Bitcoin Money Laundering & Compliance Risk

Posted by

Vivek Dodd

on 07 Dec 2017

Bitcoin Money Laundering & Compliance Risk

HM Treasury in the UK and EU institutions seem be waking from their slumber and have announced a crackdown on crypto-currencies, such as Bitcoin to prevent financial crime.

Virtual currencies have been used to facilitate financial crimes, including money laundering, tax evasion, fraud and terrorist financing. Which has prompted the EU to act.

FATF research found that while crypto-currencies may offer some benefits (such as lower transaction costs, payment efficiency, and bringing banking services to populations with limited access), there are also significant risks due to their characteristics.

The vertiginous rise of Bitcoin is only partly explained by bubble/mania theories. As the FT puts it: "While there are no legitimate, non-speculative reasons to buy bitcoin, there are of course significant illegitimate ones... [it] is a useful tool for tax evaders, money launderers, and anyone who wishes to avoid .. regulations."

The 5th Anti-Money Laundering Directive (5MLD) amended the 4th Anti-Money Laundering Directive to extend EU anti-money laundering and counter-terrorism financial regulations to virtual currencies.

The measures bring crypto-currencies and exchange platforms into the existing AML/CTF regulation, with activities overseen by national competent authorities, which in the UK will be the Treasury.

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Risks associated with crypto-currencies

Based on FATF research, here's a reminder of the potential risks of virtual currencies:

  • Anonymity - anonymous transfers between buyers and sellers enable transactions to take place under the radar. There are no names, no account numbers and no verification checks, with the source of funding never identified. Such traceless payments (as with eCache) facilitate money laundering and crime
  • Lack of identification and verification (ID and V) checks - with no names, account numbers, checks on the source or destination of funds, or historical records of transactions, there is real potential for abuse
  • Global transfers - with a global reach to any jurisdiction (all you need is a mobile phone), the AML/CTF risks are increased. Supervision and enforcement can be more challenging, though not impossible (for example, Silk Road, AlphaBay, Liberty Reserve and Western Express International). What if centralised virtual currency systems deliberately seek out territories with weak AML/CTF regimes?
  • Lack of oversight - suspicious trading activity goes undetected  if there are no AML systems. Law enforcement is complex as there is no central administrator and asset seizures are difficult.
  • Law enforcement - how can law enforcement work when decentralised virtual currencies operate across different jurisdictions with no central administrator in charge? How can we stop centralised virtual currency systems targeting territories with weak AML/CTF regimes?
  • Volatility - the extreme volatility of virtual currencies makes them attractive to high-risk traders. What control measures are currently in place in your organisation?

Experts see value in the blockchain technology behind crypto-currencies, like bitcoin, in transaction settlements. But the crypto-currencies themselves are seen with suspicion. While banks like JP Morgan and Goldman Sachs are investing heavily in blockchain, they have publicly called Bitcoin as a vehicle for fraud and money laundering. Even Nobel prize winners have demanded that Bitcoins be regulated or banned. The FT puts it brilliantly : "Innovative technology is not a licence to break the law."

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