October 27, 2020

Volume X, Number 301

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October 27, 2020

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October 26, 2020

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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.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 262
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About this Author

Carolyn H. Jackson, International Attorney, Katten Muchin law firm
Partner

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws...

+44 0 20 7776 7625
Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring and documentation relating to OTC derivatives and structured products.

Prior to joining Katten, Nathaniel was a member of the US Regulatory and the Derivatives and Structured Finance practices at Allen & Overy LLP.

+44 0 20 7776 7629
Neil Robson, private equity fund managers counselor, Katten Law Firm, London
Partner

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

44-0-20-7776-7666
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