AML: FATF ‘Red Flags’ associated with Cryptoassets
On September 14, the Financial Action Task Force (FATF) published a report on cryptoassets (which the FATF refers to as virtual assets (VAs)) with its ‘red flag’ indicators of money laundering and terrorist financing (the Report).
Indicators of suspicious VA activities, or potential attempts to avoid law enforcement detection within the Report, are based on more than 100 studies contributed by FATF’s global network members, as well as data disclosed within FATF reports and publicly available information on the misuse of VAs.
In the Report, the FATF notes that the existence of a single indicator does not necessarily indicate criminal activity but that, most usually, it is the presence of multiple indicators in a transaction with no logical business explanation that raises suspicion of potential criminal activity. The Report further states that the presence of such indicators should encourage further monitoring, examination and reporting, where appropriate.
The key indicators identified in the Report include:
- Technological features: The increase of anonymity, mixing or ‘tumbling’ services or anonymity-enhanced cryptocurrencies.
- Geographical risks: Countries with weak, or absent, national measures for VAs are at a higher risk of exploitation.
- Transaction patterns: In instances where transactions are irregular, unusual or uncommon.
- Transaction sizeL In instances where the amount and frequency have no logical business explanation.
- Sender or recipient profiles: unusual behavior can suggest criminal activity.
- Source of funds or wealth that can relate to criminal activity.
The Report is intended to help VA service providers (VASPs), financial institutions, designated non-financial businesses and professions, and other reporting entities detect and report suspicious transactions and facilitate a risk-based approach to customer due diligence (CDD) requirements.
Alongside the Report, the FATF has published handouts summarizing VA red flag indicators relating to the financial and non-financial sectors, VASPs and the public sector. (The Report is in addition to the FATF’s guidance for a risk-based approach to VAs and VASPs, which it incorporated into its AML and CTF standards in June 2019. The FATF published a report in June setting out the findings from the 12-month review of its standards in this area.)
The FATF report on Virtual Assets Red Flag Indicators is available here.
The FATF handout on Financial and Non-Financial Sectors is available here.
The FATF handout on Virtual Asset Service Providers is available here.
The FATF handout on the Public Sector is available here.