Guidance Issued on Virtual Currency Red Flags

By Alma Angotti

On 2 December, 2020, FINTRAC issued guidance on potential red flags related to virtual currency transactions, virtual currency users, virtual currency issuers, and virtual asset service providers (VASP). The Guidance is not intended to be an exhaustive list and should be used in conjunction with other indicators and context to determine if there are reasonable grounds to suspect that the activity is associated with reportable potential money laundering or terrorist financing, and whether there is valuable financial intelligence to include in the suspicious transaction report narrative.

FINTRAC noted several virtual currency indicators of potential money laundering or terrorist financing, which can be grouped by theme:


A. Know Your Customer and Enhanced Due Diligence

  • Multiple customers register with the exchange within a short period, using similar or common addresses, mobile devices, phone numbers, IP addresses, and other identity indicators.
  • The white paper issued by the blockchain project disclosing information (e.g., technology, methodology, product, and services) is of poor quality, incomplete, misleading, and has limited information.
  • Significant publicity is created around the initial coin offering (ICO), which may result in a pump and dump scenario.
  • The developers are anonymous, or information provided about the ICO cannot be verified.
  • There is no access to the smart contract (self-enforcing agreement embedded in computer code managed by a blockchain)  to the code (the terms of the contractual agreement) or to technical information about the token contract (smart token containing account addresses and their balances).
  • There is no clear or reasonable way to sell the investment or to exit the blockchain project to recover the invested funds.
  • The customer provides an anonymous email address obtained through an encrypted email service.


B. Watchlists

  • Virtual currency addresses match addresses on recognized watchlists such as the Office of Foreign Assets Control, United Nations, or law enforcement information.
  • The customer's virtual currency wallet or address is linked to negative news in media reports and/or cybersecurity bulletins.
  • Virtual currency address has links or hops from a wallet address that has appeared on online platforms indicating support for violent extremism or radicalization (e.g., social media, fundraising sites, and sites on Tor or messaging sites).


C. Behavior or Pattern of Activity

  • A platform receives unusual or persistent requests from other exchanges, vendors, and/or service providers concerning customers' deposited funds.
  • A broker charges abnormally high commission fees compared to the industry standard.
  • A series of complicated transfers of funds to multiple addresses or wallets that seems to be an attempt to hide the source and intended use of the funds.
  • Similar transactions take place at the same time of day, such as transfers from fiat to virtual currency and virtual currency to fiat.
  • High volume and frequency of transfers between different types of virtual currencies.
  • Funds are deposited or withdrawn from a virtual currency address or wallet with direct and indirect exposure links to known suspicious sources, including darknet marketplaces, mixing/tumbling services, questionable gambling sites, illegal activities (e.g., ransomware) and/or theft reports.
  • Funds flow through a large number of intermediate addresses in a very short period of time prior to being deposited in a client's wallet, or just after being withdrawn.
  • Virtual currency passes through mixers/tumblers and is transferred to multiple wallets, where the funds are cashed out.
  • The virtual currency's funds originated from an over-the-counter trade broker that advertises its services as privacy-oriented/anonymous.
  • The source of funds used for the purchase of large amounts of virtual currencies is unknown.
  • The email address used in the transaction is linked to advertisements for the sale of virtual currencies on peer-to-peer exchange platforms. These advertisements may suggest that the client is buying and selling virtual currency on a commercial scale through a business as a nonregistered money services business.
  • The client frequently receives funds from multiple payment processors.13. The client makes frequent payments/transfers to companies or post office mailing services, or uses money orders for the purchase of computer software or hardware.


D. Privacy Coin Usage

  • Customer’s portfolio only consists of privacy coins or has a high value in privacy coins, which allow users and transactions total anonymity, including hidden wallets, addresses, and balances.
  • Customer transfers virtual currency in large volumes in exchange for privacy coins.
  • Customer is unwilling or unable to provide information about the source of privacy coins they once held or currently have.


What's New?

In Canada as of 1 June, 2020, virtual currency dealers and service providers are currently considered a Money Service Business (MSB) for the purposes of anti-money laundering laws. In addition, the Canadian Securities Administrators provided guidance that because certain crypto assets that are securities or derivatives are traded on a platform, such platforms would be subject to securities legislation. Despite the uncertainties of how to classify virtual currency-related businesses, the expectations of developing and maintaining a compliance program to include and address virtual currency is clear. 

The potential impact of the regulatory expectations should be weighed by all parties currently dealing with virtual currency transactions and verified users, parties who are considering entering the virtual currency industry in Canada or for Canadians from a foreign jurisdiction, and parties who may be inadvertently dealing with virtual currency. The anti-money laundering regulations require all covered entities or those wishing to become a virtual currency dealer to be registered with FINTRAC, have compliance programs in place, keep and retain prescribed records, and report suspicious or terrorist financing-related transactions. 

Virtual currency’s increase in popularity, accessibility, and related businesses has been gaining significant momentum. FINTRAC’s guidance on potential indicators of money laundering or terrorist financing was released to provide additional resources and training materials for anti-money laundering compliance purposes.


Practical Impact to Financial Institutions and Digital Asset Businesses

The Guidance provides specific indicators or red flags that may be incorporated into a covered entity’s existing compliance program or as an advisory for those who are considering assessing their entry into the industry. The Guidance identifies red flags that should be incorporated into a robust AML and sanctions compliance program.


Key Considerations

Covered entities and those considering entering the industry in Canada and abroad should consider proactively evaluating their existing compliance and training programs for areas that may require enhancements to comply with the Guidance. This includes identifying and assessing any operational or technical limitations that would inhibit compliance with the Guidance and evaluating their current trainings, policies, procedures, and controls relating to customers, products, services, and transactions associated with virtual currency.


How Guidehouse Can Help

Guidehouse can help financial institutions, MSBs, VASPs, and those considering entering the virtual currency industry in Canada and abroad assess their compliance programs in light of the Guidance, including determining changed obligations under the Guidance and developing and implementing updates to trainings, operations, policies, procedures, controls, and technology. Its areas of relevant expertise include the following:

  • Anti-money laundering
  • Sanctions
  • Strategic planning
  • Risk management
  • Vendor sourcing and governance
  • Executive training

Guidehouse can quickly review and assess your financial crime program to determine whether it is sound, identify gaps or weaknesses, or conduct training on AML and Sanctions compliance, including blockchain tracing and analytics. Guidehouse is well-equipped to make an individualized assessment of your unique circumstances and offer innovative advice and solutions for responding to heightened regulatory requirements.

Contributing author: Ji Kang

Alma Angotti, Partner

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