Global anti-money laundering and counter-terrorism financial authority, FATF, has created a ‘red flag’ list to help financial institutions and currency trading entities identify suspicious, and potentially criminally linked, virtual asset transactions.
The Financial Action Task Force’s (FATF) virtual asset ‘red flag indicators’ are based on more than 100 case studies contributed by its member jurisdictions between 2017 and 2020.
Virtual assets, effectively digital representations of tradable currencies, include the globally traded ‘cryptocurrencies’ Bitcoin, Ethereum, and Ripple.
The vast majority of virtual asset trades are based on peer-to-peer distributed ledger technologies, or blockchain, allowing them to operate independently of a central banking authority.
While virtual or crypto-currencies are recognised widely for their transfer speed, global reach, and even investment potential, FATF said, their anonymity is a major lure for criminal entities seeking “to escape authorities’ scrutiny”.
FATF warned of significant “loopholes” in the global regulatory system that oversees virtual asset trading, attracting, it says, criminal entities looking to take advantage of crypto to “launder proceeds from drug trades, illegal arms trades, fraud, tax evasion, cyber-attacks, child exploitation, human trafficking, and sanctions evasion”.
FATF has advised trading entities to be on the lookout for various “irregularities” in virtual asset trades, including rapid increases transactions, particularly those that fall under reporting thresholds, transactions made at a potential loss to the payer, or peculiarities at the sender or recipient end, particularly where transactions may be initiated from IP addresses based within FATF-sanctioned jurisdictions.
Financial institutions are also warned to look out for customers that have multiple credit or debit cards linked to a virtual asset wallet, or whose wealth is “disproportionately drawn from virtual assets” originating from jurisdictions that lack adequate AML-CTF controls.
FATF urged entities to enact stronger safeguards for countries that have not, or have yet to, fully implement the Taskforce’s own recommendations, or for financial institutions that lack adequate KYC measures.
“Criminals can exploit these gaps in implementation and move their illicit funds to countries where regulations are less strict,” FATF said.
“Without proper regulation, [virtual currencies] risk becoming a virtual safe haven for the financial transactions of criminals and terrorists.”
FATF stressed that “without established regulation and oversight”, the sector will remain as a kind of “wild west” of the finance industry.
While virtual asset trades have increased markedly in Australia over the last decade (representing around $5.9 billion in trades in 2017, according to Accenture), the RBA stresses that “no cryptocurrencies currently function as money in Australia, or as widely used payment methods”.
