Financial Crime World

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

The Financial Action Task Force (FATF) has published a report highlighting ongoing trends in money laundering and terrorist financing risks associated with virtual assets. The report, released in July 2021, identifies three key trends:

Regulatory Arbitrage

Due to uneven global implementation of revised standards, regulatory arbitrage is a growing concern.

Misuse of Virtual Asset Service Providers (VASPs) and Custodian and Exchanger Services Providers (CESPs)

VASPs and CESPs are being misused for money laundering and terrorist financing purposes.

Anonymity-Enhancing Tools and Methods

The report highlights the misuse of certain tools and methods to increase anonymity, including:

  • Tumblers and mixers: methods that obscure the connection with the originator by mixing transactions with those of several others.
  • Anonymity Enhanced Coins (AECs) and Privacy Coins: crypto-assets that embed anonymous technology in a blockchain platform.
  • Privacy wallets: wallets that do not have an intermediary, allowing individuals to manage their private keys and complete transactions themselves.
  • Chain hopping: replacing one crypto-asset with another, making it difficult to trace the transaction.
  • Dusting: transferring small amounts of funds to random wallets to hide ownership.
  • Use of decentralized applications (DApps) and decentralized exchanges (DEX).

The report also notes that the method of CoinJoin, which pools coins and combines multiple transactions into one to enhance anonymity, has increased significantly since 2020.

Risks in Peer-to-Peer Transactions

Peer-to-peer (P2P) transactions are a growing concern, with five out of seven blockchain analytics companies reporting that approximately 50% or more of bitcoin transactions are P2P. However, the report concludes that there has been no significant increase in the proportion of P2P transactions since the finalization of FATF standards in 2019.

Stablecoins and Future Risks

The report notes that if globally adopted stablecoins and other crypto-assets become widely adopted in the future, the current approach of reducing risk at on- and off-ramps to the traditional fiat economy will not be sufficient. Therefore, close monitoring of this front is necessary.

FSA Red Flag Indicators

The Financial Services Agency (FSA) has long provided 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.

Conclusion The FATF report highlights the ongoing risks associated with virtual assets and emphasizes the need for jurisdictions to implement robust regulatory frameworks to combat money laundering and terrorist financing.