FATF publishes report on Virtual Assets – AML/CFT red flag indicators
15 September 2020
Regulatory News Alert
Context and objectives
On 14 September 2020, the Financial Action Task Force (FATF) published a report entitled “Virtual Assets - Red Flag Indicators of Money Laundering and Terrorist Financing”. This report complements the FATF’s adoption of the Interpretative Note to Recommendation 15 in June 2019, which clarifies the application of FATF requirements to virtual asset (VA) activities or operations and virtual asset service providers (VASPs), including with respect to suspicious transaction reporting.
The purpose of this report is to help national authorities, and to assist reporting entities, including financial institutions (FIs), designated non-financial businesses and professions (DNFBPs), and VASPs to detect whether virtual assets are being used for criminal activity, and to facilitate the application of a risk-based approach to their Customer Due Diligence (CDD) requirements.
Key red flag indicators
Suspicious activities involving the use of VAs may share similar traits with money laundering/ terrorist financing (ML/TF) activities involving the use of fiat currency, or other kinds of assets. Reporting entities should therefore consider the following most important red flag indicators:
1. Technological features that increase anonymity - such as the use of peer-to-peer exchanges websites, mixing or tumbling services or anonymity-enhanced cryptocurrencies
- These factors make VAs attractive to criminals looking to disguise or store their funds
- The presence of these indicators should be considered in the context of other characteristics about the customer and relationship, or a logical business explanation
2. Geographical risks - criminals can exploit countries with weak, or absent, national measures for virtual assets
- Customer’s funds from, or are sent to, an exchange that is not registered in the jurisdiction where either the customer or exchange is located
- A VA exchange in a high-risk jurisdiction with non-existent or minimal AML/CFT regulations on VAs and VASPs
- Offices in jurisdictions that have no regulation / have not implemented VAs regulations governing
3. Transaction patterns - irregular, unusual or uncommon patterns which can suggest criminal activity
- Conducting a large initial deposit to open a new relationship with a VASP
- A new user attempts to trade the entire balance of VAs, or withdraws the VAs
- Transactions involving the use of multiple VAs with no logical business explanation
- Making frequent transfers in a certain period to the same VA account
4. Transaction size – if the amount and frequency has no logical business explanation
- Structuring VA transactions in amounts under record-keeping or reporting thresholds
- Making multiple high-value transactions in short succession, or in a staggered and regular pattern
- Accepting funds suspected as stolen or fraudulent
5. Sender or recipient profiles - unusual behavior can suggest criminal activity
- Account creation: separate accounts under different names, non-trusted IP addresses, open an account frequently within the same VASP
- During CDD: incomplete or insufficient KYC information, lacking knowledge or providing inaccurate information
- Profile: identification shared by another account, discrepancies arise between IP addresses, VA address on public forums
- Profile of potential money mule or scam victims
6. Source of funds or wealth - which can relate to criminal activity
- Illicit trafficking in narcotics
- Psychotropic substances
- Fraud, theft and extortion (including cyber-enabled crimes)
FATF emphasizes that such indicators should not be the sole determinant of whether or not suspicious transaction reports (STRs) should be filed. Reporting entities should consider filing an STR if they know, suspect, or have reasonable grounds that ML/TF has been committed.
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