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AML: how money launderers use virtual assets

Author: ICAEW Insights

Published: 28 Feb 2022

In the seventh instalment of Anti-Money Laundering: The Basics, IFAC and ICAEW look at the risks associated with virtual assets.

Cryptocurrencies and other virtual assets offer a lot of opportunities for legitimate businesses, but it’s also potentially useful for money launderers. 

Virtual assets, which include non-fungible tokens (NFTs) in addition to cryptocurrencies, generally offer far greater opacity than traditional fiat currencies, explains Omid Tissier, Economic Crime and Ethics Manager at ICAEW. “It is also the speed at which they can be transferred between users via exchanges that makes them attractive to money launderers.”

Virtual Asset Service Providers (VASPs) allow assets such as cryptocurrencies and NFTs to be traded.

A virtual asset is defined as a digital representation of value that can be transferred or used for payment. While people are increasingly familiar with cryptocurrencies such as bitcoin and ether, NFTs and VASPs are less known or understood.

An NFT is a unique virtual asset. So, while you can buy many bitcoin, there is only one of each NFT in existence. They often come in the form of a digital artwork, another digital asset, or a representation of a real property.

A VASP is a business that provides one or more of the following services: the transfer or exchange between virtual assets and fiat currencies, or between different virtual assets; the safekeeping and administration of virtual assets; and providing financial services related to virtual asset issuance. It can also act as a virtual currency wallet for holding, storing and transferring virtual assets.

All of these offer money launderers opportunities to hide cash, says Tissier. “In some cases, launderers will charge a fee to provide money laundering services for traffickers who have sold illegal goods through the dark web for virtual currency,” he says. The launderers will charge commission in return for cashing out or exchanging the funds, keeping the traffickers’ identities secret.”

This often involves launderers taking ownership of the traffickers’ wallets (where the virtual currency is stored) and then ‘layering’, which involves multiple transactions converting from one virtual asset into another to remove all links to the crime, Tissier explains.

Red flags

The seventh and most recent instalment in the IFAC/ICAEW Anti-Money Laundering: The Basics educational series identifies a few of the red flags that accountants should be aware of when dealing with clients involved in the virtual asset market, including where a client’s source of wealth is derived from investments in virtual assets but there is a lack of trading records supporting this. The AML considerations are much the same as for other types of clients. In particular, make sure you understand: 

  • who owns and controls the client;
  • the source of funds and wealth of the client/owners; and
  • why your services are needed.

A suspicious activity report (SAR) must be submitted to the National Crime Agency as soon as you suspect that a person is engaged in money laundering or dealing in criminal property. Having submitted a SAR, it is important to be aware of the ‘tipping off’ provisions, which make it an offence to reveal information that is likely to prejudice any resulting law enforcement investigation. 

ICAEW and the International Federation of Accountants (IFAC) have produced an instalment on virtual assets for its Anti-Money Laundering: The Basics educational series. The publication aims to help accountants enhance their understanding of how money laundering works, the risks they face, and what they can do to mitigate these risks and make a positive contribution to the public interest. Instalment seven looks at virtual assets.

Anti-Money Laundering: The Basics is featured on both the IFAC and ICAEW websites. It is available for download for free. To be globally relevant, the series uses the risk-based approach of the Financial Action Task Force (FATF) – the global money laundering and terrorist financing watchdog – as a starting point.

Find out more about anti-money laundering here