FINTRAC Guidance On Red Flag Indicators Associated With Virtual Currency Transactions – Finance and Banking

On December 2, 2020, the Financial Transactions and Reports
Analysis Centre of Canada (FINTRAC) published guidance on money laundering
(“ML“) and terrorist financing
(“TF“) red flag indicators for virtual
currency transactions. In Canada, businesses dealing in virtual
currency are subject to the Proceeds of Crime (Money
Laundering) and Terrorist Financing Act
(Canada). Reporting entities are required to have
effective internal systems for identifying, assessing and reporting
suspicious transactions. These ML/TF red flag indicators provide
useful guidance for businesses dealing in virtual currency to
refine their anti-ML/TF compliance strategy.

The red flag indicators are comprised of factual
characteristics, behaviors and patterns associated with suspicious
financial transactions. FINTRAC developed the red flag indicators
based on their analysis of ML/TF cases, suspicious transaction
reports (“STR“), input from reporting
entities and materials published by international organizations
such as the Financial Action Task Force (FATF). The guidance from
FINTRAC follows the recent report on red flag indicators associated
with virtual assets published by FATF, summarized here.

The red flag indicators can be grouped into the following
categories:

1. Red Flag Indicators Related to the
Transaction – Red flags associated with traditional
transactions also apply to virtual currency transactions. For
example:

• Funds flowing through a large number
  of intermediate addresses in a very short period of time prior to
  being deposited in a client’s wallet, or immediately after
  being withdrawn.




• A broker charging abnormally high
  commission fees compared to industry standards.




• A client’s virtual currency
  wallet or address being linked to fraudulent activity in media
  reports and/or cyber security bulletins.

2. Red Flag Indicators Related to
Transaction Patters – ML/TF can be identified through
unusual transaction patterns such as:

• High volume and frequency of
  transfers between different types of virtual currencies.




• Multiple transactions taking place at
  the same time of day. Transfers from fiat to virtual currency and
  virtual currency to fiat.

3. Red Flag Indicators Related to Anonymity -
The nature of virtual currency allows for a level of anonymity that
makes it harder to identify suspicious transactions. Additional
measures in virtual currency transactions to conceal the identity
of the parties and the source of funds can be a red flag:

• A client providing an anonymous email
  address obtained through an encrypted email service.




• A client’s portfolio solely
  consisting of, or having a high value of, privacy coins (for
  example, Monero, Dash, Zcash).




• A client transferring Bitcoin in
  large volumes in exchange for privacy coins.

4. Red Flag Indicators Related to the Sender or
Recipients – The profile and behavior of the sender or
recipient can identify ML/TF:

• Virtual currency addresses matching
  addresses on recognized watch lists such as those maintained by the
  Office of Foreign Assets Control (OFAC) or other law
  enforcement.




• Many individuals registering with the
  exchange within a short period using a shared address, mobile
  device, phone number, IP addresses and other common identity
  indicators.

5. Red Flag Indicators Related to the Source of the
Funds – There are a number of indicators that suggest a
criminal organization is using virtual currency to obscure the
original source of funds, such as:

• The developers are anonymous or
  information provided about the initial coin offering cannot be
  verified.




• Virtual currency passes through
  mixers/tumblers and is transferred to multiple wallets, where the
  funds are cashed out.




• Client is unwilling or unable to
  provide information about the source of privacy coins they once
  held or currently have.

The full list of virtual currency ML/TF red flag indicators can
be found in the published guidance. FINTRAC notes that in
isolation, a single red flag may not appear suspicious. However, it
may require organizations to conduct further investigation.
Organizations should use the red flag indicators in their internal
investigations along with other facts and contextual circumstances
to determine if there are reasonable grounds to believe a
transaction is associated with ML/TF activities. If there are
reasonable grounds, a STR must be submitted to FINTRAC. The red
flags should then be used to describe the transaction in the
narrative section of the STR. Additionally, during its review of a
STR, FINTRAC will assess how an organization uses the red flag
indicators in its own investigations.

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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.