FinCEN Warns Public About Suspicious Activity Involving Convertible Virtual Currency

Jun 18, 2019

The Financial Crimes Enforcement Network (FinCEN) issued an advisory to assist financial institutions in identifying and reporting suspicious activity concerning convertible virtual currencies (CVCs).

The advisory includes ways in which criminals exploit convertible virtual currencies for money laundering, sanctions evasion, and other illicit financing purposes, particularly those involving dark web markets, peer-to-peer (P2P) exchangers, and CVC kiosks.

As people to increase their use of alternative payment methods, like virtual currency, financial institutions must evaluate and mitigate any possible money laundering, financing of terrorist actions, and any other illegal activity involving CVCs.

The advisory by the FinCEN, which aims to protect the financial system from illicit use, combat money laundering, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence, breaks down red flags associated with this illicit behavior.

Understanding Regulations Regarding Businesses Dealing with CVC

Many business models of entities dealing with CVC operate as money transmitters, which are required to register with FinCEN as money service businesses (MSB) and comply with:

  • Anti-money laundering/countering the financing of terrorism (AML/CFT) program
  • Record keeping
  • Reporting requirements

Domestic and foreign-located CVC money transmitters doing business in whole or substantial part within the United States, even if the foreign-located entity has no physical presence in the United States, must comply with requirements.

The Risks Posed by Virtual Currencies

Due to the global nature, distributed structure, limited transparency, and speed of the most widely utilized virtual currency systems, CVCs may create illegal financial vulnerabilities, according to the advisory.

Anonymity-enhanced CVCs have emerged that further hinder transparency of and obscure the source of the CVC through the incorporation of anonymizing features, such as mixing and cryptographic enhancements. Additionally, entities or actors mix or tumble to break connections CVC sending and receiving addresses. Some CVCs are even created to circumvent anti-money laundering controls.

All of the factors listed above make it more difficult for authorities and national security agencies to fight money laundering and other financial activities. Financial institutions that don’t comply with record keeping, regulatory, and reporting obligations administered by the Office of Foreign Assets Control (OFAC) put themselves in danger of exposing themselves to more illegal financial risk. Without sufficient controls in place, financial institutions cannot reasonably assess and mitigate possible risk to customers.

The prevalence of unregistered CVC entities without sufficient controls, and the limited transparency of their transactions make them alluring methods to criminals.

Red Flags of Virtual Currency Abuse

Knowing red flags can help CVC-focused MSBs and other financial institutions identify unregistered activity and suspicious virtual currency purchases, transfers, and transactions. Though no one suspicious act is indicative of illegal conduct, banks should consider a customer’s historical financial activity and whether the customer exhibits multiple indicators before validating that CVC activity is suspicious.

Overall, some red flags are easier to notice than others.

With dark web markets, major red flags may include:

  • A customer conducts transactions with CVC addresses that have been linked to darknet marketplaces or other illicit activity
  • A customer’s CVC address is listed on public forums associated with illegal activity
  • A customer’s transactions start form IP addresses associated with Tor
  • Blockchain analytics indicate that the wallet transferring CVC to the exchange has a suspicious source of funds
  • A transaction makes use of mixing and tumbling services, which suggests there may be intent to hide the flow of illegal funds

With unregistered or illicitly operating P2P exchangers, major red flags include:

  • A customer receiving multiple cash deposits or wires from disparate jurisdictions, branches, branches, or banks
  • A customer having a phone number or email connected to a known CVC P2P exchange platform advertising exchange services
  • Transactions with CVC addresses that have been linked to extortion, ransomware, and sanctioned addresses
  • Transactions initiated from non-trusted IP addresses, IP addresses from sanctioned jurisdictions or IP addresses flagged as suspicious
  • The use of virtual private network (VPN) services or Tor to access CVC exchange accounts

In Conclusion

Identifying and reporting suspicious activity concerning convertible virtual currencies (CVCs) protect businesses, financial institutions, and consumers. Money laundering and financial activity involving terrorists can disrupt markets and being detrimental to economies. Knowing the red flags can prevent this from occurring.

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