Money Laundering: Customer Due Diligence in the Era of Cryptocurrencies Razana Juhaida Johari*, Norareena Binti Zul, Norli Talib Faculty of Accountancy UiTM Shah Alam, 40000 Shah Alam Selangor, Malaysia *razana@salam.uitm.edu.my Sayed Alwee Hussnie Sayed Hussin Jabatan Audit Negara Putrajaya, Malaysia Abstract—Money laundering is a global phenomenon and has been considered as major threat towards economic stability as it is associated with criminal’s activity such as drug trafficking, terrorism funding and financial crimes including corruption and tax evasion. Advancement of technologies and emergence of cryptocurrencies such as Bitcoin and Monero are disruptive financial technology that present governments with new national security challenges and terrorist groups, criminals and rogue states with opportunities. Cryptocurrencies garnered attention and intense interest especially from businesses, consumers, central banks and other authorities as it promised to replace trust in commercial and central banks with a new decentralized system founded on block chain and related distributed ledger technology. Nevertheless, customer due diligence (CDD) which is the first line of defense of money laundering is vital in order to curb illicit money inflows and outflows from financial institution. In the era of cryptocurrencies, customer due diligence should be thoroughly conducted. The combination of information technology and CDD teams will create stronger defense in curbing the risks of money laundering in financial institution. This paper addressed the stages of money laundering, customer due diligence, emergence of cryptocurrencies and its nature as well as how it related to money laundering activities. Finally, the discussion on how CDD procedures could curb money laundering involving cryptocurrencies is also discussed. Keywords: money laundering, cryptocurrencies, financial institution, technologies I. INTRODUCTION Money laundering is a global phenomenon which can be considered as major threat towards economic stability as it is associated with criminal’s activity such as drug trafficking, terrorism funding and financial crimes including corruption and tax evasion [1]. There are various definition of money laundering across the globe and according to Financial Action Task Force (FATF), money laundering as the processing of a large number of criminal acts to generate profit for an individual or group that carries out the act with the intention to disguise their illegal origin, in order to legitimize their ill- gotten gains of crime [2]. Furthermore, money launderers maximized their return and minimize their risk in non-financial term where such optimization is achieved by decreasing the possibilities of having their illicit money traceable to its origin [3]. In general, money launderers mainly focusing on finding ways to disguise their ill-gotten money and most of developing countries have the characteristics and attributes that is suitable for the money launderers to carry out their illegal activities [4]. A report by Global Financial Integrity (GFI), Malaysia’s illicit outflows between 2005 and 2014 was estimated up to about US$431 billion (RM1.8 trillion). Moreover, as depicted in Figure 1, in 2014, illicit financial outflows from Malaysia was estimated around 6-10% of the value of Malaysia's trade of US$443.2 billion which put Malaysia in the fifth among all countries for illicit capital flight behind China, Russia, Mexico and India [5]. Fig. 1. Estimated ranges for illicit financial flows [5]. It is crucial to understand that money laundering activities may lead to volatility in exchange rates and interest rate owing to unexpected inflows and outflows of capital thus negatively affect the economic growth as a whole due to the availability of illicit funds in an economy [6]. Aluko and Bagheri [4] further stated that money laundering gives a significant impact on the economic, political and social facets of developing countries, hence, understanding all of these settings in developing countries is fundamental ingredient in the war against money laundering. Particularly in smaller and less developed countries, the rise of an illicit economy from injection of laundered money including from illicit drugs activities will resulted un reductions of annual economic growth rates because money laundering activities weaken the rule of laws, facilitates corruption and also reinforces the illicit drug sector [6]. Advances in Economics, Business and Management Research, volume 123 1st International Conference on Accounting, Management and Entrepreneurship (ICAMER 2019) Copyright © 2020 The Authors. Published by Atlantis Press SARL. This is an open access article distributed under the CC BY-NC 4.0 license -http://creativecommons.org/licenses/by-nc/4.0/. 130