Red flags that can help identify money-laundering in the virtual assets sector


Virtual assets (VA) and related services are proving to be novel targets for financial criminals to launder stolen money. In 2018, the Financial Action Task Force (FATF) amended its standards explaining how they applied to VA services and Virtual Asset Service Providers (VASPs). The aim of this update was to help jurisdictions to mitigate VA-related ML/TF risks. Now, the FATF has issued a report summarizing many VA-related ML/TF red flag indicators to help authorities and stakeholders alike.

Firstly, red flags typically linked to conventional modes of payment are still useful to identify VA-related wrongdoings. Examples of such red flags include conducting VA transactions in small amounts or making successive high-value transactions within a short period of time. Similarly, quick transfer of VAs to multiple VASPs, particularly to those operational in a different jurisdiction with weak AML/CFT regulations, is an important red flag. Further, VA transactions involving online gambling services pose a major red flag. In short, any and all unusual patterns of transactions could potentially be associated with ML/TF risks.

Secondly, the technological characteristics of VA help maintain anonymous identities and consequently prove to be challenging for identifying financial crimes. Therefore, if a customer conducts transactions that involve different VAs that could guarantee greater anonymity, it is a red flag. Similarly, problems that show up during customer due diligence, like inadequacy of or denial to provide KYC information, are strict red flags.

Money mules or intermediaries in ML transactions pose an important problem in VA-related transactions. Certain red flags can help identify these money mules. For instance, if senders seem to be unfamiliar with VA technology during transactions, they could be money mules. FATF’s report discusses many other such red flags. Authorities and stakeholders should use the information provided in this report to formulate customized organization-level procedures.