AML/CFT Risks of Dealing with Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs): A Guide for Financial Institutions
The Financial Action Task Force (FATF) has issued guidelines on the risks associated with dealing with VASPs and VAs. As a result, financial institutions (FIs) must be aware of these risks and take necessary measures to mitigate them.
Risks Associated with Life Insurance Products
Life insurance products can be used for money laundering when they have saving or investment features that allow full or partial withdrawals or early surrenders. These features can be exploited by criminals to launder funds.
Examples of Schemes
- Policies entered into by the same insurer/intermediary for small amounts and then cancelled at the same time
- Return premiums being credited to an account different from the original account
- Requests for return premiums in currencies different from the original premium
- Regular purchase and cancellation of policies
- Insurance policy being closed with request for payment to be made to a third-party account
Risks Associated with General Insurance Products
General insurance products can also be used for money laundering. For example:
Examples of Schemes
- Overpayment of premiums by arranging excessive numbers or excessively high values of insurance reimbursements by cheque or wire transfer
- Using prepaid cards, which can be misused for money laundering and terrorist financing due to their potential anonymity and ease of cross-border transactions
Tax Evasion Risks
Tax evasion can also be a risk when dealing with VAs and VASPs. This can be achieved through underreporting income or creating false deductions, resulting in the generation of untraceable funds that can be used for illicit purposes.
Risks Associated with Non-Financial Businesses
Non-financial businesses can also be used for money laundering and terrorist financing by providing a means to legitimize illicit funds through transactions or services. Examples include:
Examples of Schemes
- Travel agencies, which can facilitate the movement of illicit funds through booking fraudulent or overpriced travel services
- Car dealerships, which can manipulate vehicle sales and transactions to legitimize illicit funds and obscure their origin
- Cash- intensive businesses, such as large hypermarkets, which can use large cash transactions to obscure the origin and nature of illicit funds
Risk-Based Approach
To mitigate these risks, FIs must apply a risk-based approach (RBA) in the identification and assessment of ML/TF risks. This requires FIs to:
Steps to Implement RBA
- Identify, assess, and understand the ML/TF risks to which they are exposed
- Take AML/CFT measures commensurate with those risks
- Conduct a business ML/TF risk assessment, which assists them in understanding risk exposure and identifies areas that would be prioritized in combating ML/TF
- Allocate resources on a risk-sensitive basis
By being aware of these risks and taking necessary measures to mitigate them, FIs can help prevent money laundering and terrorist financing activities involving VAs and VASPs.