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Virtual asset, including cryptocurrency, poses a high risk to developing countries with weak financial regulation. Although they share many aspects of onboarding, transaction monitoring and customer anonymity are high. The virtual asset’s red flags indicators can be summarized in the following points:

1. Transaction activity

The frequency of virtual asset transactions is instantaneous and difficult to trace as it crosses different jurisdictions, anonymous wallets, and geographical areas. It can happen by transferring VAs immediately to multiple Virtual Asset Service Provides (VASPs), especially those registered with no relationship to where the customer lives or non-existent or weak AML/CFT regulations.

2. Transaction pattern

Transaction deposited and funds immediately transferred to accounts of several VASPs (in one day) for VApurchase (Bitcoin); controlling VA to the fiat currency exchange at a possible loss (e.g., when the value of VA is unstable, or regardless of unusually high commission charges as compared to business standards, particularly once the transactions have no rational commercial explanation); and exchanging a large amount of fiat currency into VAs, or a large amount of one
type of VA into other kinds of VAs, with no rational business explanation

3. Customer anonymity

Despite extra transaction charges, customers conducting more than one kind of VA transaction provide sophisticated anonymity. Those VAs, such as anonymity-enhanced cryptocurrency (AEC) or privacy coins, move a VA that runs on a public domain, transparent blockchain, for example, Bitcoin, to a centralized exchange and then instantaneously trading it for an AEC or privacy coin. Also, VAs transferred to or from wallets that show previous forms of activity linked with VASPs that operate mixed services or P2P platforms and the use of decentralized hardware or paper wallets to transport VAs across borders.

4. The sender or recipient’s anonymity

The sender or recipient anonymity can occur in a variety of methods. The most forthcoming include irregularity observed during account opening, such as opening separate accounts under different names to go around restrictions on trading or withdrawal limits imposed by VASPs; transactions initiated from non-trusted IP addresses, or IP addresses from
Sanctioned countries or IP addresses previously flagged as suspicious; and customers using internet domain registrations different from their authority or in a jurisdiction with a weak domain registration process. Finally, a Customer has provided forged documents or has tampered with photographs and identification documents as part of the onboarding process.

5. Source of fund or wealth

Hiding sources of funds involves a misuse of VAs often related to criminal activities, such as illegal trafficking in narcotics, human and psychotropic substances, fraud, theft, and extortion (including cyber-enabled crimes). Here are common red flags concerning the source of funds or wealth linked to such criminalundertakings. These activities can be summarized as transacting with VA addresses or cards connected to known fraud, blackmail, coercion, sanctioned entities, dark net websites, or other illegal websites; VA transactions originating from or intended for online gambling service. Deposits made into a bank account or a VA account are significantly higher than ordinary with an unknown source of funds, followed by an immediate exchange with fiat currency, which may indicate theft of funds, and A customer’s source of wealth is excessively drawn from VAs originating from other VASPs that lack AML/CFT controls.

6. Geographical risk

This set of indicators emphasizes how offenders, when moving their illicit funds, take advantage of the unpredictable periods of execution by jurisdictions on the revised FATF Standards on VAs and VASPs. Based on reported cases by jurisdictions, criminals have exploited the holes in AML/CFT regimes on VAs and VASPs by moving their illicit funds to VASPs’ addresses or operating in jurisdictions with minimal AML/CFT regulations on VASPs. Some of the common VA geographical risks include:

The customer’s funds originate from, or are sent to, an exchange that is not
Registered in the jurisdiction where either the customer or exchange is located; the customer utilizes a VA exchange or foreign-located MVTS in a high-risk jurisdiction lacking or known to have inadequate AML/CFT regulations for VA entities, including inadequate CDD or KYC measures. The customer sends funds to VASPs operating in jurisdictions without VA guidelines or implementing AML/CFT controls. A customer sets up offices in or moves offices to jurisdictions that have no regulation or have not implemented rules governing VAs or sets up new offices in jurisdictions where there is no clear business rationale to do so.

Lately, unregulated VASPs have been cited in Hargeisa and Mogadishu, although they cannot be ruled out of other cities in the east/horn Africa region. These VASPs act as clandestine agents of more complex cryptocurrencies that criss-cross different jurisdictions and P2P exchanges without regulatory oversight. The impact of these agents is great; they usually prey on the unwitting sector of the population and are not different than Ponzi scams.

Disclaimer

The opinion in this blog is solely for awareness purposes

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