AML Compliance Solutions: Choosing the Right Provider

Navigating the complexities of Anti-Money Laundering (AML) compliance within cryptocurrency requires a robust understanding of regulatory frameworks. Even more importantly, businesses must have access to an effective AML compliance solution to maintain strong government relations, enhance user trust, and streamline business operations.

In this comprehensive guide, we delve into the critical considerations for selecting the right AML compliance provider. From understanding how AML compliance solutions can help your business to identify what tech features you should look for, we equip you with the insights needed to make informed decisions that safeguard your business against money laundering and associated crimes.

What is AML? A Brief Overview

Money laundering in cryptocurrency can take two general forms. The first is when criminals convert funds from other criminal activities, such as drug trafficking or terrorism, into cryptocurrency to obscure their source or make them appear legitimate. The second is when digital assets are obtained illegally, such as through a hack or rug pull. In both cases, criminals may use layering, mixers, chain hopping, and other strategies to obfuscate their trail.

Anti-money laundering is the process of preventing, stopping, and addressing money laundering. These activities thus extend across the entire value chain, beginning with know-your-customer (or KYC) procedures on new users. Businesses must also examine transactions for any suspicious activity that could indicate money laundering. In the event that users are found to be laundering money, AML also extends to tracking these criminals and taking the appropriate enforcement action in coordination with authorities, such as seizing funds, freezing accounts, and reporting incidents.  

Who Can Benefit from an AML Compliance Solution? 

There are many organizations that would benefit from an AML compliance solution. Here are some of the most common types of organizations or industries where AML compliance solutions are most needed:

• Banks: Banks are increasingly venturing into digital assets, either on their own or through affiliates such as subsidiaries. Banking is already one of the most heavily regulated sectors in the world. 

Banks must ensure AML compliance to uphold regulatory standards in digital assets equivalent to those applied to traditional financial assets.

• Crypto exchanges: Exchanges are the primary audience of AML compliance solutions. Because of the risky nature of their business, crypto exchanges should rely on a reputable AML compliance solution provider to gain a deeper understanding of their customers and transactions. Staying compliant will help them avoid intense regulatory scrutiny from the government. 
  
  
• Virtual asset service providers: Outside of crypto exchanges, there are many other types of businesses that interface with cryptocurrencies, such as crypto wallet providers or crypto ATM operators. Even if they do not facilitate the buying or selling of crypto, these businesses must also meet the same stringent requirements for AML compliance. 
  
  
• Authorities: Government agencies and regulators may use AML compliance solutions in one of two ways. First, they may use these tools for their own transaction monitoring and investigation. Second, they may use AML compliance solutions to evaluate whether the businesses they regulate are following compliance policies - for instance, if they willfully overlooked a high risk customer and still engaged in business with them. 
  
  
• Financial institutions and fintech companies: There are many other financial sector businesses that may deal with cryptocurrency in a less prominent way, but are not spared from meeting the strict requirements from AML. These include everything from money transmitters and payment processors to peer-to-peer lending platforms. 

Types of AML Compliance Solutions 

Although AML compliance is still a nascent industry, there is already significant specialization in the space. These are some of the common product categories in AML compliance:

• Customer due diligence / know-your-customer (KYC) solutions 
• Transaction monitoring/filtering solutions 
• Blockchain analytics solutions 
• Risk assessment solutions 
• Sanctions screening solutions 
• Regulatory reporting solutions

An organization can benefit from these different solutions one-by-one to form a robust compliance stack, but this would be operationally intensive. Businesses should instead prioritize finding a solution that combines what are often separate products into a single unified AML compliance solution.  

Why You Need an AML Compliance Solution

Because most businesses already have a deep tech stack, some stakeholders may be hesitant to adopt yet another software solution. Here are some of the most important ways your organization can benefit from an AML compliance solution: 

• Protect brand equity: Businesses understandably do not want to be associated with cybercriminals and terrorist organizations. Each business that fails AML risks being linked to these sordid individuals and groups, and as a consequence, face reputational damage to their brand. This loss of brand equity was illustrated in the recent case against Binance, which could not have experienced a worse timing. The charges by the US federal government came just one month after Hamas’ surprise attack on Israel in October 2023. Binance was thus accused of supporting one of the most vilified terrorist organizations at the time.
• Ensure business continuity: It is far more prudent to implement robust AML procedures than to deal with the consequences of not doing so. Businesses that are punished for AML violations face stiff penalties. First, there are the direct costs, such as the $2.9 million penalty that Crypto.com had to pay for failure to register for AML purposes in March 2024. There are also steep opportunity costs. Businesses must reevaluate their procedures, identify gaps in their AML operations, and address them with wholesale changes, or face even harsher penalties and business disruption - a circle which will draw resources away from their strategic plans.
• Facilitate government regulations: Crypto exchanges and other financial institutions cannot place themselves in an adversarial role against the government. In a business environment with increasing regulatory scrutiny, crypto exchanges must demonstrate their strict adherence to government policies, AML included. Businesses that run counter to this principle by disobeying AML will invite more regulatory scrutiny from governments. Being tagged as a rogue crypto exchange and placed under a regulatory microscope may be the death knell for businesses, such as Bitzlato, which was shut down in Hong Kong by the Financial Crimes Enforcement Network (FinCEN) and the Department of Justice for “money laundering concern” in January 2023. 
• Enable expansion to different markets: Entering new markets has traditionally been difficult for crypto businesses. Upon launching in a new market, crypto projects have to meet a new set of regulatory requirements, which may be different from what they are accustomed to. AML compliance solutions can make this transition more seamless, with behavior-based rules that are customizable to different conditions, including the unique policies of specific countries or jurisdictions. With the rightl AML compliance solution, businesses can focus on growth. They do not need to be artificially constrained by how quickly they can adjust to the regulatory environment of a different market - their AML compliance solution can shoulder the lion’s share of this work. 
  
  

What to Look For In an AML Compliance Solution

AML compliance solutions operate at the intersection of several highly technical fields and domains, including data science, cryptocurrency, blockchain, and forensic analysis. Due to this complexity, many businesses do not know what features and tools to look for in their AML compliance solution. What separates a strong AML compliance solution versus a second-rate option is not always obvious.

Here are some of the features and specs that matter the most when choosing the right AML compliance solution provider:

• Real-time transaction monitoring

Traditional AML compliance solutions are built around manual processes, which are expensive, intensive, and worst of all, slow. The lengthy nature of these solutions limits what businesses can do. In the first place, money laundering activities may go undetected for longer, giving criminals the opportunity to pass illicit funds through a financial institution and put them through an exit node from which they are difficult to recover. Furthermore, businesses are always in firefighting mode: This approach means they are always combating money laundering after it happens. 

An ideal AML compliance solution will enable real-time transaction monitoring. This ability is made possible through automation. Rather than rely on professionals to spot anomalies, the solution takes over this function and sends alerts to compliance teams as they occur, enabling them to take swift action, such as blocking a transaction or freezing an account. 

Merkle Science’s best-in-class AML compliance product, Compass, offers real-time transaction monitoring that not only follows blacklists but goes deeper by flagging transactions based on behavior. 

• Sophisticated behavior-based rules

 Criminals who launder money are increasingly sophisticated. They will act in unnatural ways in an attempt to disguise their laundering as legitimate financial activity. AML software solutions that primarily operate by blocklists will invite criminals who use alternative accounts and wallets as a simple work-around. Those that rely on overly simplistic rules will trigger both false positives and false negatives, each of which is problematic in its own right. False positives (eg. identifying legitimate transactions as money laundering) will alienate your users with a bad customer experience. False negatives (eg. overlooking instances of money laundering) will subject the business to serious AML penalties.

To avoid these two problems, the AML compliance software solution you choose should have behavior-based rules that are nuanced enough to lessen both false positives and negatives. Each of these rules should consider multiple conditions: A wallet that withdraws 90% of its funds within 60 minutes of receiving them, for example, may be indicative of money laundering. These rules should also be customizable so that businesses can adjust them to suit their unique needs.

Merkle Science’s Compass is powered by some of the most sophisticated behavioral analysis in the compliance industry, enabling anomaly detection through rulebooks that cover numerous business activities, including everything from custody and exchange services to VA issuance. 

• Risk-based approach

 Unilateral action is as dangerous as overly simplistic rules. For example, one AML compliance solution might block the transaction mentioned above, wherein the customer withdraws 90% of his funds within 60 minutes of receiving them. There may be a legitimate reason for the customer’s behavior - they may be acting in fear of a recently announced security vulnerability with the blockchain they were transacting with, for example. Blocking this customer’s transaction would thus not only be an inconvenience, but place their own funds in danger.

Rather than take a draconian approach to each customer or transaction with potential issues, businesses should be able to operate along a continuum, one with escalating steps that correspond to increasing risk. Such is only made possible through risk categorization. The best AML solutions will categorize transactions according to risk (i.e. low, medium, high risk) so that businesses can take a measured risk-based approach to all their business dealings. 

Merkle Science’s Compass offers complex risk analysis - for example, it can create certain risk-based triggers and thresholds, especially for medium or high risk clusters - so that businesses can always act appropriately to the risk involved.  

How to Choose an  AML Compliance Solution: Step By Step

Now that you understand why AML compliance solutions matter and what to look for in them, here are the steps you can take to choose the best AML compliance solution for your business: 

1. Engage with their knowledge base: Business leaders should begin by browsing through the AML compliance provider’s knowledge base, especially for any content related to AML compliance. Read their blogs, sift through their news articles, and download their white papers. Your goal is to examine their expertise in this space. While this step may seem unnecessary, their authority should never be assumed. There are a surprising number of software developers who make software solutions for sectors that they have little familiarity with, and AML compliance is no exception. You want an AML compliance provider that has equal expertise in both AML compliance and technology, which should be the baseline for any provider you move into the next stage for deeper consideration.
2. Gather social proof: After you have thoroughly vetted their expertise, you need to determine their track record. You want an AML solution already trusted by notable crypto exchanges, banks, and other financial institutions. If they find the software suitable for their own needs in AML compliance, chances are your organization will, too. Look for testimonials on their site, and read through case studies. If you see an organization listed as a current client and know someone there, you can reach out to them to learn more about their experience with a particular AML compliance solution. These back-channel referrals will often yield the most insight into how effective an AML compliance solution really is, allowing you to further trim down your shortlist in advance of the next, more time-consuming stage of evaluation. 
3. Reach out for a free demo: Upon establishing an AML solution provider’s expertise and their track record, it’s time to experience the product up close. Like other software providers, companies who provide AML compliance solutions also usually offer a free demo. Companies are often reluctant to take up this opportunity, fearing that they will be pressured by pushy salespeople to continue down the sales funnel. But this situation is usually not the case in AML compliance, where providers are also trying to determine whether their product can rightfully address your organization or financial institution’s particular needs (failure on this front can result in a bad reputation and negative publicity). Businesses should take the free demo as a chance to do a preliminary investigation on whether the solution can help them comply with relevant AML policies. If the AML software passes the eye test during the demo and seems to meet your needs, you can bring it forward to the last and final stage of a thorough evaluation process.  
4. Test the software during the trial phase: If the AML compliance solution seems to have all the essential features during the demo - it has real-time monitoring, behavior-based rules, and risk-based categorization - businesses should test it out in a trial. This use will enable the organization to determine whether the AML compliance solution will work well in the real world conditions of their particular business environment (and not just in a remote presentation). Businesses should check whether the AML compliance solution can handle their transaction volume, accurately analyze the nuances of their transaction types, and fairly categorize based on risk. If the software holds up to what you need during a first-hand examination, then and only then should your organization move into discussion on financials: Now you know the AML compliance solution will be worth the time and effort to negotiate on. 
   
   

Next Steps with Merkle Science

In this guide, we have covered everything you need to know about AML compliance solutions, including what it is, who it is for, and what use cases it should cover. We have also explained how AML compliance solutions are essential for brand equity, business continuity, market expansion, and most importantly, government relations.

When choosing an AML compliance provider, businesses must be careful and look for those equipped with real-time transaction monitoring, behavior-based rulesets, and risk categorization of customers and transactions. Any AML compliance solution that you are considering should be taken through a detailed evaluation process that includes establishing their expertise and track record, demoing the software, and testing it out in real-world conditions through a free trial. 

Businesses who want to consider Merkle Science for their AML compliance solution should reach out to our team for a free demo of Compass, the best-in-class AML compliance solution trusted by crypto exchanges, banks, and regulators all over the world.