Every company which deals with cryptocurrencies at some point needs to implement a risk-based approach when it comes to complying with AML regulations all over the world.
In June 2019, FATF published Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. Since then, many countries have reinforced their regulatory landscape to include cryptocurrencies under the scope (e.g. European Union, Estonia, Singapore, and more could be listed).
Procedures to implement a risk-based approach toward this new class of asset generally include:
- Registration to the competent authorities and in some countries, licensing
- Anti-Money Laundering policies
- Risk Management in place
Why Risk Scoring is important?
Having a Risk-AML software helps the compliance and internal controls team to implement a strong risk management procedure.
Funds from a wasabi wallet went to Bitstamp
Indeed such a tool is a guaranty to get complete AML data in order to mitigate risk according to each company's risk appetite and country of registration.
It also helps to save time because it provides a comprehensive risk analysis as we do at Scorechain with Scorechain Risk Scoring (i.e. Scorechain index, aka. SCx).
Risk Scoring is one of the most important parts of the risk analysis a crypto-related company should perform.
Zoom in on Scorechain Risk Scoring in a crypto risk management perspective
Scorechain users are able to ask for risk scoring to evaluate the risks when it comes to funds monitoring.
Risk Scoring aims to give a trust level between 1 and 100 depending on the origin and destination of funds. A Scoring (SCx) close to 1 means funds are very risky in terms of AML whereas close to 100 shows fewer risks.
How to implement Risk Scoring for Risk-AML compliance?
With a Risk-AML software, it's easy to follow the money and to have proper risks AML internal controls in place within a small, medium or large company. Risk Scoring is directly integrated within Scorechain Blockchain Analytics.
It is then essential to understand how it works to implement the feature to fit internal rules.
How Risk Scoring is computed?
First, Scorechain synchronises public Blockchains in real-time. The second step is to de-anonymize some Blockchain data such as entity types and names with advanced algorithm techniques, clustering methods and data mining.
The tool can display 3 types of Scoring:
1 - SCx assigned by Scorechain – For named entities
Scorechain uses a unique risk assessment methodology to define Scoring on named entities. It is based on the latest AML/CTF standards and guidelines (Basel Institute of Governance Index, PEP screening, international sanction lists screening, AML due diligence level, etc.)
For each found and named entity, Scorechain puts a type depending on the entity activity.
Here are some examples of types identified by the platform : Airdrop / Child Abuse / Darkweb / Exchange / Decentralized Exchange /OFAC Sanction List / Mixing Pattern / Payment Channel / Mining Pool / Terrorism (+30 types have been defined by Scorechain).
Each entity type and named entity has a risk scoring based on Scorechain risk assessment methodology and risk matrix. The goal of scoring is to rate on the origin and destination of funds. All addresses and entities have 2 types of scoring (SCx for incoming and outgoing funds) between 1 (bad/untrusted) and 100 (good/trusted).
2 - SCx computed by Scorechain depending on the funds received for incoming risk scoring and funds sent for destination risk scoring.
3 - Customized SCx by the user
Scorechain users can assess Scorechain default SCx and change it for a lower or upper one depending on their own due diligence and risk evaluation for a specific named entity. This custom risk scoring can also be applied to an entire type for entities, for example, all gambling types should have a 1 scoring because gambling is a high-risk activity.
Where Risk Scoring is displayed?
Scorechain Risk AML software brings risk scoring at a level of transaction, address, wallet and entity.
Risk Scoring is also displayed on reports that users can download for record of monitoring.
How to interpret Risk Scoring?
Scorechain Index helps customers to find their level of risk tolerance between 1 and 100. While defining a Risk Scoring threshold for a different type of operations, Scorechain users can work quickly on risk analysis and make AML decision accordingly.
Want to know more?
Request demo on www.scorechain.com
Source:
https://www.fatf-gafi.org/media/fatf/documents/recommendations/RBA-VA-VASPs.pdf
