Financial Crime World

Financial Crime Investigation Process in Saint Pierre and Miquelon: A Growing Concern

The Rise of Digital Assets

The island territory of Saint Pierre and Miquelon, located off the coast of Canada, has been making headlines for its growing digital asset industry. As a small but strategically located hub, it is vulnerable to financial crimes such as money laundering (ML) and terrorist financing (TF). In this article, we will explore the financial crime investigation process in Saint Pierre and Miquelon, highlighting the challenges faced by law enforcement agencies and regulatory bodies.

The Aggregate Market Capitalization of Crypto-Assets

The aggregate market capitalization of all crypto-assets has hovered just below $1.0 trillion since June 2022, according to a recent publication by the Treasury’s Crypto-Assets: Implications for Consumers, Investors, and Businesses. This sharp decline from its peak of approximately $2.9 trillion in November 2021 does not diminish the fact that digital assets are here to stay.

National Consumer Research

National consumer research performed by Raddon Research Insights shows that 28 percent of consumers are very or extremely interested in having digital asset services as part of their banking relationship. This escalating consumer demand for digital asset banking and custody services will force traditional financial institutions to address the dilemma of either embarking on the digital assets train or potentially losing market share to current key players and growth-drivers in this space, such as fintech companies, VASPs, and other payment service providers.

Regulatory Uncertainty

Traditional financial institutions may need to strategically consider answering the call to action by either launching their own digital assets business to compliment traditional banking services or create partnerships with VASPs and other payments service providers to meet the needs of their customers. Regardless of the route chosen, financial institutions must place special emphasis on firstly identifying and understanding the key threats, vulnerabilities, and illicit financing risks related to virtual assets, as outlined in the Treasury’s Action Plan.

Financial Institutions’ Risks

For example, partnering with VASPs that offer both custody and exchange services can indirectly expose a financial institution to facilitating suspicious transactions through their institution, based on their role as an intermediary when converting digital assets to fiat currency, and vice versa. Also, payment service providers that use conventional operating bank accounts to deposit or withdraw fiat funds to facilitate digital asset payment services pose indirect ML/TF risks to traditional financial institutions, as illicit actors frequently attempt to capitalize on the non-face-to-face client interaction channels available through most payment service providers.

FATF’s Guidance

The Financial Action Task Force (FATF) has provided guidance on virtual assets, outlining AML/CFT measures that can be applied when partnering with VASPs. The traditional risk-based approach recommendations in FATF’s guidance puts financial institutions in a good position to cost effectively adopt these practices by leveraging existing frameworks used for customer due diligence and risk assessments within functioning AML/CFT programs.

Due Diligence

In its guidance, the FATF notably highlighted the importance of conducting counterparty VASP due diligence prior to partnering with VASPs, and ongoing CDD and monitoring on a periodic basis thereafter. As part of this recommended due diligence, traditional financial institutions should certainly confirm whether a VASP or payments service provider has performed a thorough risk assessment of its AML/CFT program, while also performing a risk assessment of its own to understand the following factors:

  • Size and Structure: specific registration and licenses held by the VASP, as well as the asset size, revenues, staff levels, and customer types, etc.
  • Ownership: identify all beneficial owners and the percentage of ownership by foreign individuals and entities located in high-risk jurisdictions
  • Products and Services: obtain information on and understand the purpose and intended nature of the business relationship, and determine the type of digital assets offered, and which services are available to customers of the VASP and payments service provider (issuance, custody, exchange, trading services)
  • Geography: Does the VASP and payment service provider have a presence in high-risk countries? Where are their customers mainly located (domestic or foreign), and what percentage of PEPs and other high-risk customers exist?
  • Channels: What are the different types of client interaction channels (in person, online, indirectly through intermediaries) available to customers of the VASP?

By performing the appropriate levels of customer due diligence regarding strategic alliances with VASPs and payments service providers, traditional financial institutions increase their likelihood of creating long lasting business relationships, while addressing compliance with evolving regulatory expectations, ultimately avoiding reputational risk implications. As the digital assets markets continue to grow, it is essential that financial institutions remain vigilant and adapt to evolving regulatory expectations to ensure compliance with AML/CFT requirements.

Conclusion

The financial crime investigation process in Saint Pierre and Miquelon is a complex and challenging task, requiring a thorough understanding of the digital asset industry and associated risks. By implementing effective due diligence practices and leveraging existing frameworks for customer due diligence and risk assessments, traditional financial institutions can mitigate their exposure to ML/TF risks and maintain a strong reputation in the market. As the digital assets markets continue to grow, it is essential that financial institutions remain vigilant and adapt to evolving regulatory expectations to ensure compliance with AML/CFT requirements.

References

  • [1] Treasury’s Crypto-Assets: Implications for Consumers, Investors, and Businesses (2022)
  • [2] Raddon Research Insights National Consumer Research (2022)
  • [3] FATF Guidance on Virtual Assets (2020)