On September 14, 2020, the Financial Action Task Force (“FATF”) — an inter-governmental anti-money laundering (“AML”) and counter-terrorist financing (“CFT”) standard-setting organization — issued a report on red flag indicators of money laundering and terrorist financing for virtual assets (the “Report”).
Based on over 100 case studies, the Report highlights potential red flag indicators of virtual assets being used for criminal activity. The Report is the latest guidance related to FATF’s Focus on Virtual Assets and is meant to complement FATF’s June 2019 guidance on developing a risk-based approach to virtual assets and virtual asset service providers.
The Report notes that virtual assets have the potential to spur financial innovation and efficiency, but also create new opportunities for criminals to launder money or finance illicit activity. Because of the anonymity and innovative technology associated with virtual assets, the Report suggests it may be more difficult to identify suspicious activity, and to detect and investigate criminal activity involving the use of virtual assets, such as to fund terrorism or to launder proceeds from a range of criminal activities including drug trafficking, illegal arms smuggling, fraud, tax evasion, cyber attacks, sanctions evasion, child exploitation, and human trafficking.
The Report sets out common categories of red flag indicators that could potentially indicate suspicious transactions or other illicit AML/CFT activity involving virtual assets, including:
- Technological features that increase anonymity (e.g., the use of more than one type of virtual asset despite additional transaction fees, unlicensed or unregistered actors conducting transactions on peer-to-peer exchanges, anonymity-enhanced cryptocurrency or privacy coins);
- Geographical risks presented by dealing in virtual assets in countries that lack or have less stringent regulation of virtual assets;
- Unusual virtual asset transaction patterns, sources of funds or wealth, and instances where the amount and/or frequency of the transactions lack, or are inconsistent with, a stated business purpose; and
- Irregularities observed in the profiles of senders and recipients of virtual assets or other unusual behavior by parties to a virtual asset transaction.
In addition to identifying more granular potential red flags within each of these larger categories, the Report includes case studies to illustrate customers, transactions, and practices involving virtual assets that could suggest a heightened risk of illicit activity. However, the Report emphasizes that the presence of one or more indicators is not in and of itself proof of criminal activity.
FATF helpfully summarizes the key findings of the Report for different sectors as follows: