Monitoring for Virtual Currency

Considerations for monitoring for virtual currency include identifying unregistered or illicitly operating P2P exchangers, unregistered foreign-located MSBs, unregistered or illicitly operated CVC kiosks, and additional red flags associated with suspicious activity involving virtual currency.

Rachelle Dekker – Senior Compliance Advisor

Virtual currency is becoming more accessible than ever. With providing just a little information, purchasing virtual currency can be conducted without being a computer programmer. The popularity of virtual currency is continuing to increase with users ranging from everyday consumers to criminals. Unfortunately, virtual currency is widely popular by criminals for purposes of money laundering, sanctions evasion, and other illicit financing purposes. With the increase in availability, popularity and criminal use of virtual currency, there comes regulations.

Back in December, 2020, FinCEN issued a proposed rule which would require recordkeeping, verification, and reporting requirements for certain deposits, withdrawals, exchanges, or other payments or transfers of CVC, by through or to a bank or MSB that involves an unhosted or otherwise covered wallet. In addition, the proposed rule would require banks and MSBs to file a report with FinCEN related to CVC transactions conducted through an unhosted wallet when the transaction is greater than $10,000. Lastly, the proposed rule would require banks and MSBs to keep records of a customer’s CVC transaction, including verifying their identity using an unhosted wallet when the transaction is greater than $3,000. Along with the proposed rule, FinCEN recently published the AML/CFT Priorities, which included cybercrime and virtual currency considerations. So with the increase in availability of virtual currency and the regulatory changes coming, what should financial institutions consider when monitoring for suspicious activity involving virtual currency?

  • Unregistered or Illicitly Operating P2P Exchangers: Identify unregistered or illicitly operating P2P exchangers by monitoring for customers or members who receive multiple cash deposits or wires and shortly after use funds to acquire virtual currency. Also, maybe your customer or member receives a series of deposits from disparate sources, that when aggregated, are nearly identical to aggregated funds transfers to a known virtual currency exchange, all conducted within a short period of time. In addition, consider monitoring for phone numbers or email addresses that are provided and connected to a known virtual currency P2P exchange platform. Overall, financial institutions should monitor to identify frequent interactions with CVC-focused MSBs to identify potential P2P exchangers.
  • Unregistered Foreign-Located MSBs: Similar to P2P exchangers, foreign-located MSBs, offer to exchange fiat currency and CVCs (convertible virtual currency). In general, foreign-located MSBs seek to avoid regulatory coverage by operating in jurisdictions that lack or have limited AML/CFT regulations governing the use of virtual currency. To identify unregistered foreign-located MSBs consider monitoring for customers or members who transfer or receive funds to or from an unregistered foreign CVC exchange or other MSB with no relation to where the customer lives or conducts business. In addition, utilization of a CVC exchanger or foreign-located MSB in a high-risk jurisdiction lacking AML/CFT regulations for CVC entities can be a red flag for suspicious virtual currency activity. Consider monitoring for CVC transactions with CVC entities in jurisdictions with reputations for being tax havens. Overall, unregistered foreign-located MSBs can increase illicit financing risks.
  • Unregistered or Illicitly Operating CVC Kiosks: ATM-like devices or electronic terminals that are used to exchange cash and virtual currency are known as CVC kiosks. In general, CVC kiosks facilitate money transmission between a CVC exchange and a customer’s wallet or operate as a CVC exchange themselves. Financial institutions should consider monitoring for customers or members that operate multiple CVC kiosks in locations that have a relatively high incidence of criminal activity. Consider monitoring for frequent transactions from different customers or members that are sent to and from the same CVC wallet address but not operating as known CVC exchange. CVC kiosks can be utilized for illicit activity including structuring activity beneath the CTR threshold and can be operated in way that evades BSA requirements.
  • Other Potentially Illicit Activity: Suspicious virtual currency purchases, transfers and transactions can be identified through additional red flags. Consider monitoring for customers or members who conduct transactions that rapidly execute multiple conversions between various types of different CVCs below relevant due diligence, recordkeeping, or reporting thresholds followed by a transfer after the exchange. Additionally, monitor for customers or members who appear to have limited knowledge of virtual currency, yet have transaction activity that include CVC transactions. Consider elderly customers or members that have account activity which includes a large volume of CVC transactions. Discrepancies that arise between IP addresses associated with the customer’s or member’s profile and the IP addresses from which transactions are being initiated may be an indication of suspicious activity. Deposits into an account or CVC address significantly higher than ordinary with an unknown source of funds, followed by conversion to currency of legal tender can also be a red flag of potential suspicious activity associated with virtual currency.

What should you do if suspicious activity is identified in relation to virtual currency? Financial institutions that identify this type of activity should consider their SAR filing procedures. Keep in mind that a financial institution is required to file a SAR if it knows, suspects, or has reason to suspect a transaction was conducted or attempted by, at, or through the financial institution involving funds derived from illegal activity. In addition, attempts to disguise funds derived from illegal activity is also SAR reportable. Therefore, monitoring for the use of virtual currency by your customer or member is critical as part of your institution’s BSA/AML program.

In conclusion, don’t wait to enhance your due diligence efforts when it comes to monitoring for virtual currency. As the use of virtual currency increases, regulatory requirements won’t be far behind. In the meantime, don’t hesitate to reach out to Temenos Compliance Services for additional guidance.

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Rachelle Dekker – Senior Compliance Advisor