HOW TO TACKLE THE MONEY LAUNDERING ISSUE IN THE CRYPTO SPACE!

FATF Financial Action Task Force

In its press release of 19 October 2018, the Financial Action Task Force (FATF) calls on its members to take rapid and coordinated action on the increasing use of digital assets for money laundering and other illegal activities.  With more and more organizations pointing out that criminals, especially in Europe, have already discovered the use of cryptocurrencies for money laundering, this can only be a start.


The Expert Group to fight money laundering

In 1989, the Financial Action Task Force (FATF) was set up as an expert group within the OECD with the task of analyzing money laundering methods and facilitating the detection of assets of illegal origin. The mandate of the FATF, which was limited in time, was last extended until 31 December 2020 on 20 April 2012. The declared main objective of the FATF is to establish norms, international standards and policy recommendations for “legal, regulatory and operational measures” to combat money laundering, terrorist financing and other related threats to the security and integrity of the international financial system.

The World Bank, the International Monetary Fund (IMF) and the United Nations Security Council have so far recognized the FATF recommendations as international standards, although they do not constitute directly binding law.

The FATF monitors its members in defining appropriate measures and institutions to combat money laundering and terrorist financing. While the FATF has no enforcement authority in individual countries, it does manage to exert massive economic and media pressure by publishing “black lists” of those countries (NCCT countries:(non-cooperative countries and territories) ) that show themselves to be “uncooperative” in combating the organization’s stated objective. Banks must be particularly vigilant in monitoring money transactions with countries identified in this way.

Cryptocurrencies and Money Laundering

In view of the increasing use of digital assets for money laundering and other illegal transactions, the FATF is now forced to take action in the area of cryptoassets. The FATF urges countries to act quickly and urgently to develop legal and practical measures to prevent the misuse of digital assets. This includes assessing and understanding the risks associated with virtual assets in each country.

In particular, the FATF calls for all providers of services related to virtual assets, such as wallet service providers, virtual marketplaces, financial services providers for ICOs, etc., to be rapidly required to apply the AML/KYC rules on monitoring, logging and reporting suspicious transactions. The FATF will also require the registration or licensing of these financial service providers and the installation of supervision to ensure compliance with the AML/KYC regulations by these service providers. The FATF will publish guidelines for cryptocurrencies by June 2019.

The FATF defines the term “virtual asset” very broadly and wants to include any assets that can be digitally traded or transferred and can be used for payment or investment purposes, including digital value representations that serve as a means of exchange, unit of account and/or storage of value.

New Money Laundering Directive already obsolete?

It is interesting to note that the definition of both the digital assets and the service providers in the area of digital assets to be regulated according to the instructions of the FATF significantly exceeds the scope of the 5th Money Laundering Directive adopted by the European Parliament on 19 April 2018.

The fifth Money Laundering Directive, to be implemented by the individual member states by 10 January 2020, should also deal comprehensively with the issue of virtual currencies for the first time. According to the Directive, online FIAT crypto marketplaces and certain wallet providers (private key is with the provider) must also be subject to the AML/KYC provisions and must, therefore, take appropriate measures.

According to the FATF definition, the issuance of utility tokens, security tokens, etc. would probably also be subject to the AML/KYC provisions – which is not provided for in the 5th Money Laundering Directive. Crypto-to-Crypto marketplaces would also have to be subject to more rigid regulations under FATF.

This probably means that the 5th Money Laundering Directive will already be outdated even before it has been implemented across the board in the individual member states.

The dark side is always faster

It is common knowledge that the dark side of society – often early adopters of new technologies – has recognized the potential of cryptocurrencies long before the authorities of the bright side.

In early 2018, the European Union Agency for Law Enforcement Cooperation (Europol) announced that three to four billion pounds (USD 4.1-5.5 billion) of illegal money had already been laundered using cryptocurrencies. Rob Wainwright, the head of Europol, made the following statement.

It’s growing quite quickly and we’re quite concerned. They’re not banks and governed by a central authority so the police cannot monitor those transactions. And if they do identify them as criminal they have no way to freeze the assets unlike in the regular banking system.

The volume of money laundering in the crypto sector still seems to be negligible, as it is assumed that the current money laundering volume of up to 100 billion euros p.a. is only for Germany.

In January 2018, the results of a study of Elliptic and the Center on Sanctions and Illicit Finance, published by the Foundation for Defense of Democracies, were published with the insight that the extent of money laundering and illegal transactions with Bitcoin in the period 2013-2016 was 4* higher than in North America. Europe also performed very poorly compared to the Asian countries, which recorded the highest number of cryptocurrency transactions in 2015 and 2016.

This creates new challenges for investigators and prosecutors in tracking down and seizing the proceeds of crimes in cryptocurrencies.

Authorities need to respond

A Royal United Services Institute report on cryptocurrencies published in March 2017 points out that governments need to understand that working with the crypto sector is the key to developing knowledge and understanding of the legitimate use of cryptocurrencies and related technology.

The cryptocurrency industry can also better combat financial crime if it understands the challenges and perspectives of investigators and law enforcement agencies. In September 2016, Europol, Interpol and the Basel Institute on Governance established a working group on money laundering and cryptocurrencies. The partnership was developed as a network for the exchange of information and knowledge between European law enforcement agencies and other industry experts.

Expenses from regulatory authorities for ChaiNanalysis, Elliptic,.., @diar/Volume 2

A number of companies (e.g. Coinfirm, Elliptic, Chainalysis, BitRank) have meanwhile specialized in the development of tools that can be used to investigate financial crime using cryptocurrencies. These companies have succeeded in winning orders in the millions from authorities and law enforcement agencies to trace cryptocurrency transactions.