Financial Crime and Money Laundering Risks in Digital Assets

Financial crime and money laundering risks in digital assets have become a paramount concern for regulatory authorities as the adoption of cryptocurrencies and virtual currencies continues to surge across global financial markets. Financial crime and money laundering an illegal activities that threatens the existence of the financial institution or entity. Entities face various types of financial crime or money laundering risks due to the evolution of cryptocurrencies and digital assets exchange platforms. 

Financial Crime and Money Laundering Risks in Digital Assets

Some examples of potential sources of information on the level of risks are the following, but are not limited to the AML/CFT laws and regulations of the home country or the host country where the respondent institution is doing business and how they apply:

Public databases of legal decisions and/or regulatory or enforcement actions;

Annual reports that have been filed with a stock exchange;

Country assessment reports or other information published by international bodies which measure compliance and address ML/TF risks;

Lists issued by the FATF in the context of its International Cooperation Review Group process;

Reputable newspapers, journals or other open-source electronic media;

Third party databases;

National or supranational risk assessments;

Information from the respondent institution’s management and compliance officers ;and

Public information from the regulator and supervisor.

Some of the financial crime or money laundering risks are:

Anonymity: The individuals involved in the exchange of digital assets may not be appropriately identified, screened, and verified before onboarding or opening an account to utilize the product. This risk is increased due to the offering of the product in different countries/jurisdictions. Individuals may use proxies to open accounts. Individuals may open various accounts by providing different information, which may not be properly verified. 

Use of multiple accounts: The use of different teenager accounts from a single mobile device of a teenager causing transaction obscurity and lack of clarity resulting in potential money laundering or terrorism financing risks.

Use of customer accounts by unauthorized persons: Criminal, who may be the family member of the individuals, may use the account to instantly transfer or move small amounts of large transactions in different jurisdictions, causing money laundering or terrorism financing.

Illegal payment: It may arise due to the use of the product by an individual for making payments for purchases executed on any blocklisted or banned platform or website offering illegal goods or services. 

Payment mismatch: This risk relates to the payment mismatch with its actual purpose. Individuals may transfer or receive money without any commercial activity causing a lack of clarity over the purpose of payments executed. For example, individuals may collaborate and access the prohibited digital asset or cryptocurrency website/s in different markets for which they may transfer virtual assets or currency as subscription payment using various accounts and inter-transfers. 

Fraud: Fraud risk may arise in different ways, such as making false payments, hacking teenager accounts by stealing or getting passwords, or using an individual’s accounts by any unauthorized person.

Sanctions violation: This is relevant due to the involvement of different jurisdictions which may have different sanctions.

Final Thoughts

According to the Financial Action Task Force, a leading international standards-setting body for financial crime, financial-crime incidents and failures have been on the rise throughout the pandemic. The COVID-19 pandemic has increased the potential for fraud, particularly in the consumer realm. While the majority of platforms have strict know-your-customer (KYC) requirements (such as identity verification) and ongoing transaction monitoring, others require less information to open and maintain an account. Vulnerabilities in existing controls across the anti-financial crime value chain are, in any case, targets for those involved in financial crime.

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