Why was this wrong? Can you explain? Did you receive dirty coins there?

The exchange don't care for that moment but as soon as the destination wallet report your wallet address for stealing of funds or comprises, they will seize the funds immediately if you haven't used or withdrawal the money and if you have withdraw the money before the report, you account will be suspended with all your information given to law enforcement to track you down, this is the main reason why they ask you to do KYC verification in the first place.

If you are using a centralized exchange to deposit and withdraw funds, try as much as possible to make sure that your funds are clean as possible, if they accept mixed funds which I'm don't they would, mixed your coins before you deposit them to exchanges and if they don’t, don't try it. Rather, make use of decentralized exchanges to swap to other assets and then you can send it after to centralized exchange where you wouldn't have any problem later.

Just like the first comment already made everything clear to you @OP, yes exchanges actually do care about where your coins is coming from when it's deposited to their exchange. If your coins comes from a platform that they blacklisted such as mixer or casino, the exchange will definitely send you a notification asking to know the source of your assets or they will restrict your account and ask you answer their question concerning that deposit.

It happened to me once, the coin was withdrawn directly from mixer to my exchange wallet and they asked me to explain who sent the coins. They gave me a period of 7 days to respond else my account would have been suspended.

The source of funds would definitely be something they want to see. Where did the crypto come from? where did the fiat come from?  They can however and probably will drag this for a very long time (and we have seen many cases where this happens in the past).

So again, if you're not willing to provide any of this stuff to them or you just don't want to deal with the headache and end up making multiple Reddit posts about this matter on /r/CryptoCurrency, /r/Kraken or /r/Bitcoin, tagging them on Twitter, and opening a scam accusation in bitcointalk etc. You should probably just stay away. I know I wouldn't deal with a fiat exchange with large sums of money.

And then of course, if you're cashing out for fiat, you should probably expect a call from the bank as well. Unless you're used to transfer large sums of money and the bank is crypto friendly.

I think you're overthinking it at this point. Exchanges do use sophisticated methods (Look into ChainAnalysis KYT, they used to have a proper page, but I can no longer find it) but simply using a mixer for example does not necessarily guarantee that your account will get locked. Pretty sure dozens, if not hundreds of people here have used mixers before.

If you haven't done anything wrong, you should probably be fine. But at the same time, if you're really not willing to provide any kind of information to Kraken or any other KYC exchange, then you should probably stay away from them completely. It's not uncommon for exchanges to block a transaction for "extra verification" especially if the amounts involved are big.

They can be strict or soft with on-chain tracking to find Tainted coins.
Bitcoin Q&A: Blacklists, Taint, and Wallet Fingerprinting.

If you used a small non-KYC exchange, and withdraw it as your deposit to bigger exchanges, I believe that you will have no issue. The exchange from which you withdraw your coin must be not like a P2P exchange or mixers, if you don't want to have problems with your deposits. If you want to avoid risk, don't use these platforms as your temporary storage before you deposit your coin to a big exchange.

They care that’s why they are regulated and implement KYC to all their customers. You should use decentralized exchange if you don’t want any check like this.

@omegastarscream said above is correct so don’t risk your money if you knew that your funds came from shady origin/tainted.

I’m not sure what exchange Biofin is but it’s safe to avoid all CEX.

It is not about if the coins are too much but even if it is a small amount of money, the exchanges still have tools that track the coin past transactions. Make sure your coins is not linked with something illegal. There is nothing to be worried about if you are doing nothing wrong or illegal.

They have tools for it which their blockchain analysts can use for the tracking.

Exchanges do have whats called "Know your transaction" (KYT) implemented.

You can think of it as an automatic system that checks the source of the funds. Did it come from a mixer? a gambling site? an address linked to a terrorist organization, or maybe a hack of another exchange? etc. How much of a risk is it? High, medium, low?

A transaction from a bridge or an unknown exchange would only raise suspicion if the original funds you deposited to the bridge, were suspicious for example, or if the crypto platform has been involved in something shady.