The Financial Action Task Force (FATF), a global intergovernmental organization that sets standards and policies for anti-money laundering and counter-terrorist financing (AML/CFT) recently issued a report on Virtual Assets Red Flag Indicators of Money Laundering and Terrorist Financing (the Report). According to the FATF, a virtual asset is a digital representation of value that can be digitally traded, transferred or used for payments, thanks to the benefit it offers, such as speed and efficiency. The Report allows affected stakeholders to use the proposed red flag indicators of money laundering and terrorist financing activities (the Indicators) as guardrails against the criminal use of virtual assets. The Indicators are based on the FATF’s analysis of over 100 case studies from 2017 to 2020.
Below is a brief overview of the Indicators as detailed in the Report:
- Transactions: The Report identifies certain transactions as Indicators, such as: (i) multiple virtual assets transactions made up of small amounts, (ii) completing high-value virtual asset transactions in a short time, and (iii) depositing virtual assets at an exchange and then immediately withdrawing or converting those assets into another type of virtual asset.
- Transaction Patterns: The Report identifies certain transaction patterns as Indicators, such as transactions involving multiple virtual assets or accounts with no clear explanation, or frequent transfers in the same virtual asset account by more than one person.
- Anonymity: Transactions shrouded in anonymity are also identified as Indicators. These transactions include the use of technology to increase anonymity, making it difficult for law enforcement and regulators to detect any criminal or fraudulent activity. For example, the Report cites certain transactions involving anonymity-enhanced cryptocurrencies and privacy coins which conceal the sender or recipients’ information.
- Senders or Recipients: Next are Indicators relating to certain senders and recipients of virtual assets for whom accounts are created. Those persons provide different identification information that consequently obfuscates the account opening process. According to the Report, senders and recipients of virtual assets also include “money mules.” In general, money mules are financially vulnerable persons who are often unfamiliar with virtual asset platforms, but are used for money laundering activities.
- Sources of Funds or Wealth: There are also Indicators involving customers whose funds are sourced directly from third party “mixing services” or “wallet tumblers.” These refer to instances where the bulk of a customer’s source of wealth is derived from investments in virtual assets and international coin offerings, or any other offering with an indication of a fraudulent appearance.
- Geographical Risks: Lastly, another important Indicator involves threat actors who have leveraged the disparities in the respective AML/CFT regimes for virtual assets across multiple jurisdictions around the world. Threat actors achieve this by moving their funds to (or through) jurisdictions with weak AML/CFT regimes for virtual assets.
The FATF guidelines complement recent changes to the Canadian AML/CFT landscape. For more information on this, see the previous blog post here. Please contact the author for any questions regarding this article.
The author would like to thank Vahini Sathiamoorthy, articling student, for her contribution to this legal update.