  • Blockchain analytics: Examine transactions and identify potentially problematic trends or patterns.

Completing each of these steps on your own can sap your business's time and resources. Using technology increases your operational efficiency while also mitigating the risk of financial crimes.

Although there are many technology providers on the market, it's crucial to partner with a trustworthy company. AMLBot has built a reputation for safety and security. When you partner with AMLBot, you'll have access to a full range of AML compliance assistance services, and you can also receive help with creating your regulatory policies and procedures.

Step Five: Train and Educate Employees

Without proper training, well-intentioned employees could accidentally undermine your startup's financial compliance. That's why the next step is to provide comprehensive training for your staff. Your program should include:

  • An explanation of how criminals use cryptocurrencies to launder money
  • Common indicators of illicit activity and how to spot them
  • Strategies for using AML tools and technologies
  • A complete overview of your company's policies and procedures

It might be tempting to hand your employees a policy manual and ask them to read it when they have a chance. However, taking a more engaged approach to training will yield better results. Host regular sessions that review policy changes. Hold workshops where your staff practice identifying suspicious transactions and using AML tools. Finally, develop knowledge-sharing initiatives, such as forums, newsletters, or conferences. These avenues for discussion allow employees to exchange information and recommendations.

Step Six: Foster a Compliance Culture

Simply saying that compliance is important isn't enough. Instead, strive to build a culture of compliance with your crypto startup. Most importantly, remember that the biggest impact often comes from the top. Leadership should encourage ethics and compliance and put them into practice.

foster a compliance culture

Prove that compliance is deeply valued within your company with these steps:

  1. Hold regular compliance reviews and share the results with your team. In this way, they'll know what weaknesses exist and how to improve them.
  2. Conduct risk assessments regularly. Provide employees with updated examples of transactions and customers that present red flags.
  3. Develop and implement improvement initiatives to increase compliance. Try using new tools, providing additional training, and consulting with experts.
  4. Be transparent with stakeholders about your actions, including areas needing change.

Keep in mind that these measures are ongoing rather than one-time events. Your startup will have to keep working toward a compliant culture daily.

Step Seven: Stay Up-to-Date on Regulatory Changes

Regulations in the crypto space are constantly evolving. For instance, a group of United States senators introduced a new AML bill for decentralized finance (DeFi) services in July 2023. Staying current on emerging and recently enacted policies ensures that you'll maintain compliance. You can learn about changes from a variety of resources, such as:

  • News reports: Cryptocurrencies are a popular topic, and newly introduced laws are often in the headlines.
  • Atlantic Council: The Atlantic Council offers free access to a cryptocurrency regulation tracker that lists policies from all over the world.
  • AML consultants: An AML consultant will notify you of any changes that affect your startup.
  • Crypto specialists: Organizations such as AMLBot provide frequent updates about AML regulations.

Regardless of how or where you receive your regulatory news, take a proactive stance. Don't wait for regulators to ask questions. Instead, adopt policies and procedures that comply with the most current policies as soon as you become aware of them.

Guard Against Illicit Activity with AML Policies

The risk of criminal activity isn't exclusive to the world of cryptocurrency. Any business involved in financial services faces the same types of threats. Fortunately, you can defend your startup and your clients from money laundering and other illegal activity with a set of carefully crafted AML policies and procedures.

The most effective policies are comprehensive, detailed, and based on current regulations. They're also adaptable to changing laws. Following this guide to AML documentation will help build compliance, trust, and confidence within your startup. If you need support in drafting your policies or want to learn more about compliance tools, reach out to the crypto experts at AMLBot.