FinCEN Warns About Bad Actors in Virtual Currency Business

June 5, 2019

The Financial Crimes Enforcement Network (FinCEN) is warning financial institutions that criminals continue to exploit virtual currencies through illegal activities, such as money laundering. As a result, they are endangering U.S. national security, they said.

FinCEN issued its advisory on the same day it released its long-awaited guidance on the convertible virtual currency industry to help define what constitutes a money service business (MSB) and how they must comply with the Bank Secrecy Act (BSA).

The anonymity behind the convertible virtual currencies (CVCs) is seen as one of the main reasons “criminals and other bad actors” use them for “money laundering, sanctions evasion, and other illicit financing purposes, particularly involving darknet marketplaces, peer-to-peer (P2P) exchangers, foreign-located money service businesses (MSBs), and CVC kiosks,” FinCEN said in the advisory issued May 9.

Virtual currencies, particularly CVCs, are increasingly used as alternatives to traditional payment and money transmission systems, causing new headaches for those concerned about anti-money laundering compliance (AML).

“As with other payment and money transmission methods, financial institutions should carefully assess and mitigate any potential money laundering, terrorist financing, and other illicit financing risks associated with CVCs,” FinCEN warned.

The regulator also said new types of anonymity-enhanced CVCs have emerged that further reduce the transparency of transactions and identities, as well as obscure the source of the CVC through the incorporation of anonymizing features, such as mixing and cryptographic enhancements.

Financial institutions need to step up

The advisory says these make it more difficult for law enforcement to combat money laundering, terrorist financing and other criminal activities. At the same time, they point out that financial institutions need to do their part.

“A financial institution that fails to comply with its AML/CFT program, recordkeeping and reporting obligations, as well as other regulatory obligations, such as those administered by the Office of Foreign Assets Control (OFAC), risks exposing the financial system to greater illicit finance risks.”

FinCEN said an analysis of banking data shows CVCs have been used to facilitate human trafficking, child exploitation, fraud, extortion, cybercrime, drug trafficking, money laundering, terrorist financing, and to support rogue regimes and facilitate sanctions evasion.

The agency says CVC transactions generate a significant variety of information elements that may be extremely useful to law enforcement and other national security agencies in investigating potential illicit conduct involving CVC transactions. Specifically, the following red flags are mentioned, among others:

  • Customer conducts transactions with CVC addresses linked to darknet marketplaces or illicit activity.
  • Customer’s CVC address appears on public forums associated with illegal activity.
  • Blockchain analytics show the wallet transferring CVC to the exchange has a suspicious source of funds.
  • Transaction uses mixing and tumbling services to obscure the flow of illicit funds.
  • Customer transfers or receives funds from an unregistered foreign CVC exchange or other MSG with no relation to where the customer lives or conducts business.
  • Customer uses a CVC exchanger or foreign MSB in a high-risk jurisdiction that lacks adequate AML/CFT regulations, including inadequate KYC or customer due diligence measures.
  • Customer directs large numbers of CVC transactions to CVC entities in jurisdictions with reputations for being tax havens.

Guidance when Filing SARs

When filing a suspicious activity report (SAR), financial institutions should provide all pertinent available information in the SAR form and narrative.

“The comprehensive advisory FinCEN issued today highlights the risks associated with darknet marketplaces, peer-to-peer exchangers, unregistered money services businesses, and CVC kiosks and identifies typologies and red flags to help the virtual currency industry protect its businesses from exploitation,” said Sigal Mandelker, Under Secretary of the Treasury for Terrorism and Financial Intelligence.

CaseWare’s Alessa is an anti-money laundering solution that gives financial institutions and other regulated entities the ability to integrate with existing core and banking systems to detect, investigate, remediate and report any suspicious activities. To learn more about Alessa, please contact us.

About Anu Sood

Anu Sood (LinkedIn | Twitter) is the Director Marketing at CaseWare RCM and is responsible for the company’s global marketing strategy. She has over 20 years of experience in product development, product management, product marketing, corporate communications, demand generation, content marketing and strategic marketing in high-tech industries.

Try Alessa