18 Sep 2020
FATF has published a report on Virtual Assets Red Flag Indicators this Monday, September 14. The purpose of this report is to help national authorities detect whether virtual assets are being used for criminal activity by entities such as VASPs, designated non-financial businesses and professions (DNFBPs)and even financial institutions (FIs). The main focus of the report's red flag indicators pertains to the discovery of money laundering for VASPs.
The categories of red flags as the FATF Report lists them are:
- - Red Flag Indicators Related to Transactions
- - Size and frequency of transactions
- - Red Flag Indicators Related To Transaction Patterns
- - Transactions concerning new users
- - Transactions concerning all users
- - Red Flag Indicators Related to Anonymity
- - Red Flag Indicators about Senders or Recipients
- - Irregularities observed during account creation
- - Irregularities observed during CDD process
- - Profile
- - Profile of potential money mule or scam victims
- - Other unusual behaviour
- - Red Flag Indicators in the Source of Funds or Wealth
- - Red Flag Indicators Related to Geographical Risks
The report goes into some detail regarding potential situations which should raise a red flag for the authorities, even providing case studies as examples.
However, a less obvious flaw of the red flags stated in the report might be that a single FI or VASP might not notice certain indicators. Also, DeFi is not identified as a potential money laundering risk by the report.
Even though mainly dealing with VASPs, the movement of illicit funds through the banks, with special accent on money mules, is noticed and described in the paper.
The main privacy concern still remains as banks must have complete insight into all cryptocurrency related transactions if they are to fulfill all the recommendations, and thus have an ability to identify and deal with the red flags prescribed by FATF's report in the first place. With such insight, they will be able to notice these red flags as suggested by FATF:
- - Large amounts of fiat currency is being converted into virtual assets without a logical explanation or a business related reason
- - Conducting P2P transactions via bank accounts on peer-to-peer (P2P) exchange websites as an unregistered/unlicensed VASP
- - Withdrawing large amounts of fiat currency via one or multiple credit and/or debit cards that are linked to a VA wallet (crypto-to-plastic), or funds for purchasing VAs are sourced from cash deposits into credit cards.
- - Potential crypto money mule or scam victims
Read the full FATF Report