United Nations Security Council and the Financial Action Task Force on Money Laundering (FATF) are emphasizing cooperation for money laundering and counter terrorism.
In Korea, the importance of Anti-money Laundering (AML) and Combating the Financing of Terrorism (CFT) is increasing day by day. In particular, under the revised Special Act, virtual asset businesses must obtain real-name account certification, and it is necessary to establish an AML/CFT system on the condition to receive a real-name account.
Financial Action Task Force on Money Laundering (FATF)
A common definition of money laundering is "the process of disguising the illegal sources of property in order to make them appear legitimate". The term was used in the 1920s by organized criminals in the United States to make a lot of profits from gambling or illegal liquor sales. It also stems from avoiding tracking funds in a way that masquerades as legitimate revenue through Laundry, where cash transactions were frequent.
We also officially introduced the AML system through legislation in 2001 in line with the international community's demand for strengthening this system, including the UN, and the liberalization of foreign exchange transactions in Korea.
The FATF is an international organization focused on AML
The evaluation criteria of AML/CFT are based on FATF recommendations. It was established at the 1989 G7 Summit in Paris at the instruction of leaders who recognized the importance of AML and international cooperation. At the time of its launch, it was a temporary organization that the period of activities was five-year. However, after the September 11 attacks, the period of activities at the general assembly in 2004 was extended by eight years, and now it is actually permanent. A total of 36 countries and organizations, including the United States, Germany, the United Kingdom, Japan and South Korea, are affiliated with FATF.
Its main activities are organizing international networks for AML/CFT, establishing and evaluating the implementation of the FATF recommendations, overseeing, and researching and responding to money laundering/terrorist financing methods.
It oversees the AML/CFT assessment and implementation of 40 recommendations and imposes sanctions on countries that do not have AML systems or are not cooperative. If there is no improvement after the designation of NCCT, additional sanctions will be imposed.
Building an AML/CFT system is mandatory
Since March this year, FATF has defined cryptocurrency as a virtual asset and included it in the monitoring list of money laundering.
According to 'Recommendation 15', the FATF recommends that countries to apply a risk-based AML and CFT approach to those assets, regulate, monitor, supervise, and facilitate information sharing between authorities.
The guidance also explained the need to understand the virtual asset business ML/TF (Money Laundering and Terrorism Financing) risks and take appropriate mitigation measures to address them.
As a result, operators must perform customer verification (KYC), Watch List Filtering (WLF), Transaction Management System (TMS), Fraud Detection System (FDS), Suspicious Transaction Report (STR), Currency Transaction Report (CTR) to respond AML/CFT.
Since it is a field that requires specialized technology and a lot of time and cost, most exchanges are building systems in partnership with professional solution companies.
How domestic virtual asset operators should handle?
Financial authorities believe that the FATF's due diligence assessment is a highly influential issue that could negatively affect the national credit rating. In fact, right after the "The Panama Papers" incident, 21 global banks, including the U.S. and the EU, broke exchange transaction contracts with Panama banks due to the lack of AML/CFT systems.
The Panama Papers refers to about 11.5 million confidential documents owned by Fonseca, Panama's largest law firm,
disclosed by the International Association of Investigative Journalists (ICU).
This document contained information on how wealthy people around the world stashed away from tax audits
Korea's IBK Industrial Bank was also fined $86 million by U.S. prosecutors and the New York State Financial Services Agency in April last year. This took issue with Kenneth Chung, a U.S. citizen, withdrawing 1.948 trillion won in deposits under the name of Iran's central bank through the IBK New York branch. The reason for the fine was that the bank's failure to comply with AML.
As such, international sanctions against AML/CFT have already become a reality. Moreover, the international community is increasing pressure on virtual assets due to their high risk of being easily misappropriated as borderless assets.
AML/CFT is now a must, not an option. In addition, domestic virtual asset operators are also quickly responding to it with less than three months left before the Special Act grace period.
Virtual asset businesses such as Bithumb, Coinone, and Coco Entertainment Korea are making every effort to establish AML/CFT systems
Bithumb enforced restrictions on the use of exchanges in countries designated as major anti-money laundering countries by the FATF and blocking new member registrations throughout 2018 and 2019. In addition, it is said that KYC authentication has been strengthened and IDs with detected risks have been blocked in advance.
Upbit is restricting transactions between companies and individuals subject to financial crimes or unfair acquisition. Coinone is analyzing suspected money laundering transaction patterns and operating its own regulations through the AML system established in collaboration with RegTech (Financial IT Technology) company Able Consulting in 2019.
Coco Entertainment Korea, which is preparing for a virtual asset exchange, is working with a professional solution company to apply optimized AML/CFT system. If the system is applied, it will be able to respond immediately by reporting suspected money laundering transactions to the FIU, and furthermore, a green light will be given to the issuance of real-name accounts.