New guidance from the FATF has been welcomed by the crypto industry, despite the compliance challenges it presents, writes Nathan Smale at Emfarsis.
Members of the cryptocurrency industry have welcomed new guidance from the Financial Action Task Force (FATF) outlining red flag indicators to help reporting entities, including financial institutions and virtual asset service providers (VASPs), better identify criminal activity among cryptocurrency users. However, the new guidelines will also increase compliance pressure on VASPs, as a benchmark has now been set for AML/CTF reporting requirements.
Red flag indicators
In a new report, the FATF highlighted how virtual assets have helped spur financial innovation and efficiency, but also created opportunities for criminal activity by money launderers and terrorist financiers. Using blockchain to rapidly move funds across borders at low cost has benefits for many global industries. However, key features of the technology, such as user pseudonymity, can also be exploited by criminals wanting to operate outside the traditional financial system or obfuscate the origin and destination of illicit funds.
Since the FATF brought VASPs into its purview in October 2018, these entities have had the responsibility to help protect the integrity of the global financial system. The new report, Virtual Asset Red Flag Indicators of Money Laundering and Terrorist Financing, was released to assist VASPs in identifying illicit activities. The document lists a number of examples of suspicious activities and transactional behaviour that should prompt a compliance team to evaluate whether to file a Suspicious Activity Report (SAR) or Suspicious Transaction Report (STR) with the relevant Financial Intelligence Units (FIUs).
For example, the FATF said VASPs should compare the user’s cryptocurrency transaction with that of their historical financial profile. When a customer purchases significant amounts of virtual assets not substantiated by their available wealth, it might indicate money laundering or that the customer might be the victim of a scam. The FATF also said that a customer who appears to not be familiar with virtual assets yet proceeded to make complicated transactions could imply potential account takeover or possible coercion to transact on behalf of criminals.
The FATF also listed a set of red flag indicators associated with users who attempt to increase their anonymity, for example, purchasing bitcoins on a centralised exchange only to trade them for privacy coins, such as Monero or Zcash (which are more difficult to trace). Another indicator is using peer-to-peer platforms and services to withdraw funds, rather than using the direct withdrawal features at a cryptocurrency exchange. Both these activities create hurdles in detecting criminal activity.
While the FATF concedes that some efforts by the user to become more private, such as transferring cryptocurrencies to a hardware wallet, represent a legitimate way to secure one’s cryptocurrencies, these activities must be considered in the context of other indicators, such as the customer’s financial profile and other sets of behaviour.