Crypto Is Tightening Up Its Anti-Money Laundering Game, While Banks Are Still Being Fined for Non-Compliance

In 2018, barely a month passed without an official at a financial institution or government department calling on crypto to clean up its act. In the last quarter of the year alone, the United States Department of the Treasury, the Canadian Parliament and the Russian Federal Financial Monitoring Service all urged or announced the introduction of Anti-Money Laundering (AML) laws for cryptocurrencies, and all of them based their moves on the (noticeably mistaken) presumption that cryptocurrencies are a primary haven for criminals, who use them either as a medium of exchange for illicit goods or as a means of hiding (i.e., laundering) the source of dirty money.

However, when the U.S. Financial Industry Regulatory Authority (FINRA) dished out a $10 million fine on Dec. 26 for failures to comply with AML legislation, this penalty didn't actually go to a crypto exchange or crypto-related business. Instead, it went to Morgan Stanley, the 38th-biggest bank in the world (and the sixth-biggest in the U.S.). For anyone who's ever noticed the sheer abundance of news stories about crypto's apparent problem with money laundering, this may come as a shock, yet a deeper inspection of recent history reveals that the traditional financial world, in fact, has just as serious a problem with laundering as crypto, if not a more serious problem.

And what's particularly interesting about the issue of money laundering is that, while the cryptocurrency industry is rapidly tightening up its own codes and conduct, the established financial industry still seems stuck on a plateau of underlying illegality, despite its vastly superior position and resources. Indeed, crypto exchanges are increasingly observing Know Your Customer (KYC) and AML regulations, while new trade bodies are being established with the aim of erecting self-regulatory guidelines for the crypto industry to follow. And in the industry's zeal to become a fully legitimate and secure feature of the global economic landscape, it might just have a thing or two to teach the pre-existing banking sector.

Morgan Stanley, Deutsche Bank, Société Générale, UBS and so on…

As reported by Reuters, FINRA slapped a $10 million fine on Morgan Stanley's brokerage arm for long-standing failures in its AML reporting system. Between January 2011 and April 2016, Morgan Stanley's automated monitoring system failed (for an undisclosed reason) to receive vital customer information and data from the bank's other systems, thereby preventing it from being able to exhaustively track the movement of "tens of billions of dollars" (according to Reuters) in currency transfers and bank wires.

Making this lapse even worse for Morgan Stanley, FINRA learned that the bank became aware of deficiencies in its monitoring system as early as 2015, but didn't actually begin taking action to address these issues until February 2017. FINRA also found that, between 2011 and 2013, Morgan Stanley had failed to “reasonably monitor” the transfer of 2.7 billion shares of penny stocks, something that needs to be done in order to ensure that the trading volumes of such stocks hadn't been inflated. And tellingly, Morgan Stanley declined to contest both charges, with the bank simply stating, "We are pleased to have resolved this matter from several years ago."

Such violations already present the non-crypto financial industry in a poor light, yet if there were any doubts that the non-crypto world isn't at least as poor at AML compliance as the crypto world, numerous other episodes throughout 2018 would dispel it. For example, in November, the Reserve Bank of India (RBI) levelled a 30.10 million rupee fine (about $420,000) on Deutsche Bank, which had failed to observe Indian KYC and AML regulations. Also in November, French bank Société Générale agreed to foot a hefty $95 million bill in order to settle charges that it had contravened U.S. AML regulations, a bill which comprised an even bigger charge of $1.34 billion for breaking U.S. trade sanctions against the likes of Cuba, Iran and Libya.

Moreover, in December, Latvia's financial regulator levied a 1.2 million euro charge on BlueOrange Bank for AML noncompliance, while FINRA fined Swiss bank UBS $5 million for similar violations. And back in August, China's central bank, the People's Bank of China, fined five financial institutions anywhere from $100,000 to $250,000 each for falling foul of AML laws, including Ping An Bank, Shanghai Pudong Development Bank and the Bank of Communications.

Given that these fines were all imposed in the second half of 2018 alone, it's hard to shake the suspicion that the traditional financial industry has a serious problem with money laundering. And this is actually more than a suspicion, because a September report published by Ireland-based financial services company Fenergo revealed that, over the past 10 years, a massive $26 billion in fines had been taken from the world's banks as a result of noncompliance with AML and KYC regulations. Commenting in the report, Fenergo’s director of global regulatory compliance, Laura Glynn, said that the problem isn't restricted to specific countries or banks, but is global in scope:

"Up until now, the focus of regulators had been on the US and European markets. However, we are now witnessing regulators in Asia Pacific and the Middle East markets becoming more proactive in their supervisory efforts."

Crypto and AML

In contrast to what would appear to be an endemic problem in the traditional financial industry, crypto's relationship with AML legislation is tangibly less fraught. First of all, there have been far fewer cases of fines for AML and KYC violations, with crypto exchanges doing much less to attract the attention of authorities than major international banks. Apart from the $110 million civil fine demanded by FinCEN from Russian exchange BTC-e in July 2017, and the $700,000 charge also demanded by FinCEN from Ripple in May 2015, there have been no high-profile fines imposed on crypto exchanges and platforms as a result of AML noncompliance.

Of course, the rejoinder to this point is that crypto exchanges have spent most of their lives outside the jurisdiction of the regulators responsible for AML enforcement. However, what's worth underlining here is that, since governments and financial regulators first began beating their chests about crypto and money laundering, exchanges and platforms have been racing to make themselves fully compliant with all applicable regulations.

For example, Coinbase has been a registered Money Services Bu