Financial Crime World

FATF Identifies Ongoing Trends in Money Laundering and Terrorist Financing Risks Associated with Virtual Assets

Introduction

July 2021 - The Financial Action Task Force (FATF) has identified three ongoing trends in money laundering and terrorist financing risks associated with virtual assets, including “regulatory arbitrage” resulting from uneven global implementation of revised standards.

Global Implementation of FATF Standards

As of April 2021, only 58 out of 128 jurisdictions surveyed reported taking necessary legislative measures to implement the FATF standards related to virtual assets and VASPs. While six jurisdictions have prohibited VASP operations, only 29 jurisdictions have conducted on- or off-site inspections, and 18 have administrative sanctions in place.

Tools and Methods to Increase Anonymity

The report identifies several tools and methods used by illicit actors to increase anonymity, including:

  • Tumblers and Mixers: mixing transactions with those of others to obscure the originator
  • Anonymity Enhanced Coins (AECs) and Privacy Coins: using blockchain technology to conceal identities
  • Privacy Wallets: individual management of private keys and self-executed transactions
  • Chain Hopping: replacing one cryptocurrency with another to avoid tracing
  • Dusting: transferring small amounts to random wallets to hide ownership
  • Use of Decentralized Applications (DApps) and Decentralized Exchanges (DEXs)

P2P Transactions

The report notes that since 2020, the use of CoinJoin, a method of pooling coins and comingling multiple transactions to enhance anonymity, has increased significantly.

Additionally, the report highlights the growing trend of peer-to-peer (P2P) transactions, which are at a reasonably large scale. However, the proportion of illicit transactions is higher for P2P transactions than for transactions via CESPs.

Recommendations

The FATF report emphasizes the importance of early adoption of the FATF standards in each jurisdiction to address P2P risks. It also underscores the need for close monitoring of stablecoins and other widely adopted crypto-assets, as they could potentially undermine the current approach of reducing risk at on- and off-ramps to the traditional fiat economy.

The report concludes that continuous monitoring by VASPs and CESPs is crucial to detect cases of money laundering and terrorist financing.