FATF has released the "Virtual Assets Red Flag Indicators of Money Laundering and Terrorist Financing
" report this month to assist virtual asset service providers (VASPs), financial institutions (FIs) and designated non-financial businesses and professions (DNFBPs) in identifying virtual assets situations indicative of money laundering (ML) and terrorist financing activity (TF). Building on previous guidance provided by the FATF, the report presents a number of indicators and case studies that can be used by regulators and service providers to develop more effective ML/TF programs to mitigate risks in the area of virtual assets.
The report is broken down into sections which include: size and frequency of transactions, transactional patterns, transactions concerning all users, anonymity, indicators about senders and recipients, source of funds/wealth and geographical risks. Many of the indicators included are similar to those used as tools to prevent ML/TF in fiat currencies. However, there are many indicators discussed in the report that are unique to virtual assets.
Virtual assets require a new outlook on how they can be incorporated into the current environment without compromising existing compliance rules. FATF has taken a focused approach in spelling out the areas that pose perceived elevated levels of risk to VASPs, FIs and other parties involved in virtual assets.
The report specifically highlights innovative technology that whilst offering benefits such as increased payment speeds and more competitive rates, enables a degree of anonymity which can ‘attract criminals, who have used [virtual assets] to launder proceeds from a range of offenses such as the drugs trade, illegal arms smuggling, fraud, tax evasion, cyberattacks, sanctions evasion, child exploitation and human trafficking’.
FATF specially identifies technological capabilities such as peer to peer exchanges, which bypass the traditional payment infrastructure, as well as a method known as mixing or tumbling (a technique used to obscure the origin or recipients of virtual asset transactions). Another activity capitalizing on anonymity mentioned in the report is privacy orientated cryptocurrencies, which may also make it harder to track and trace coin movements.
FATF noted that authorities, VASPs and other financial service providers may find the report helpful when it comes to identifying and flagging suspicious or fraudulent transactions. The report provides a technical insight into the techniques used by criminals to carry out such activities.
Methods for combatting fraud and other offences relating to virtual assets may inhabit traits of traditional ML/TF techniques as the report highlighted similar underlying factors. Geographical risks play a part as ‘criminals can exploit countries with weak, or absent, national measures for virtual assets’. Transaction patterns are a further indicator of nefarious actions, whereby ‘irregular, unusual or uncommon behavior can suggest criminal activity’, along with an unusual transaction size and an illogical business explanation for the transaction. Not too dissimilar to traditional forensic techniques investigating fiat transactions.
FATF also added the report would ‘provide useful information for financial intelligence units, law enforcement agencies, prosecutors and regulators to analyze suspicious transaction reports or monitor compliance with anti-money laundering and counter-terrorist financing controls’.
While the FATF report is useful to identify key indicators of ML/TF activity, service providers should consider engaging a firm that specializes in providing the knowledge and comprehensive strategy to enhance virtual asset policies and procedures.
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