Financial Crime World

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FATF Review Highlights Ongoing ML/TF Risks in Virtual Assets

The Financial Action Task Force (FATF) has recently conducted a review that highlights ongoing trends in money laundering and terrorist financing (ML/TF) risks associated with virtual assets. The review notes that “regulatory arbitrage” is a major concern, with uneven global implementation of the revised standards contributing to a large number of weakly compliant or non-compliant jurisdictions.

Ongoing Risks

The report identifies several ongoing risks, including:

  • Regulatory arbitrage: Many Virtual Asset Service Providers (VASPs) and Cryptocurrency Exchange Service Providers (CESPs) operate in jurisdictions with weak regulatory and supervisory regimes, making them vulnerable to illicit activities.
  • Illicit activities: Criminals are taking advantage of these weak environments to launder funds and finance terrorist activities.

Tools and Methods Used by Criminals

The FATF review highlights various tools and methods used by criminals to increase anonymity, including:

  • Tumblers and mixers
  • Anonymity Enhanced Coins (AECs)
  • Privacy wallets
  • Chain hopping
  • Dusting
  • Decentralized applications (DApps) and decentralized exchanges (DEX)

CoinJoin Method

The report also notes an increase in the use of CoinJoin, a method of hiding the relationship between the originator address and the beneficiary address by pooling coins and comingling multiple transactions into one.

Peer-to-Peer Transactions

The FATF review warns about the growing trend of peer-to-peer (P2P) transactions, which are increasingly being used to avoid regulations. While P2P transactions currently account for a significant portion of crypto-asset transactions, the report concludes that there has been no significant increase in the proportion of illicit transactions since the finalization of the FATF Standards in 2019.

Future Risks

However, if globally adopted stablecoins and other crypto-assets become widely adopted in the future, the current approach to reducing risk at on- and off-ramps to the traditional fiat economy may not be sufficient. The report emphasizes the need for close monitoring of these developments.

Recommendations

The Financial Services Agency (FSA) has been providing red flag indicators related to these cases and has received reports on the number of cases identified by CESPs. It is essential that providers continue to take measures such as monitoring to ensure the detection of such cases.

Overall, the FATF review highlights the ongoing ML/TF risks in virtual assets and emphasizes the need for robust implementation of the revised standards, including effective regulation and supervision of VASPs and CESPs.