Fraud, tax evasion, cyber attacks, drugs trade and human trafficking. According to a new report released by the Financial Action Task Force (FATF), these are just a few of the offences that criminals disguise using virtual assets like blockchain, bitcoin, crypto assets and virtual currencies. Thankfully, this report has been prepared to assist virtual asset service providers (VASPs) with the identification of money laundering or terrorism red flags.
As with most regulator reports, this latest FATF report opens with a fairly typical acknowledgement of the transformative potential of blockchain, before quickly emphasising the:
new opportunities for money launderers, terrorist financiers, and other criminals to launder their proceeds or finance their illicit activities
FATF summarises these concerns by remarking that the speed and supposed anonymity of virtual assets also create opportunities for those who want to launder the proceeds of, or finance their criminal activities. Or as the FATF put it:
The ability to transact across borders rapidly not only allows criminals to acquire, move, and store assets digitally often outside the regulated financial system, but also to obfuscate the origin or destination of the funds and make it harder for reporting entities to identify suspicious activity in a timely manner.
The report's findings are based on more than 100 cases collected by members of the FATF global network since 2017, and includes some of the more common indicators for attempts to evade law enforcement detection as observed by financial intelligence units, law enforcement agencies, and reporting authorities.
While there are too many red flags identified to repeat here, any business which interacts with virtual assets would be well advised to look through the list and consider whether their Customer Due Diligence processes would pick up the issues identified by FATF.
Key takeaways
Perhaps the most illuminating part of the report is the granularity of detail in some of the case studies. These examples provide a valuable example for reporting entities with multiple indicators to identify suspicious activity. Ironically, despite some ongoing scepticism from regulators, including FATF, many of these case studies being with something to the effect of:
To disguise the funds’ origin, cash was first deposited into various accounts at different [Financial Institution]s across the jurisdiction.
pointing once again to the best tool for money laundering (cash), and the greater ability of the money to be followed in the world of virtual assets, relative to fiat currencies.
The report made a note of the many similarities between the red flags associated with virtual assets and fiat currencies, but despite the above, maintained the assertion that virtual assets increase the risk of illicit activities because of the new rapid ease with which illicit funds can hop between the two currencies.
Preparing for the future
While the report can hardly be described as revolutionary, it is promising that FATF is working to assist both the public and private sectors in identifying and preventing illicit activities involving virtual assets.
Of course, the FATF urges that it’s indicators are not exhaustive and would be best used when applying other contextual information from other relevant authorities. To prepare for the future, it is important regulators continue to explore and become comfortable with virtual assets, so that they can sew closed the loopholes that terrorists and criminals attempt to exploit. Thankfully this report is a step in the right direction, and excludes any passive aggressive references to "so-called virtual assets".