On Monday, September 14, 2020, FATF released a report on Virtual Assets Red Flag Indicators. This report is meant to assist reporting entities, including financial institutions (FIs), designated non-financial businesses and professions (DNFBPs), and VASPs. The red flag indicators are an excellent start and are mostly focused on indicators of money laundering for VASPs.
The FATF Report lists red flags in the following categories:
Red Flag Indicators Related to Transactions
Size and frequency of transactions
Red Flag Indicators Related To Transaction Patterns
Transactions concerning new users
Transactions concerning all users
Red Flag Indicators Related to Anonymity
Red Flag Indicators about Senders or Recipients
Irregularities observed during account creation
Irregularities observed during CDD process
Profile of potential money mule or scam victims
Other unusual behaviour
Red Flag Indicators in the Source of Funds or Wealth
Red Flag Indicators Related to Geographical Risks
One limitation of the red flags is that some indicators are not visible by a single What is a Virtual Asset Service Provider (VASP)? A Virtual A... More or FI. Additionally, the paper does not identify DeFi as a potential money laundering risk.
Despite the focus on VASPs, the paper does recognize the critical role that banks provide during ingress and egress of illicit funds and highlights the use of money mules at both ends.
In order for banks to comply with any of the red flags indicated in FATF’s report, it is necessary for them to be able to accurately identify and monitor all crypto-related transactions. Doing so will allow them to identify the following red flags listed by FATF:
- Customers are converting a large amount of fiat currency into VAs with no logical business explanation
- Customers that operate as an unregistered/unlicensed VASP on peer-to-peer (P2P) exchange websites, using bank accounts to facilitate these P2P transactions
- Customers using of one or multiple credit and/or debit cards that are linked to a VA wallet to withdraw large amounts of fiat currency (crypto-to-plastic), or funds for purchasing VAs are sourced from cash deposits into credit cards.
- Customers as potential crypto money mule or scam victims
Read the full FATF Report: http://www.fatf-gafi.org/publications/methodsandtrends/documents/virtual-assets-red-flag-indicators.html