Combining Anti-Money Laundering (AML) considerations with cryptocurrency technology is akin to adding gasoline to a bonfire. It is a hot topic on the mind of every member of the global financial services industry. How are we to regulate and manage a new technology that seems to feed into the hands of money launderers?

As AUSTRAC grapples with the need to keep ahead of criminal activity, the industry must continue to grow and expand its AML infrastructure. While guidance was released by AUSTRAC in April 2022 directed at digital currency exchange providers (DCEPs), the remainder of the industry should not become complacent to the increase in reform and growing focus on the impact of crypto on broader AML procedures.

The current regulation of AML and cryptocurrency

Those in the cryptocurrency industry are readily familiar with the requirement for DCEPs to be registered and regulated by AUSTRAC. Since 2018, DCEPS have been required to adhere to AML obligations such as maintain an AML Program and conducting Know Your Customer (KYC) reviews of their clients. Not only does this protect the business operations of these exchanges from criminal activity (or attempt to limit the exposure), but it also increases public, consumer, and stakeholder confidence.

There are not too many facilities as susceptible to money laundering activity as cold, hard cash. However, cryptocurrency comes close if AML infrastructure breaks down, being vulnerable to money laundering at three key stages:

  1. Placement: conversion of fiat (e.g. AUD) into a digital currency.
  2. Layering: a transaction of that digital currency into a cryptocurrency or transfers between exchanges.
  3. Integration: reintroduction of the laundered money into goods, services, or fiat.

In April 2022, AUSTRAC released guidance for DCEPs to assist their understanding and identification of money laundering or criminal behaviour at risk of occurring through their platforms.

The tinder: Indicators of money laundering

DCEPs currently maintain extensive AML procedures in an attempt to limit criminal activity. But the industry must remain vigilant to new opportunities for money laundering activity to occur through cryptocurrency. Unfortunately, the decentralised, anonymous nature of cryptocurrency means that all transactions outside of regulated exchanges are largely immune to regulatory or AML oversight.

It takes significant resources and sophistication for DCEPs to identify and monitor indicators of money laundering activity. AUSTRAC’s guidance provides an informative and useful insight to some of the challenging indicators DCEPs must be cognisant of, as well as potential consequences of a failure to implement AML procedures. For example, DCEPs need to monitor for financial, behavioural, and account activity indicators on each and every account, including:

  • the use of cryptocurrency ATMs for unusual or regular withdrawal;
  • customers who provide inconsistent explanations as to the source of funds or source of wealth that are used for the purchase of digital currencies;
  • chain-hopping (i.e. moving between currencies or exchanges);
  • the existence of multiple accounts linked to the same IP address; or
  • a record of multiple or inconsistent IP addresses for the same account.

Interestingly, AUSTRAC identified a key indicator of money laundering behaviour as high-volume cryptocurrency transactions by elderly individuals. Indicators such as these are critical additions to Part A of AML Programs and Risk Assessments. We are actively working with our DCEP clients to ensure their AML Programs and Risk Assessments are updated to comply with and reflect the AUSTRAC Guidance.</…….

Source: https://www.lexology.com/library/detail.aspx?g=1c8aa7ac-c13d-45c6-b732-55d0eee7d44e

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