Crypto AML Red Flags (2024)

What are Crypto AML Red Flags?

Virtual assets, crypto assets or cryptocurrency are terms used for the digital representation of value that can be digitally traded and allows for the speedy transfer of funds around the world, outside of conventional banking and finance systems. Unlike traditional or “fiat” currency, it is generally not issued or controlled by governments but managed by peer-to-peer networks of computers running software, with the transfer of funds being recorded in an electronic ledger, or blockchain. Cryptocurrency by its very nature can be volatile with value rising dramatically offering investment opportunities, but also value falling equally dramatically.

While cryptocurrency has brought innovation and offers benefits such as faster and cheaper payments than more traditional methods, owing to a relative lack of regulatory oversight, cryptocurrency may be used by criminals to commit fraud and other crimes or to launder the proceeds of crime by avoiding the anti-money laundering (AML) checks in place at traditional financial institutions.

In 2019 the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, adopted standards establishing obligations for countries and virtual asset services providers (VASPs) to comply with the FATF recommendations in order to prevent the misuse of virtual assets for money laundering, terrorist financing and the financing of proliferation.

FATF issued a report Virtual Assets – Red Flag Indicators in 2020 drawing attention to behaviors that may denote suspicious activity. The red flags will depend on the nature of the virtual asset and the financial activity. Common red flags include:

• The size and frequency of transactions (multiple small amounts or multiple high-value amounts within hours)
• An irregular or unusual pattern of transactions
• Sending virtual assets to jurisdictions with weak AML regulations or measures to counter the financing of terrorism
• Receiving or sending cryptocurrency to or from darknet marketplaces
• The use of heightened anonymity features
• Irregularities during account creation and during the customer due diligence process by either the sender or recipient