Financial Crime World

FATF Issues Warning on Virtual Asset Risks Amid Global Implementation Challenges

The Financial Action Task Force (FATF) has identified three key trends in money laundering and terrorist financing risks associated with virtual assets, including “regulatory arbitrage” due to uneven global implementation of standards.

Growing Concerns around Virtual Asset Service Providers

In a report published in July 2021, the FATF highlighted growing concerns around the misuse of virtual asset service providers (VASPs) and crypto-asset exchange service providers (CESPs) that do not comply with regulations. The report also warned about the use of tools and methods to increase anonymity, including:

  • Tumblers and mixers
  • Anonymity-enhanced coins
  • Privacy wallets
  • Chain hopping
  • Dusting
  • Decentralized applications and exchanges

Global Implementation Challenges

The FATF’s assessment of global implementation of its standards related to virtual assets and VASPs/CESPs showed that only 29 out of 128 jurisdictions have conducted on- or off-site inspections, while 18 have administrative sanctions in place. This has led to a situation where some VASPs/CESPs operate in jurisdictions with weak regulatory and supervisory regimes.

Growing Trend of Peer-to-Peer Transactions

The report also highlighted the growing trend of peer-to-peer (P2P) transactions, which are at a reasonably large scale, with five out of seven blockchain analytics companies reporting that approximately 50% or more of bitcoin transactions are P2P. The proportion of illicit transactions is higher for P2P transactions than for transactions via CESPs.

Recommendations

The FATF recommended that jurisdictions should take immediate action to implement the revised standards and conduct regular on- and off-site inspections of VASPs/CESPs. The organization also emphasized the importance of monitoring the development of stablecoins and other crypto-assets, as their widespread adoption could pose significant risks to the financial system.

Red Flag Indicators

The report identified several red flag indicators that financial institutions and regulators should be aware of, including:

  • Unusual transaction patterns or volumes
  • Transactions involving jurisdictions with weak AML/ CFT regimes
  • Use of anonymity-enhanced coins or privacy wallets
  • Chain hopping or dusting transactions
  • Large cash withdrawals or deposits

Recommendations for Financial Institutions and Regulators

The FATF recommended that financial institutions and regulators should:

  • Implement robust customer due diligence (CDD) processes to identify and verify the identity of customers
  • Conduct regular on- and off-site inspections of VASPs/CESPs
  • Monitor the development of stablecoins and other crypto-assets
  • Take immediate action to address any red flag indicators identified

Conclusion

The FATF’s report serves as a wake-up call for the financial industry, highlighting the need for robust implementation of standards and regulations to combat money laundering and terrorist financing risks associated with virtual assets.