Cryptocurrency risks for US banks

How to Check a Wallet for AML Compliance and Avoid Blocking

Introduction

As cryptocurrency usage grows, regulators are tightening control. Checking wallets for AML/KYC compliance has become necessary for both private users and organizations. Indiscriminate transactions or transferring funds through suspicious addresses risk asset freezes and legal consequences. To mitigate these risks, AML screening tools are used—ranging from simple online checks to integrated corporate systems.

Why It Matters—Brief Facts

• In 2024, according to analytics data, approximately $2.2 billion in stolen funds was recorded within the crypto ecosystem, highlighting the scale of risks in the absence of control.
• Regulators are issuing warnings: For example, FinCEN released FIN-2024-Alert005 regarding fraud schemes involving virtual assets.
• Sanctions lists (OFAC, EU, UN) are regularly updated with addresses and services; interacting with them carries a direct risk of blockages and reputational loss.

Specific Tools and How to Use Them—Examples

1. Quick Address Check (For Private Users)

   • Tools: Monetory, Scorechain, Etherscan, BscScan.
   • Example workflow:
     • Copy the wallet address.
     • Paste it into Monetory or Scorechain: the service will provide a risk score, tags (e.g., "mixer," "sanctioned," "exchange"), and links to related addresses.
     • Interpretation: If there are "sanctioned" or "mixer" tags, or if the score exceeds your acceptable threshold—do not proceed with the transfer. If marked "exchange," check the exchange's KYC policy.
     • Additionally: Manually review the transaction history in Etherscan—large and regular inflows/outflows to known mixers or darknet markets are a signal to decline.

2. Flow Tracing (For Private Users or Analysts)

   • Tools: Chainalysis Reactor, Crystal, TRM Labs.
   • Example application:
     • Upload the tx-hash or address into the tool.
     • Perform backward tracing (where the funds came from) and forward tracing (where they went next) for 2–3 "hops."
     • Pay attention to connections with mixers (Tornado Cash, etc.), non-KYC exchange services, or addresses labeled "hacked" or "fraud." If the flow intersects with such entities, the risk is high.

3. Corporate Integration and Automation

   • Tools: APIs from Chainalysis, TRM, Elliptic, Crystal; internal SIEM/Transaction Monitoring systems.
   • Example workflow:
     • Connect the AML provider's API to receive a risk score for every incoming address/transaction in real time.
     • Set rules: for example, automatic flagging for EDD (Enhanced Due Diligence) if the amount > $10,000 or the score > X.
     • Visualize graphs of suspicious flows—an analyst receives a case file with the transfer chain, connections, and a recommendation (freeze/release/request KYC).
     • Maintain logs and reports for audits and potential SAR/STR (Suspicious Activity/Transaction Reports) in accordance with local requirements.

Practical Recommendations—Separately for Private Users and Organizations

For Private Users (Short and Clear)

• Before a transfer, check the address via Monetory/Scorechain or at least Etherscan.
• Refuse transfers to addresses labeled "sanctioned," "mixer," or "darknet."
• Store seed phrases offline, use hardware wallets, and enable 2FA.
• Do not keep all assets in one place; distribute amounts and periodically move large balances to cold storage.

For Organizations (Clear Steps)

• Integrate an AML provider’s API into your TMS/AML system.
• Set thresholds and rules for automatic transaction classification (e.g., amount threshold, geography, counterparty type).
• Implement standard operating procedures: alert → triage by analyst → EDD → decision and documentation.
• Conduct regular audits of procedures and run test investigation scenarios (playbooks).
• Train employees: use practical cases, work with tools, and stay updated on regulatory requirements.

What to Look for When Interpreting Screening Results

• Tags and scores are indicators, not a final verdict. A high score requires EDD but does not always imply a crime.
• Source and route of funds: Direct receipt from a sanctioned address or through a mixer increases the probability of a block.
• Context: Counterparty type, amount, frequency of operations, and the client's industry.
• Compliance with local rules: Requirements for documentation, data retention periods, and reporting vary by jurisdiction.

Illustrative Case Example (Brief)

You received a payment from a buyer to an unfamiliar address. Actions:

1. Copied the address → Monetory showed a score of 78/100 and a "mixer" tag.
2. Chainalysis showed that within 2 "hops," the funds passed through a known mixer and then to an address labeled "hacked."
3. Decision: Do not credit the funds to turnover; request an explanation and KYC documents from the sender; in the absence of clear data—record the incident and notify compliance/legal counsel.

Documents and Compliance—Briefly

• Maintain an evidence base: report screenshots, graph exports, and records of analytical conclusions.
• Monitor updates to sanctions lists (OFAC SDN, EU, UN) and regulatory warnings (FinCEN, etc.).
• Conduct periodic external and internal audits of AML processes.

Conclusion

AML wallet checking is a combination of simple daily habits (quick address checks) and corporate processes (API integration, rules, EDD, and auditing). For private users, it is sufficient to regularly check addresses and avoid interaction with flagged services. For organizations, automation, clear procedures, and trained analysts are essential. Specific tools (Monetory, Scorechain, Chainalysis, TRM, Elliptic, Crystal, etc.) allow for quickly obtaining verifiable check results and minimizing the risk of asset blocking.