Europe has the highest count of virtual asset service providers (VASPs) with deficient KYC procedures, followed by the strongest Asia-Pacific (APAC) region, and North America, claims CipherTrace, a developer of anti-money laundering, cryptocurrency forensics, and blockchain threat intelligence solutions.
Their 2020 Geographic Risk Report argued that “effective Know-Your-Customer (KYC) protocols are a vital part of any anti-money laundering (AML) regime.” But in order to see how strongly implemented these protocols are, and to have geographical locations of where KYC could be “exploited by money launderers, criminals, and extremists,” the researchers analyzed KYC processes of over 800 VASPs in over 80 countries. They assigned VASPs “Weak,” “Porous,” or “Strong” KYC score, based on how easy it would be to launder money after opening an account.
What they found is that many countries continue to host VASPs with deficient KYC – 56% of VASPs globally have weak or porous KYC in 2020. Compared to last year’s result that said that two-thirds (c. 65%) of the 120 most popular crypto exchanges had weak or porous KYC practices, this year’s result is an improvement – but CipherTrace warned there is still a long way to go. “The high percentage of KYC-deficient VASPs make it easy for criminals to exploit these institutions and launder their funds,” they added.
Despite the 5th Anti-Money Laundering Directive (AMLD5), Europe has the highest count of VASPs with deficient KYC procedures – 60% of European VASPs have weak or porous KYC. Yet, per the chart below, it’s in second place when it comes to the count of VASPs with strong KYC as well.
“The number two spot is an outlier,” said the report. APAC is the region with the second-highest count of weak KYC VASPs, but at the same time, it leads as the region with the largest count of VASPs with strong KYC, as well as the region with the lowest percentage of weak and porous VASPs, according to the researchers.
North America sits in the third spot when it comes to the count of all three types of KYC that VASPs utilize. Per the chart, its weak and strong types are neck to neck.
Furthermore, the US, UK, and Russia lead as countries with the highest count of VASPs with weak KYC. Per the report, “while 44% of US and 40% of UK exchanges were found to have weak KYC practices, these KYC deficiencies characterize 80% of Russian exchanges.”
The US and UK, this time with Singapore, take the lead again when looking at the countries with the highest count of combined weak and porous VASPs in the world. However, these have equally large count of strong-KYC VASPs, so their KYC averages are all still in the porous range.
“The next two closest countries with large numbers of KYC-deficient VASPS are China and Russia, yet these two countries have between 31%-44% fewer VASPs with weak or porous KYC than any of the three leading countries,” the report added.
The researchers concluded that 60% of the top 10 worst KYC countries in the world are in Europe, 20% are in Latin American and Caribbean countries, and 20% are in APAC countries.
Lastly, there are VASPs that do not publicly disclose the country they are registered in, many of which hide it, even though it’s clear that they are serving clients in a given country. The report found that 85% of VASPs without a clear domiciled country have weak or porous KYC. CipherTrase concluded that “[t]he fact that these VASPs lean heavily on having little to no KYC highlights their intention to circumvent AML regulations. The lack of a clear domicile should be considered an AML red flag, especially when coupled with a poor KYC score.”
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