More than a third of crypto firms are still not FCA registered - and don’t think they should be

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One in three crypto firms (34%) are not registered with the FCA – despite a legal requirement to do so - according to brand new research from digital compliance experts SmartSearch.

In its new report - EV Uncovered III - Emerging financial sectors – SmartSearch interviewed 500 compliance decision makers across a range of regulated sectors including and crypto and discovered one in three exchanges (40%) and over a quarter (27%) of OTC trading firms are trading without being FCA registered.

Furthermore, more than one in four (28%) of all crypto firms, rising to almost a third (30%) of crypto exchanges, do not think that the FCA should be involved in crypto products.

This lack of belief in regulation is leading to a somewhat lax attitude to AML and compliance within the sector – SmartSearch’s research found that just one in four (25%) crypto firms are running full ID and verification checks on all new customers and even fewer (17%) are screening all new customers to check if they are on any sanctions or Politically Exposed Person (PEP) lists.

Not only are the vast majority of crypto firms failing to run checks at onboarding, but most are not monitoring their existing clients regularly enough either, with just 9% running daily checks. Most (58%) run checks fortnightly or less, with more than a quarter (27%) waiting between a month and a year before rechecking clients.

This is even more worrying when you consider that almost four in ten (37%) of crypto firms admit they have actually been a victim of money laundering and/or financial crime in the past six months and the vast majority (70%) admit they are ‘worried’ they are committing an AML breach due to their lack of proper procedures.

The Russian ‘loophole’

When Russia invaded Ukraine in February 2022, the world quickly imposed financial sanctions on Russian nationals and entities in an attempt to cut them off financially,  but an AML expert - Chen Limin, CFO and head of trading operations at the ICB Fund, has suggested that Russian companies and individuals are evading sanctions by using crypto.  He told Russian media outlet Izvestia that stablecoins are the preferred digital asset for Russians exchanging ruble for crypto, suggesting this was being used as a way of getting around Western sanctions.

And while analysis by Cahinalysis suggests cryptocurrency markets don’t have the liquidity to support Russian sanctions evasion en masse, it is likely the sector is being used for ‘small scale’ money laundering, making it harder to spot, and even more important that crypto firms have robust compliance checks in place.

Unfortunately, according to SmartSearch’s data, most crypto firms have not increased checks on clients since Russia invaded Ukraine, with 40% saying they have done ‘nothing’ in response to the increased threat, while 11% admit they have actually reduced checks on clients in relation to ongoing sanctions in Russia.

Martin Cheek, Managing Director at SmartSearch said: “It is quite shocking that, despite being required to register with the FCA and subject to anti-money laundering law and compliance requirements, most crypto firms are not taking their obligations seriously enough.

“Just, one in four are running full ID and verification checks on all new customers and less than one in five are screening all new customers to check if they are on any sanctions or Politically Exposed Person (PEP) lists – even with the increased risk as a result of Russian sanctions.

“This lackadaisical attitude to AML leaves crypto hugely vulnerable – especially when you consider its clandestine nature which already makes it the perfect place for anonymous actors to hide. Not only does a lack of regulation or AML process allow criminals much easier access to financial means, enabling them to potentially get away with financial crimes, but the firms themselves are at huge risk, reputationally and financially. In fact, crypto is in the top five ‘most fined’ sectors, with a total of $30million in AML fines in 2022 alone.”

1 in 3 crypto firms rely on inaccurate manual processes

While the vast majority of crypto firms are not running checks on all new customers, of the ones that are, many are using inadequate methods.

Almost half (48%) of crypto firms surveyed for the EV Uncovered III -Emerging financial sectors report either rely completely on manual checks (33%) or a mixture of manual and electronic checks (8%), and given how easily manual documents can be forged, this is a very worrying statistic.

Martin Cheek, Managing Director continued: “Given crypto is a primarily digital sector, it is surprising – and worrying  - that so many crypto firms are still relying on hard copy documents to verify ID.

“Not only are manual checks time consuming and expensive to do, but they are hugely inaccurate due to the fact hard copy documents are so easy to forge.

“The only way to truly verify a new customer is to run an electronic check. SmartSearch uses triple bureau data (cross referencing the customers details using three global data sources) and screens for sanctions and PEPs all in one easy check, with the results delivered in a matter of seconds.

“Once the check has been run, the details are hosted on the platform and monitored daily for any changes – a hugely important benefit given the ever-changing Russian sanctions– to ensure customers maintain a clean and compliant position.”

If you are not yet a SmartSearch customer, contact us today to find out how our easy-to-use electronic verification platform can help you get compliant and stay compliant, saving you time, money and an awful lot of stress.

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