Money-Laundering

A virtual asset (VA) is a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. In recent years, the virtual asset space has evolved to include a range of new products and services, business models, and activities and interactions. While, such new technologies, products, and services have the potential to spur innovation, they also create new opportunities for criminals and terrorists to launder their proceeds or finance their illicit activities.

Vulnerabilities of VA’s in terms of misuse for money laundering

• Borderless nature of technologies: existence outside the formal financial system The borderless nature of virtual assets and their makes them a tempting option for criminals to conceal proceeds of corruption and other crimes, evade tax or fund terrorism.
• Obfuscation of transactions: New illicit financing typologies including the increasing use of virtual-to-virtual layering schemes have the capability to further obfuscate transactions in a comparatively easy, cheap, and secure manner. For example- hackers used virtual assets to receive payment during ransomware attacks- “wannacry”.
• Rise in the use of virtual assets: The use of virtual assets such as cryptocurrencies, for legitimate as well as illicit purposes, is exploding. In January 2021, there were an estimated 106 million cryptocurrency users globally.
• Limited data on their use for illegitimate purposes: There is very limited information and data on the use of cryptocurrencies for criminal purposes. According to a 2021 report by blockchain analysis firm Chainalysis, of the estimated USD 21.4 billion in cryptocurrency transactions in 2019, criminal activity represented around 2.1 percent (USD 450 million).
• Rise of newer technologies/business models: The virtual asset ecosystem has witnessed a rise of anonymity-enhanced cryptocurrencies (AECs), mixers and tumblers, decentralized platforms and exchanges. These technologies enable reduced transparency and increased obfuscation of financial flows.

Corrective steps for mitigation of risks emanating from virtual assets

Authorities should apply a risk-based approach to ensure that measures to mitigate money laundering are commensurate with the risks:

• Licensing and Registration: Licensed or registered Virtual Asset Service Providers (VASPs) should be required to be in the jurisdiction where they are created.
• Preventing criminal involvement: Authorities should take the necessary legal or regulatory measures to prevent criminals or their associates from holding, or being the beneficial owner of VASPs
• Implementing FATF recommendations: Authorities should ensure that VASPs are effectively implementing the relevant FATF Recommendations.
• Setting up systems for monitoring and compliance: VASPs should be subject to effective systems for monitoring and ensuring compliance:
  • VASPs should be supervised or monitored by a competent authority, which should conduct risk-based supervision or monitoring.
  • Supervisors should have adequate powers to supervise or monitor and ensure compliance by VASPs, including the authority to conduct inspections, compel the production of information, and impose sanctions.
• Originator Information: Authorities should ensure that beneficiary VASPs obtain and hold accurate originator and beneficiary information on virtual asset transfers, and make it available on request to appropriate authorities.
• International cooperation: Countries should rapidly, constructively, and effectively provide the widest possible range of international cooperation in relation to money laundering and terrorist financing relating to virtual assets.

Countries must recognise the need to adequately mitigate the money laundering (ML) and terrorist financing (TF) risks associated with virtual asset activities, and implement FATF requirements for effective regulation and supervision/monitoring of virtual asset services providers.