AML bot crypto screening verification, how it works and why to use it?

The control over cryptocurrencies is increasing simultaneously with their growing use worldwide. Companies that accept cryptocurrencies as payment for their goods or services are interested in ensuring they only get funds not associated with illegal activities or crimes. That's why LetsExchange implemented AML crypto screening of all incoming funds to guarantee users will receive only “clean” coins and tokens to use further.

We decided to interview one of our AML providers – AMLBot, to explain how the crypto screening process works and why users should be concerned not about it but about high-risk coins.

AML, in simple terms

Let's start with the basics: what is AML risk (or signal)?

AML stands for Anti-Money Laundering. AML risk is the potential risk associated with specific transactions or users involved in money laundering activities. Money laundering is disguising the proceeds of illegal activity as legitimate funds, often through a series of transactions and transfers.

AML (Anti-Money Laundering) regulations and procedures are implemented to prevent, detect, and report money laundering activities. AML risk can arise from various sources, including suspicious transaction patterns, unusual account activity, or other red flags that may indicate potential money laundering. These signals alert financial institutions and other organizations to the potential for money laundering so that they can take appropriate action to prevent, detect, and report such activities.

Who defines the categories of risks?

AML risk categories are typically defined by regulatory bodies and financial institutions following anti-money laundering laws and regulations. These categories are used to assess the level of risk associated with certain transactions or customers and to determine the appropriate level of due diligence and monitoring required to mitigate that risk. In some cases, blockchain analytic companies such AMLBot may also define their risk categories based on their internal risk assessment methodologies. These categories may be related to legislation or other regulatory requirements or based on the company’s own assessment of the risks associated with certain transactions or customers.

Based on what principles and criteria are cryptocurrency wallets and transactions classified as risky or non-risky?

Cryptocurrencies, wallets, and transactions are classified as risky or non-risky based on several criteria. These might include factors like the source of the funds and wallets’ connections to those sources, as well as the nature and frequency of the transactions made from a particular wallet.

Information used to classify wallets and transactions as risky or non-risky is collected through a variety of means. This can include monitoring transaction activity on the blockchain, analyzing patterns of behavior associated with certain wallets, grouping those wallets together to create different clusters (dark market, exchange, mixer, etc.), and cross-referencing information with law enforcement and regulatory databases. Financial institutions and other organizations may also have their own internal systems for monitoring and assessing risk, which can include machine learning algorithms and other advanced analytical tools.

Can individuals check their crypto wallets and transactions?

Yes, individuals can check their crypto wallets and transactions for AML risks. This is necessary to avoid problems with frozen crypto funds and other undesirable consequences. It is possible to conduct this type of screening through services such as AMLBot. It is highly recommended that all unknown wallets be checked prior to receiving the transaction. It is possible for individuals who have no boundaries with illicit activities to have a high-risk score simply because they are unaware of the risks and have poor crypto hygiene.

What percentage of risk is acceptable? What does it mean for the cryptocurrency owner if, for example, their assets have a risk score of 30% in the Scam category?

The acceptable percentage of a wallet or transaction risk can vary and is often defined by the specific AML Policy of a business. A crypto business shall define its risk appetite based on the types of customers they work with, jurisdictions, etc. So, there is no universal answer to this question, as different businesses might treat the same transaction differently. In addition, the user should pay attention to the two components – the overall risk score and exposure to a particular risk category. For example, a risk score of 30% in the Scam category could indicate a significant risk that may result in the coins being flagged or transactions being blocked.

How can a user keep his/her assets safe and maintain an appropriate risk score of wallet?

To prevent receiving high-risk funds, users can utilize services that offer AML screening to check the risk score of the wallet from which they will be receiving assets in advance.

You can take several measures to prevent receiving high-risk funds in your cryptocurrency wallet. Here are some tips to help you:

Utilize services that offer AML screening. You can use services that provide AML screening to check the risk score of the wallet from which you will receive assets in advance. This will help you to identify any potential risks associated with the funds and take appropriate action.
Don’t publish your wallet information. Avoid publishing your wallet information on public forums or social media platforms. This will reduce the chances of receiving unsolicited funds from unknown sources.
Use reliable services only. When transacting with cryptocurrencies, make sure to use only reliable and reputable services. This will help to ensure that the funds you receive are legitimate and not associated with any illegal activities.
Don’t accept funds from people you don’t know. Be cautious when accepting funds from people you don’t know. If you are unsure about the source of the funds, it is best to avoid accepting them.
Create a separate wallet for each transaction, separating it from your “main” wallet. Only send those assets to your main wallet once you are sure that the risk score of the transaction you just received is low.

Which wallets (services, coins) can be considered “clean”? From whom can I receive funds without concerns?

In general, assets coming from reputable licensed exchanges, merchant services, marketplaces, and payment processors can be deemed clean.

Can someone block assets considered high-risk?

Yes, assets that are considered high-risk could potentially be blocked by services that adhere to AML standards, which includes the majority of VASPs operating in the USA or European Union.

If a user uses a DeFi platform to borrow funds and earn, does their wallet become risky just because of that? Why can the DeFi platform be considered a risky source of funds?

Using a DeFi platform to borrow funds and earn does not necessarily make a wallet risky. However, DeFi platforms can be considered risky because they are often a target of malicious actors who deposit their illicit assets into these pools. The decentralized and often anonymous nature of these platforms can make it easier for bad actors to launder money or engage in other illicit activities. Therefore, funds coming from these platforms may carry a higher AML risk.