Anti-Money Laundering and Know Your Customer Laws

Initial coin offerings and Initial Exchange Offerings are proving to be valuable financial tools in the crypto economic age; however, the chaotic environment of this platform provides a viable platform for illegal operations such as scams/frauds, and money laundering.

The vast sums of money traded through cryptocurrency offerings are believed to be in the area of 9 figures, with the global value of cryptocurrencies estimated at over $200 billion. The sheer volume of funds flowing through the system gives cause to concerns about money laundering and other illicit activities.

One of the underlying foundations of the blockchain is the ability to remain anonymous. While the blockchain ledger is publicly available, access is limited to the public key. The private key, containing data about the owner, is not shared on the blockchain. Instead, the private key merely serves as a method of two-step verification for accessing and approving fund transfers between blocks. To access someone’s blockchain account, you would need both public and private keys.

Because people can launder large sums of money through the blockchain network and then converted it one cryptographic currency to another, the funds are in many ways untraceable. The potential for bad actors to use cryptocurrencies for nefarious purposes cannot be understated in an age of global terrorism and geopolitical instability.

In response to these genuine concerns about anonymous users transferring vast sums of money, Anti-Money Laundering / Know Your Customer (AML/KYC) protocols have emerged. By adopting and strictly adhering to these protocols, your company can limit undue scrutiny from financial and security regulatory agencies.

By way of a real-world example, AML with specific security coding may be the only correct way to interface between real investors with substantial resources and illegal operations of the black market. This differentiation can be accomplished by requesting identification that is digitally mapped and stored in a database. However, this method would invariably impact the sustainability of the ICO community, since one benefit most investors enjoy from cryptocurrencies is anonymity.

Conversely, an ICO issued without applying an AML code embedded within the smart contract can have a negative impact. Without investor confidence, sales of the token will probably suffer. Fortunately, the advanced technology powering the blockchain makes illicit funding activities difficult. Given the stakes, the importance of AML becomes clear.

Know Your Customer (KYC) are processes whereby a particular company uses a data verification system to confirm customers’ real identities. The primary purpose of this undertaking is to investigate and determine what kind of a business partner an investor will be once you have initiated the smart contract protocol. The goal is to identify clients with potentially illicit objectives and crime sponsoring agendas and prevent their involvement in your ICO.

ICOs must continue to uphold strict coherence with Anti-Money Laundering and Know Your Customer jurisdictional laws. Because minimal rules are guiding ICO operations, regulators routinely apply the existing AML/KYC laws across many jurisdictions. Compliance with these laws not only helps ease the security concerns that attract unwanted regulatory attention, but you must also consider them a fundamental best practice for any ICO.

Seven Benefits of Voluntary AML/KYC Compliance

Do you need more reasons to adopt AML/KYC compliance regulations voluntarily? Here are seven benefits of voluntary compliance that can further sustain your ICO:

1. Solidifying Credibility with Banks

By implementing KYC protocols before and during your ICO, work with banks and following AML regulations will become much easier. By voluntarily complying with KYC protocols, you are giving your ICO an implied stamp of legitimacy. Most would-be regulators are far more open to token sales if you can assure them that you obey “know your customer” laws.

2. Staying Ahead of the Compliance Curve

Until the muddy regulatory waters become clearer, transparency is always the best course of action when dealing with regulators. Regulatory bodies in many large markets like the United States, Canada, and the United Kingdom are trending towards classifying ICOs as securities. These trends make the need to be proactive and transparent when complying with AML/KYC guidelines even more important for operating in these markets.

3. Establishing Long Term Legitimacy

If you want your business to succeed in the long run instead of just taking the money and running, you need to understand and fully comply with the existing legal framework for your ICO. One way to establish legitimacy is by showing how thoroughly your ICO and its governance contract are designed, executed, and protected.

4. Improving Your Public Perception

All the current hype and excitement, coupled with a shortage of specific regulations, make ICOs a potential haven for fraudsters. By informing the public about your short-term and long-range plans, the strength of your financial structure, the intended use of funds, possible incentives, associated risks, and other details, the perception of your company as a heavyweight will become clear.

5. Expanding Your Reach

By voluntarily complying with AML/KYC laws, your ICO may reach a broader audience and expand the number of jurisdictions in which investors can participate. AML/KYC compliance allows you to reach coveted “accredited investors” in the United States, Canada, and the United Kingdom.

6. Post Funding Tracking

Opening up your ICO to investors in the United States carries undeniable benefits, but there are also post-funding concerns that must be taken into consideration. For example, if you raised funds under Regulation D, how you can prevent investors from selling your tokens in the first 12 months? If you chose not to accept U.S. investors, what procedures do you have in place to stop them from buying your tokens in the future? By incorporating AML and KYC processes as part of your token sale, issuing ICOs have the increased ability to track and communicate with its investors.

7. Avoiding Regulatory Fines

In many jurisdictions, money laundering concerns lead regulatory bodies to levy substantial penalties if the ICO bears too many similarities to a security. Acting FinCEN director Jamal El-Hindi has stated that his agency will hold money transmitters (including virtual currency exchangers) located in foreign countries doing business in the United States accountable if they are found to violate U.S. AML laws willfully.

The Benefits of Voluntary AML/KYC Compliance

Despite whether you are mandated to do so, complying with AML/KYC regulations provides a broad range of advantages to your company and your investors. At IBC, we will connect you with attorneys who share our vision for a forward-thinking approach to help issuing organizations leverage online identity verification during the token sale.

There are various reasons for this approach beyond verifying and validating the identity of their investors. By understanding the profile of your investors, including their business and account activities, you can assess the potential for money laundering and mitigate those risks.

As both existing businesses and startups continue to explore the benefits of an ICO, the experts at IBC predict more organizations will voluntarily comply with AML/KYC directives. This compliance will facilitate better positioning for their ICO, improve credibility with banks and investors, expand the footprint of their offering, and protect their investors from fraudulent activity.

Our team of professionals know that as blockchain and tokenization continue to emerge as one of the most potent new technological and economic movements we’ve seen in decades. By helping our clients performing necessary due diligence, the professionals at IBC can help ensure that your ICO remains a viable channel for early-stage investment and capitalization.

International AML/KYC Support

ICO/STOs face serious requirements with Anti-money Laundering (AML) and Know Your Customer (KYC) regulations. These rules are put in place to protect consumers and businesses alike. Your ICO/STO will need to support these workflows carefully to ensure that you protect both yourself and your contributors. Our trusted network of affiliated independent legal professionals have extensive experience in international money regulations and can take the guesswork out of your compliance process.

The compliance professionals at IBC have the experience in “know your customer (KYC) and anti-money laundering (AML) compliance to ensure your ICO stays within the boundaries of the law. Our proactive approach will keep you informed about developments within the financial services industry that will impact your ICO. We also keep close tabs on emerging regulatory compliance issues concerning cryptocurrencies and token sales in jurisdictions worldwide.

Specialized AML/KYC Compliance Concerns

An essential component of regulatory compliance for most ICOs and all STOs is the screening of potential token buyers, commonly referred to as the Know Your Customer (KYC) process.
Given the borderless nature of digital assets, major institutions at the international level have all focused on and issued reports addressing their perceived risks. From a government perspective, the central area of concern is said to be the potential for laundering money and financing terrorism. The Financial Action Task Force (FATF), an inter-governmental body established in 1989 on a G7 initiative, developed a series of recommendations that are recognized as the international standard in this regard.

However, as it’s up to each jurisdiction to implement and enforce the FATF recommendations, regulation and oversight can differ significantly from country to country. Some localities embrace a top-down approach, creating parallel structures to the FATF policies, while others let companies on the ground develop their own practices.

Therefore, depending on both the jurisdiction and the type of digital asset offering (ICO, STO, private offering, etc.), varying levels of information on the purchasers of tokens are required. For example, for an STO in the US that is seeking the Reg D 506B securities exemption, it’s up to the issuer to make sure that all buyers are accredited investors and that only a maximum of 1,999 is allowed to contribute. If any buyers are non-US citizens, the issuer will be tasked with the burden of complying with the securities laws of each additional buyer’s country. For all offerings, it’s the issuer’s responsibility to ensure buyers are not on blacklists for terrorism, politically exposed persons, citizens of high-risk countries, etc.

Regardless of the scope of the offering or jurisdiction, it is registered in, screening potential buyers and maintaining a database of their information is considered a significant show of good faith to regulators, making the process of compliance much smoother should regulators later have questions about the offering. In addition to helping with compliance, gathering this information can help issuers better understand their investors, which can better inform future business decisions.

How IBC Can Help Your ICO With AML/KYC Laws

IBC’s global network of experts can help you shape your KYC processes in the way that works best for your company, creating less friction, reducing your workload, and maintaining your accordance with the rules, no matter the jurisdiction.

Our experience allows us to assist you in customizing your ICO-related KYC/AML procedures to protect your business and to manage your regulatory and reputational risk. In addition to helping you draft your KYC/AML handbooks and guidelines, we can conduct manual client due diligence and enhanced due diligence on prospective investors using the customary tools of the financial services industry.

Some specialized services IBC offers include:

  • General Counsel Services
  • Money Services Business (MSB) Registration with FinCEN & State Licensure
  • Implementation of Anti-Money Laundering (AML) and Know-Your-Customer (KYC) Programs
  • Screening and Reporting through the Office of Foreign Assets Control (OFAC)

Understanding and complying with Anti-Money Laundering and Know Your Customer Laws are crucial to the success of your ICO. At IBC, we stand ready to assist you with these complex issues. Contact us today to begin a professional partnership that will defy your expectations and set your ICO apart from the competition.

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