Crypto Assets, Blockchain, and Compliance: Relation with Financial Crimes and Necessary Precautions
We have covered cryptocurrencies and related technologies in general terms. In this article we examine the relationship between cryptocurrencies and financial crimes, which stems from certain of their characteristics, and the precautions that need to be taken.
Cryptocurrencies are exempt from tax in most countries and the chance of banks or governments seizing them is low. Moreover, as we mentioned in our previous articles, many of them are very difficult and even almost impossible to trace. These characteristics make cryptocurrencies attractive for financing crime. Many people who do not want their transactions traced, who want to be exempt from tax and who run their business unlawfully prefer cryptocurrencies.
As of May 2021, with MASAK publishing the Basic Principles Regarding the Obligations on the Prevention of Laundering Proceeds of Crime and the Financing of Terrorism for Crypto Asset Service Providers, the responsibilities of crypto asset service providers against financial crime also increased. Service providers are now obliged to carry out identity verification, and to report to MASAK where necessary, when the transaction amount — or the total amount of multiple linked transactions — is 75,000 TRY or above, or when a transaction is suspicious.
Which Transactions May Be Suspicious?
It is possible to catch certain clues that may point to suspicious transactions. Analysts or compliance unit staff can detect inconsistencies in customer behaviour based on their experience. Broadly speaking, situations such as the consistency of the transaction or the transaction amount with the customer profile, commercially active individuals and organisations failing to repeat transactions they are expected to repeat — or conversely repeating transactions rarely seen in commercial life — financial transactions that should be made as a whole being split without a reasonable justification, and amounts being withdrawn from accounts with low activity may all point to one or more suspicious transactions.
Common Methods
Money is transferred to shell companies, foundations and associations via cryptocurrency, and because of the difficulty of tracing it, this transferred money is usually dirty money intended to be laundered through the association or similar entity.
Drug sales and the financing of terrorism can be carried out through cryptocurrencies, and these funds are then laundered and converted into cash. Even though presenting identification is mandatory at the point of conversion to cash, the trail of the money can be lost both through the unlawful methods we will mention and through well-known laundering methods such as smurfing and online betting. There are also institutions and individuals that accept payment in cryptocurrency. Money can be laundered by purchasing expensive assets such as houses, cars or yachts from them.
Peer-to-peer (P2P) exchange websites are another method used in money laundering. The suspect puts the cryptocurrency they earned through improper and unlawful means up for sale on these exchange sites and receives payment in cash or as a bank transfer in return.
Another method is virtual gambling sites that accept cryptocurrency payments. Dirty cryptocurrency is loaded onto these sites as a balance and, during withdrawal, is converted into cash and transferred back to a personal account. This income is then recorded as winnings from games of chance.
How Do AML Precautions Work?
At this point service providers are obliged to take their own precautions as part of the fight against financial crime. The main points to pay attention to in this respect are;
Transaction Patterns
The clues of standard money laundering methods apply here as well. Multiple transactions with no commercial explanation, crypto asset accounts that do not match the customer profile, frequent high-value crypto transfers into one account from many people within a certain period, and frequent small-amount transactions between unrelated accounts all become warning points.
Sender or Recipient Profiles
The movements of senders and recipients can also give clues about suspicious transactions. Attention should be paid to situations such as users transacting at very high volumes and frequencies relative to the information they have provided, different accounts being opened from the same IP address, frequent changes to IP, email and customer information, and the same person transacting from different IPs on the same day. In addition, if a user constantly converts money into cash immediately, this too serves as a warning against financial crime.
We can list the obligations falling on crypto asset exchanges as follows:
comparing the customer information obtained under Know Your Customer (KYC) with the transactions carried out and their amounts,
performing the necessary checks regarding the possibility that customers appear on national or international sanctions lists,
determining whether customers are associated with countries defined as high or very high risk,
establishing whether the customer is acting on behalf of and/or for the account of someone else,
monitoring customer transactions in order to detect unusual transactions,
identifying and verifying the source of income,
grading and classifying services, transactions and customers according to risk,
monitoring and controlling complex, unusual or linked transactions exceeding the defined amount,
Exchanges need a powerful system in place for these controls. There are various products on the global market offering services in this direction. However, such software requires personal information or a wallet number in order to begin an investigation. Yet detecting the types of crime mentioned above requires the detection of suspicious patterns rather than the investigation of individuals, and this is only possible with more comprehensive systems.
With Datactive — which enables scenarios to be built by defining suspicious patterns, visualises results in a relationship-oriented way and provides dashboards where transactions and reports can be monitored in real time — every need related to protecting crypto asset exchanges and their customers can be met through a single system.
You can examine in detail the work Datactive is doing in this field, offering a different solution for detecting crimes committed via cryptocurrency, by staying tuned, and you can contact us with your questions.