In the ever-evolving world of cryptocurrencies, the concept of anonymity and borderless-ness can be a double-edged sword. On one hand, the decentralised nature of cryptocurrencies offers unprecedented financial freedom and privacy, making them an attractive option for legitimate users worldwide. On the other hand, these very features make crypto a haven for individuals with less savoury intentions.
Cryptocurrencies and money laundering are inextricably linked, as digital assets can be employed to obscure the origins of illicit funds. Criminals can skilfully navigate the digital landscape, transferring their ill-gotten gains through a maze of wallets, effectively concealing the source of their wealth.
Techniques such as utilising mixing services and privacy coins further bolster the shroud of anonymity. However, it’s crucial to recognize that not all CC transactions are illegal; countless law-abiding individuals and businesses rely on digital assets for various legitimate purposes.
In this blog, we delve into the AML and CFT risks associated with businesses operating in the world of cryptocurrencies, shedding light on the complex interplay between financial innovation and the pursuit of financial integrity.
Let’s Recap the basics
Cryptocurrencies come in many forms including:
- Bitcoin
- Ethereum
- Monero
- Litecoin
- Ripple
- USDT
- BNB
- SOL
- TRON
The traditional money laundering takes the path of:
Placement > Layering > Integration
Whereas with crypto the path is:
Collection > Transmission > Storage > Use
Money Laundering v Terrorist Financing
The most basic difference between terrorist financing and money laundering involves the origin of the funds.
Terrorist financing uses funds for an illegal political purpose, but the money is not necessarily derived from illicit proceeds.
Money laundering always involves the proceeds of illegal activity. The purpose of laundering is to enable the money to be used legally.
Global Regulatory Landscape.
Cryptocurrency regulations vary widely around the world and are changing fast. Some countries proactively embrace cryptocurrencies, while others stance is somewhat more chaotic i.e. China, where they keep banning and unbanning it. Crypto remains extremely popular in China and the bans may be more related to market manipulation than anything else.
Many countries have introduced licensing and registration requirements for exchanges and businesses to ensure entities adhere to AML and KYC regulations.
Beyond the focus on regulatory compliance, regulators are increasingly focused on protecting investors and consumers. This includes dedicated efforts to curtail fraudulent activities, scams, and deceptive initial coin offerings (ICOs) that have tarnished the reputation of the cryptocurrency space.
Key international bodies, such as the Financial Action Task Force (FATF), have played a pivotal role in setting the tone for regulatory expectations within the cryptocurrency domain.
Through comprehensive guidelines, the FATF has championed Anti-Money Laundering (AML) measures specific to the intricacies of digital assets, aiming to create a more secure and transparent ecosystem.
Proactive Steps for Businesses
In order to operate safely within the crypto space, we recommend businesses consider the following when developing risk assessments:
- Business Risk
- Technology Risk
- Introducer Risk
- Customer risk
- Client Risk – onboarding stage / gathering
- Matter Risk – Assessing each instruction
- On-going – PEP’s / EDD
- Reporting – Concerns or suspicious activity
Documenting decisions and thought processes is the cornerstone of a robust risk-based approach, and here’s why:
1) Recording and documenting notes as and when they happen provides an invaluable record of what happened and why. These notes have the ability to change a client’s risk.
2) If it’s not written down, it did not happen. These words are more than a mantra; they’re a lifeline. In the complex landscape of compliance, a written record is often your only defence.
3) Notes assist internal and external audit functions. Documentation doesn’t just verify your efforts; it also improves them. Detailed notes streamline audits, uncover patterns, and pave the way for smarter, more efficient compliance.
Cryptocurrency Red Flags
Identifying potential risks is crucial in the world of cryptocurrencies to combat money laundering and terrorism financing. Certain patterns and behaviours raise red flags, signaling potential illicit activities. Understanding these warning signs is paramount in fortifying AML and CFT efforts within the cryptocurrency sphere. Here are some red flags to consider:
- Use of mixing services – criminals can use mixing services known as tumblers or mixers. These services take cryptocurrency from multiple users and mix them together, making it difficult to trace the original source of funds. The ‘cleaned’ funds are sent to a new address
- Privacy Coins – some cryptocurrencies, like Monero and Zcash, are designed to offer enhanced privacy and anonymity. Criminals may use these coins to conduct transactions that are difficult to trace.
- Offshore Exchanges – criminals may use cryptocurrency exchanges in countries with lax regulations, allowing them to exchanges criminally obtained funds for different crypto or fiat currencies without AML/KYC checks
- Promises of guaranteed returns – any investment carries risk and no one can promise guaranteed profits
- Unsolicited offers – unsolicited emails, messages, or phone calls offering ‘get rich quick’ schemes
- Anonymous developers or no whitepaper – reputable cryptocurrency projects provide a detailed whitepaper that outlines their technology, goals and plans
- Pump and Dump Schemes – coordinated efforts to artificially inflate the price of a cryptocurrency (pump) and then selling off at the peak (dump)
- Peer-to-Peer trading – P2P platforms allow users to trade directly with each other. Criminals can use these platforms to conduct transactions without the oversight of centralized exchanges
- Shell Companies – Criminals may create shell companies that engage in cryptocurrency transactions, making it appear as if the funds come from legitimate business activities
- Cash to Cryptocurrency – money can be converted in cryptocurrencies through over-the-counter trades or ‘Bitcoin ATMs’, making it difficult to link the cryptocurrency back to its source
How Can Isle of Man Businesses Protect Themselves, their Clients and the Island’s Reputation in Respect to Cryptocurrencies?
At Impact Professional Services, our cryptocurrency experts have been supporting our clients to understand and mitigate against the unique AML and CFT risks posed by the crypto ecosystem.
Some of the many ways we can support you and your business are:
- Training
- Framework and procedure development
- Oversight and monitoring
To speak to our experts, send us an email or contact us on 01624 820601.
