Ultimate Guide to AML Compliance for Crypto in 2024

Cryptocurrency has emerged as one of the most dynamic financial innovations of our time, offering unparalleled opportunities for users worldwide to invest, trade, and transfer value. For African businesses, crypto provides access to global markets and decentralised finance tools in a way that legacy financial systems couldn’t. However, as adoption rises across Africa, so do concerns about fraud and money laundering within this space.

In this guide, we’ll explore how crypto Anti-Money Laundering (AML) regulations are shaping up in Africa and globally, the key risks for crypto companies, and how Smile ID’s solutions are helping businesses navigate this complex sector. 

An Overview of the Crypto Industry in Africa

While Sub-Saharan Africa has been one of the smaller cryptocurrency markets globally, a closer look reveals that digital currencies are making significant inroads across the continent. Countries such as Nigeria, South Africa, Kenya, Ghana, and Zimbabwe are seeing increasing adoption of cryptocurrencies, particularly Bitcoin, which is becoming embedded in day-to-day life. This growing interest is largely driven by economic instability, limited access to traditional banking, and a desire for alternatives to weak fiat currencies.

Nigeria, the continent's largest cryptocurrency market, exemplifies this trend. Despite experiencing two major recessions in recent years—exacerbated by the collapse in oil prices, political instability, and the COVID-19 pandemic—Nigeria ranks second globally in cryptocurrency adoption. Faced with rampant inflation, unemployment, and a currency crisis following the Central Bank’s 2022 Naira redesign, many Nigerians have turned to cryptocurrency as a financial lifeline. 

Beyond Nigeria, several other African nations are also embracing cryptocurrency as a means to overcome financial exclusion. In East Africa, innovators have launched platforms such as BitPesa to facilitate cross-border transactions using digital currencies. In Ghana, exchanges like BTCGhana offer underbanked populations easy access to Bitcoin, with transactions supported by local mobile money services such as TigoCash and MTN Mobile Money. South Africa, meanwhile, has seen a surge in Bitcoin usage, while Zimbabweans, plagued by hyperinflation, view crypto as a safeguard against currency devaluation.

The African continent also benefits from high inflation rates and weak currencies, which create a unique value proposition for cryptocurrencies as a stable store of value. 

“The alternative to cash is cryptocurrency. For us, the formal economy is no longer an option... Sango Coin will be the currency of the new generation of the Central African Republic.” - Said Central African Republic President Faustin-Archange Touadera at a Virtual Briefing for the crypto initiative ‘Sango’ hosted by the country. 

While there are undeniable challenges—including regulatory uncertainty and slow adoption in some regions—cryptocurrency offers Africa a chance to reshape its financial landscape. Blockchain technology, which underpins crypto, could address the continent's economic challenges by enabling more efficient, transparent, and decentralised financial services. Africa’s leap into the world of cryptocurrency not only provides individuals with greater control over their wealth but also sets the stage for the continent’s future role in the global digital economy.

What is Crypto AML?

Crypto AML refers to the specific regulations and processes designed to prevent financial crimes, such as money laundering, within the cryptocurrency sector. Just like traditional finance, crypto platforms are now subject to laws requiring them to monitor transactions, identify users, and report suspicious activity.

The decentralised and often anonymous nature of crypto can make it easier for bad actors to launder funds, which is why AML processes are critical to identifying and curbing these risks.

Key Trends in Crypto Money Laundering

While cryptocurrencies bring about decentralised, innovative ways to engage with finance, they also attract bad actors who exploit anonymity for illicit gains. Across Africa, we’ve seen an increasing focus on crypto-related crime, including money laundering and terrorist financing. In fact, the global scale of crypto money laundering has ballooned—criminals laundered $8.6 billion in cryptocurrency in 2021, according to Chainalysis, and Africa has not been immune to this trend.

In Africa, this challenge is particularly significant due to already prevalent issues with illicit financial flows (IFFs). According to the United Nations, Africa loses an estimated US$88.6 billion annually to IFFs, including trade and tax abuse, and criminal activities such as money laundering, trafficking, smuggling, and corruption. These staggering losses hinder economic progress and impede sustainable development across the continent.

Key Trends point to several developments in both the African context and the broader global market, including:

a. Rising Regulatory Action: 

African governments and central banks are increasingly aware of the risks cryptocurrencies pose in facilitating money laundering and other IFFs. While regulation across the continent is still in its early stages, countries like South Africa and Nigeria are moving toward more stringent anti-money laundering (AML) regulations for crypto transactions. In 2023, Nigeria implemented the "Prohibition of Money Laundering Act," which extends AML obligations to crypto exchanges, mandating stringent Know Your Customer (KYC) requirements.

b. Cross-border Illicit Transfers: 

The decentralised nature of cryptocurrencies makes it easier to transfer funds across borders without the need for intermediary institutions. Africa, being a region heavily impacted by capital flight and illicit outflows, is vulnerable to these transfers, which have already disrupted traditional financial systems. Authorities are working toward developing frameworks that can track these suspicious transactions. 

c. Emerging Technologies for Enhanced Monitoring: 

In response to the rising threat of crypto-based money laundering, authorities are deploying sophisticated tools for blockchain analysis. These technologies help identify patterns of illicit activity, enabling authorities to track funds and understand how crypto is being used for IFFs. Tools such as Smile ID’s AML Check are increasingly used by African regulators and business owners to monitor illicit crypto transactions and trace assets involved in money laundering schemes.

d. Collaborative Global Efforts: 

The Financial Action Task Force (FATF) and international regulators are tightening AML regulations that apply to cryptocurrency transactions. African countries are being encouraged to implement these guidelines and work closely with international partners to ensure that crypto remains a tool for financial inclusion and not a criminal enterprise. 

e. The Role of Privacy Coins: 

Cryptocurrencies like Monero and Zcash, which offer enhanced privacy features, continue to pose a significant challenge for regulators. These coins are particularly attractive to criminals as they allow for transactions to be obfuscated, making it difficult to trace the origin and destination of funds. 

Examples of Crypto Money Laundering Signs

Crypto laundering often leaves clues—if you know what to watch for. Here are some signs that could signal suspicious activity:

• Unusually large transactions: Big transfers out of nowhere that don’t match a customer’s usual activity are a red flag.
• Odd transaction patterns: Repeated round-number transfers or transactions with no clear purpose should raise suspicion.
• Rapid fund movement: Multiple transactions in quick succession or funds bouncing between wallets are often attempts to cover tracks.
• Use of privacy coins or mixers: Coins like Monero, Zcash, or Dash, as well as mixing services, can hide illicit activities.
• Geographic outliers: Transfers involving countries with weak AML regulations or high financial crime rates require extra scrutiny.
• Unregistered companies: Dealing with unlicensed firms, especially in jurisdictions with lax oversight, is a clear risk.
• Inconsistent KYC data: If customer information doesn’t check out or seems off, it’s a potential sign of identity fraud.
• High-risk sectors: Industries like gambling and darknet marketplaces attract money laundering. Transactions from these sectors need closer monitoring.
• Politically Exposed Persons (PEPs): Transactions involving PEPs or their associates, especially those that seem unrelated to legitimate business, should be flagged.

While these signs don’t always mean wrongdoing, they do warrant closer examination. Proper due diligence, continuous monitoring, and timely reporting are essential for preventing bigger problems down the road.

“In markets with no regulatory bans, we tend to see the industry develop more responsibly as the market operates above the ground, with more productive interaction between regulators and exchanges. But bans aren’t stopping people from wanting crypto. The crypto industry will continue to grow with or without regulation. It is just in everyone’s interest that there is some pragmatic regulation in place that protects consumers and creates a safer operating environment for all.” - Marius Reitz, General Manager, Africa (Luno)

Global Crypto Regulations to Note

AML Requirements for Crypto

To combat money laundering in the cryptocurrency space, regulators have imposed several requirements aimed at ensuring transparency, compliance, and the protection of the financial system from abuse:

1. Know Your Customer (KYC):

Crypto companies are mandated to verify the identity of their users, typically by collecting documents like passports or driver's licenses. This helps ensure that individuals aren't using crypto platforms to engage in illicit activities, such as money laundering or financing terrorism.

2. Transaction Monitoring:

Exchanges and wallets must monitor the flow of funds in real-time. This involves using advanced analytics and artificial intelligence tools to detect unusual transactions that may indicate fraud or illegal activity.

3. Suspicious Activity Reporting (SAR):

Institutions are required to file SARs with relevant financial authorities if they identify suspicious transactions. These reports trigger investigations into potential money laundering or other financial crimes.

4. Travel Rule Compliance:

Under the Financial Action Task Force (FATF) “Travel Rule,” crypto companies must ensure that personal information (such as sender and recipient details) travels with the transaction. This applies to any transaction that exceeds a certain threshold, typically around $1,000/€1,000.

5. Enhanced Due Diligence (EDD):

For high-risk customers, such as politically exposed persons (PEPs) or those from jurisdictions with weak AML controls, companies must implement Enhanced Due Diligence. This includes stricter identity verification and ongoing monitoring to ensure no illicit activities are taking place.

6. Risk-Based Approach:

Regulatory bodies require crypto companies to implement a risk-based approach to their AML programs. This means assessing the risks posed by their customer base, products, services, and geographies, and tailoring AML measures accordingly.

7. Periodic Audits and Reporting:

Many jurisdictions require crypto businesses to conduct periodic internal audits to ensure compliance with AML policies. They may also need to submit regular reports to regulators detailing their compliance efforts.

8. Record Keeping and Data Retention:

Crypto exchanges must retain records of customer transactions, including KYC data and transaction logs, for a specific period (typically 5–7 years). This ensures that regulators can access historical data if needed for investigations.

9. Penalties for Non-Compliance:

Failure to comply with AML requirements can result in hefty fines, license suspensions, or even criminal charges. Crypto companies are under increasing pressure to align with global AML standards to avoid sanctions.

The Crypto Travel Rule & AML

A key piece of global AML regulation is the Crypto Travel Rule introduced by the Financial Action Task Force (FATF). This rule requires Virtual Asset Service Providers (VASPs) to share specific user data during transactions to ensure regulatory oversight. By enforcing this rule, regulators aim to increase transparency and curb the risk of money laundering within crypto transactions.

For African crypto businesses, aligning with the Travel Rule means adhering to international best practices while meeting local regulatory demands.

How Smile ID Helps Crypto Companies Stay AML Compliant

While AML safeguards are crucial for fostering a secure financial ecosystem, there’s a fine line to walk. If not handled thoughtfully, these measures can end up complicating the very user experience that decentralised banking promises. It’s all about striking a balance—allowing users the freedom to trade in crypto as they wish, while still keeping the risk of financial crimes in check.

Smile ID works with some of Africa’s top crypto exchanges, including Yellow Card, Luno and Binance, to provide seamless KYC and AML solutions that help these businesses strike a balance with seamless user experience and stringent compliance regulations. 

As Mandy Naidoo, Chief Compliance Officer at Yellow Card, shares:

“Working with Smile has improved our KYC in key markets but also as we expand across Africa. Working with the team to solve problems customers are dealing with from a mobile device that can’t take a picture clearly to how quickly we can get this information stored and vetted has been an interesting journey with Smile. It’s been quite amazing to work with the team.”

See how we helped Yellowcard scale to 16 markets seamlessly with our comprehensive AML and KYC Solutions. 

How Yellow Card stays KYC compliant across Africa

With our AML Check, Biometric and Document Verification capabilities; crypto exchanges like yours can screen users, monitor transactions, and remain compliant with regulatory expectations. Enabling you to focus on your business's growth while ensuring the safety of their platforms.

AML Check

With Smile ID’s AML Check solution, crypto exchanges can easily screen users against over 1,100 global and African sanctions and Politically Exposed Person (PEP) lists. Our platform also taps into more than 70,000 adverse media sources, providing comprehensive risk assessments to help identify potential threats.

Our global coverage includes critical data sources like the OFAC list, making it easier for businesses to detect suspicious activity and prevent money laundering attempts. By automating this process, crypto platforms can focus on scaling their operations while remaining compliant with regulatory requirements.

Smile ID Biometric Solutions

Our  Biometric Solutions offer unmatched security by utilising advanced facial recognition and liveness detection technologies. These solutions go beyond simple KYC, delivering seamless biometric checks that can be applied at every stage of user interaction, from onboarding to transaction approval.

Our suite of biometric tools includes:

• Biometric KYC: Matches user selfies to official government data, ensuring the identity provided is genuine and preventing fraudulent signups.
• SmartSelfie™ Authentication: Provides frictionless, real-time user authentication by comparing a user’s current selfie with their previously verified biometric data.
• Smile Secure: Prevents users from creating multiple accounts by scanning for previously registered faces across your system in real-time, helping crypto businesses avoid fraud from duplicate signups.

This tech is designed to catch 50% more fraud than traditional verification methods, protecting businesses from bad actors while maintaining a smooth user experience.

Smile ID Document Verification: Seamless, Global, and Accurate

For crypto businesses looking to onboard users from around the world, verifying identity documents is crucial to ensuring platform security and compliance. Smile ID’s Document Verification solution allows you to authenticate over 8,500 identity documents across 226 countries, ensuring accurate verification and fraud prevention on a global scale.

Here’s how it works:

1. Capture Document Photo: Users submit their ID type and country of issue, then use our intuitive capture feature to take a clear photo of their document. The system guides users for optimal results, even on older software versions like Android 4.4.
2. Smile for a Selfie: We perform a liveness check by asking users to smile, verifying both their identity and the authenticity of the document.
3. Real-Time Results: In a matter of seconds, you’ll receive validation of the document, OCR-extracted personal information, a facial match, and a liveness check.

Our document verification technology delivers 99.8% accuracy, particularly on African faces of all skin tones, and covers at least three ID types in all African markets. With real-time turnaround of 12 seconds, this solution ensures crypto businesses can verify users rapidly while minimising the risk of fraudulent activity. For extra precision, we also offer 24/7 human review at no extra cost, enhancing fraud detection by an additional 15%.

Wrapping up

As crypto adoption accelerates across Africa, so does the importance of airtight AML compliance. From thwarting money laundering to preventing fraud and terrorist financing, strong AML frameworks are essential for the secure, sustainable growth of cryptocurrency. By teaming up with Smile ID, crypto companies don’t just stay compliant—they get to focus on scaling, innovating, and driving financial inclusion across the continent. Let us handle the heavy lifting of keeping your platform secure while you continue to lead the charge in Africa’s crypto revolution.