FATF Releases Red Flag indicators To Identify Money Laundering Using Crypto

  • The Financial Action Task Force (FATF) releases report on how to identify possible red flags in crypto money laundering rings across virtual asset service providers, or VASPs in short.
  • The regulator highlights a number of ways that crypto exchanges can stop and curb illegal and illicit activity.

The report titled, Virtual Assets – Red Flag Indicators of Money Laundering and Terrorist Financing, outlines several red flags including those arising from irregular transaction patterns, anonymous transactions, arising from senders and receivers and sources of wealth profiles of the crypto users.

One of the red flags arises from the size and frequency of transactions whereby a money launderer could make multiple high frequency transactions over a period of 24 hours or staggered and regular transactions which stop shortly after they are made. Moreover, transferring virtual assets to exchanges with low or non-existent AML/CFT rules is also considered a red flag.

User profiling is also an excellent way of noticing possible money laundering and terrorist financing. Here, exchanges are tasked with checking on the transactions made and comparing it with the user’s profile.

This arises when a user deposits an unusual amount to their wallet which does not match the traders profile or recent transactions. This could signal the deposit is subject to checks of money laundering, scamming or a money mule. The report reads on transaction patterns as a red flags stating,

“Conducting a large initial deposit to open a new relationship with a VASP and funding the entire deposit the first day it is opened, and that the customer starts to trade the total amount or a large portion of the amount on that same day or the day after, or if the customer withdraws the whole amount the day after.”

Also quick deposits and withdrawals of full balance of virtual assets in a short period of time raises eyebrows.

Virtual asset accounts with no logical business explanation making frequent deposits and transfers off the exchange to less KYC friendly exchanges poses a red flag. Accumulation of funds from several unrelated exchanges or wallets sending small amounts to one virtual asset account before fully withdrawing the funds may be a money laundering scheme.

Regulators should also follow users who use anonymity enabled public cryptocurrencies and privacy coins such as Monero, Zcash and Dash closely, the report states. Also the exchange of public and transparent crypto coins such as Bitcoin for the anonymity enhanced cryptocurrencies also raises questions on the actions of the trader.

FAFT has pushed through KYC/ AML regulations and compliance rules for VASPs across the globe in a bid to curb money laundering and terrorist financing using crypto. The “Travel Rule” recommends that the 200 countries that follow it, say to mandate VASPs such as custodians and crypto exchanges to retain and share any information on possible illicit and illegal trades happening on their platforms.

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Author: Lujan Odera