On 14 September 2020, the Financial Action Task Force (FATF) published a report, Virtual Assets – Red Flag Indicators of Money Laundering and Terrorist Financing.
The report is based on more than 100 case studies and is designed to help national authorities and financial institutions identify potential money laundering and terrorist financing activity involving virtual assets by highlighting the most important red flag indicators that could suggest criminal behaviour.
The report will also help reporting entities’ application of a risk-based approach to their customer due diligence requirements, which require knowing who their clients and the beneficial owners are, understanding the nature and purpose of the business relationship, and understanding the source of funds.
Key red flag indicators in the report focus on:
- Technological features that increase anonymity – such as the use of peer-to-peer exchanges websites, mixing or tumbling services or anonymity-enhanced cryptocurrencies.
- Geographical risks – criminals can exploit countries with weak, or absent, national measures for virtual assets.
- Transaction patterns – that are irregular, unusual or uncommon which can suggest criminal activity.
- Transaction size – if the amount and frequency has no logical business explanation.
- Sender or recipient profiles – unusual behaviour can suggest criminal activity.
- Source of funds or wealth – which can relate to criminal activity.
The report complements the June 2019 FATF guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers which explains how to understand the money laundering and terrorist financing risks of virtual assets, how to license and register the sector, actions sectors need to take to know information about their customers, how to store this information securely, and how to detect and report suspicious transactions.
