Anti-Money Laundering (AML) and Know Your Customer (KYC) are security procedures used by financial services, such as the best crypto exchange in Germany, to ensure the safety of clients’ information and funds. Anti-money laundering is the method of executing transactions with the aim of converting illegal money into legal money. It refers to the web of rules, regulations, and laws, aiming at uncovering attempts to disguise illegal funds as legit income.
On the other hand, Know Your Customer (KYC) is another security standard designed to protect financial institutions such as crypto exchanges in Germany against money laundering, terrorist financing, corruption, and fraud.
Both mechanisms are becoming increasingly demanded as regulations for financial services and protection against corruption and fraud are becoming a pressing need. These two terms are often used synonymously, even though they mean different things.
In this article, we will look into Germany’s AML regulations, KYC requirements for every crypto exchange Germany, and the penalties for non-compliance with AML/KYC regulations.
Germany’s AML Regulations for Crypto Exchanges
With the rising number of money laundering cases witnessed by the best crypto exchange Germany, the country’s AML regulators have taken action and issued obligations and recommendations relating to AML for crypto exchanges. In Germany, all crypto financial providers must include an AML compliance program. As per EU and FATF standards, the main objective of this AML compliance program is to fulfill its purpose and work flawlessly with a risk-based approach.
Qualified AML compliance officers should run the compliance program on Germany crypto exchange platforms. Crypto service providers may also face administrative penalties and heavy fines for failing to comply with the regulations stated in the 5th AML Directive (5AMLD).
5AMLD requires every crypto service provider to register with local AML authorities and abide by the local AML laws. It means all crypto services are subject to AML regulations and KYC requirements. They also require a valid license to operate as a crypto exchange in Germany. Crypto exchanges are now regulated as financial institutions in the country. 5AMLD is the legislation in the EU that has to be implemented by all member states requiring more stringent rules to combat issues related to money laundering. With this directive, crypto traders and crypto exchanges are subject to AML obligations of the EU member states.
Coming to the German Money Laundering Act, credit or financial institutions, including crypto exchanges that facilitate the exchange of crypto to fiat and vice versa, need to submit all suspicious money laundering reports immediately if any case arises.
KYC Requirements for Crypto Exchanges in Germany
In terms of KYC requirements for crypto exchanges to operate in Germany, three main components or stages must be set up. These are quite standard with the regulations across Germany and other parts of Europe.
- Identity verification – This is the Customer Identification Program or CIP, the first step of the KYC process, where customers need to prove who they claim to be. It is applicable to both individual as well as corporate customers.
- Customer due diligence (CDD) – This step of verification aims to verify whether financial institutions, such as crypto exchanges, can trust their customers. CDD defines the risk level of their customer and the extent to which they can be trusted. CDD involves AML screening to verify that the customers are not on any sanctions or PEP (Politically Exposed Person) list. Further checks are performed under Enhance Due Diligence, which includes checking PEP, watchlist, sanctions, and monitoring adverse media.
- Ongoing monitoring – KYC and AML compliance is not only about verifying the identities of new customers at the time of onboarding. Crypto exchanges must also have regular programs for ongoing monitoring and KYC checks.
AML/KYC Procedures for Customer Onboarding
As many crypto traders in Germany are onboarded on crypto exchanges and verified digitally, AML and KYC processes need to follow the regulatory guidance laid out by the German regulatory body, BaFin. BaFin is responsible for AML and KYC Regulations and issuing licenses to crypto exchanges and other financial institutions. Identity verification and customer onboarding involve the collection of identity documents and verifying their authenticity by ensuring that the document identity and the customers match.
Customer Due Diligence or CDD is then carried out for all new individual traders on crypto exchanges undertaken in multiple situations specifically defined by BaFin, such as for large or suspicious transactions or with changes in traders’ circumstances. A risk assessment procedure should also be in place, allowing further EDD to be carried out if the regulatory body determines any risk. However, video-based KYC/AML procedures for customer onboarding are prohibited where BaFin does not allow biometric verification and artificial intelligence, which is quite common in other jurisdictions.
Penalties for Non-Compliance
The regulatory body in Germany, BaFin, ensures that crypto exchanges use convenient prevention systems to safeguard themselves from terrorist financing and money laundering. However, non-compliance with BaFin may lead to fines, criminal liability, seizure of assets, license, termination, or suspension. It also imposes administrative fines for compliance breaches, such as failing to establish a proper risk management system, reporting requirements, and retention of records. For systematic or serious violations, crypto exchanges can receive a maximum of €1 million fine or up to twice the economic benefit derived from the breach. The penalties may go up to €5 million in certain serious cases.
To sum up, AML (Anti-Money Laundering) and KYC (Know Your Customer) regulations are fundamental to establishing controls that facilitate crypto transactions, increase the level of security of crypto exchanges, and prevent fraud and corruption on these platforms. Most common crimes on any crypto exchange Germany include terrorist financing, money laundering, identity theft, tax fraud, and organized crimes that are being targeted by BaFin, Germany’s regulatory body. KYC and AML measures in crypto exchanges aim to prevent the illegal use of cryptocurrencies and track transactions that may indicate criminal activity.