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22 September 2021, 12:30


Red flags and Regulations

What is Cryptocurrency?

The cryptocurrency, Bitcoin, has created some controversy to the payment system industry since it was introduced in 2009. Virtual currency holds a digital value that allows users to send money across the world without conventional banking systems. It can be traded but does not have legal tender status, whereas fiat currency covers all physical, paper and coin, currency globally.

Cryptocurrency, according to the FATF report, Virtual Currencies, has gained attention for two main reasons: it can be seen as the future for payment systems, however, on the other hand it provides a powerful nesting ground for criminals, terrorist financiers and money laundering. One main reason for this is that they are not in the control of any law enforcement or authority.

What is Cryptocurrency Money Laundering?

Without official regulation, cryptocurrency can lends itself to be a platform that attracts criminal trading. It can be used as a vehicle to convert funds gained illicitly into cryptocurrency, and eventually to clean money. Virtual currency relies on users to trade with high levels of anonymity.

Cryptocurrencies do not require identification or verification and it can be exchanged into fiat money. The higher level of anonymity within cryptocurrencies than traditional payment systems is a huge attraction to criminals. Cryptocurrency is generally traded online and so this stretches out the anonymity. Historical records of transactions are not associated to individuals and so they do not impact the criminals’ real life. Moreover, these customer and transaction records are often held by different entities which makes is hard for law enforcement to access them.

Cryptocurrency systems are not in the control of any law enforcement or authority.

FATF, 2014

Red Flags in Cryptocurrency

Criminals can use virtual currency systems because without the use of conventional financial systems they do not have to pass money laundering regulatory checks. The FATF published a report, Virtual Assets Red Flag Indicators of Money Laundering and Terrorist Financing, which outlines common red flags used to identify suspicious activity through cryptocurrencies.

Transaction Type:
-Camouflaging a large amount by diving into many transactions of small amounts to avoid reporting
-Many transactions of a high value over a short period of time
-Immediately transferring cryptocurrency deposits to a service provider in a low regulation jurisdiction

Transaction Patterns:
-Transaction to a new cryptocurrency account with a large sum, one that is inconsistent with the customer profile
– Frequent conversions of fiat currency to virtual currency without a logical business explanation

-Transactions involving many types of cryptocurrencies, especially ones with high levels on anonymity that require additional fees
-The use of cryptocurrency ATMs for many small transactions, especially those that are located in high risk regions
-Funds deposited from a suspicious source, such as gambling sites, darknet marketplace or other illegal sources

Senders or Recipients:
-Creating separate accounts under different names
-Incomplete KYC information
-A customer that is known to law enforcements due to a past criminal association

Source of Funds or Wealth:
-A lack of transparency about the origins of funds
-Unusually high deposit that is immediately withdrawn into fiat currency

Regulation and Recommendations

Similar to other new payment methods, cryptocurrencies have legitimate benefits. It aims to improve efficiency in payment methods and has the capability to avoid exchange fees. Virtual currency systems could be complicit in money laundering and could seek out regions with weak AML regulations.

The aim of cryptocurrency regulation is to create entire transparency. Efficient regulation will mitigate the risk of money laundering but are unlikely to eliminate it entirely. Virtual currency systems should have KYC regulations in place to be able to identify and report suspicious activity. The Central Bank of Ireland published a Customer Warning on Virtual Currencies.  Countries must identify, assess, and understand the risks of money laundering and terrorist financing to combat it.


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