Cryptocurrency Transactions Surveillance: Unravelling Its Functionality in the Year 2024
In a bid to combat money laundering and terrorist financing within the crypto ecosystem, the Financial Action Task Force (FATF) issued comprehensive guidance on money laundering schemes via virtual assets in September 2020 [1]. This guide serves as a roadmap for crypto service providers to establish robust automated transaction monitoring systems that align with international Anti-Money Laundering (AML) regulations.
To comply with FATF's recommendations, crypto service providers should build their risk profiles and transaction monitoring measures on accurate Customer Due Diligence (CDD) [2]. This involves acquiring valid digital credentials from customers and using automated AML tools to ensure timely detection and reporting of suspicious activity.
The best practices for automated crypto transaction monitoring include:
- Risk Assessment: Identify high-risk factors such as jurisdictions, token types, wallet profiles, and user behavior patterns to tailor monitoring rules effectively.
- Policy Configuration: Define threshold limits for reporting, suspicious activity detection rules, and align them with legal and FATF requirements, including implementing the FATF Travel Rule [3].
- Comprehensive Data Collection: Combine on-chain transaction data with off-chain customer information like KYC (Know Your Customer) and personal identification data.
- Real-Time Transaction Monitoring and Alerts: Deploy automated, AI-driven systems to analyze transactions continuously and generate real-time alerts for suspicious activities such as unusual transaction patterns, laundering, phishing, or sanctions violations.
- Investigation Workflow and Case Management: Route flagged alerts to compliance officers with tools for prioritization, investigation, and decision-making while maintaining audit trails.
- Sanctions and PEP Screening: Continuous, real-time screening of customers against global sanctions and politically exposed persons (PEP) lists is essential.
- Regulatory Reporting: Generate and submit Suspicious Activity Reports (SARs) or equivalent reports to Financial Intelligence Units (FIUs) as stipulated by FATF guidelines.
- System Optimization and Update: Regularly update detection algorithms, rule sets, sanction lists, and machine learning models to adapt to evolving threats and regulatory changes.
- Integration with KYC/CDD Processes: Automated systems should be integrated with robust Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) measures, including biometric authentication and adverse media monitoring.
These practices ensure continuous compliance with FATF's recommendations, especially the requirement for Virtual Asset Service Providers (VASPs) to monitor transactions effectively, detect illicit financial activities, and maintain transparency in crypto asset movements.
The FATF's recent guidance expands the scope to stablecoins and decentralized finance, emphasizing the need for scalable and technologically advanced AML frameworks [2]. Countries like Saudi Arabia exemplify implementation approaches aligning national laws with FATF standards, focusing on automation, risk-based monitoring, and maintaining audit trails [4].
Money laundering through crypto is a growing concern, with criminals laundering $8.6bn of cryptocurrency in 2021, up by 30% from the previous year [5]. Regulators around the world have imposed special crypto transaction monitoring rules to ensure that companies dealing with crypto have mechanisms to detect and prevent threats.
The adoption of cryptocurrencies by both individuals and businesses has surged in recent years, along with the amount of related theft and fraud. In October 2021, the FATF issued updated guidance for a risk-based approach for crypto [6]. Smaller businesses may handle transaction monitoring manually, while mid-size and large companies are expected to automate to combat a growing amount of high-risk crypto transactions.
Notably, Robinhood Markets' cryptocurrency division was fined a record $30 million by the New York State Department of Financial Services for violating anti-money laundering (AML) and cybersecurity rules [7]. This underscores the importance of robust AML compliance for crypto service providers.
A cryptocurrency monitoring platform is software which detects high-risk and suspicious transactions [8]. The best choice is a blockchain transaction monitoring platform with a legally-equipped, customer-focused AML compliance framework in line with the FATF and FinCEN requirements. Suspicious activity reports should be stored for future auditing purposes.
It is crucial to note that transaction monitoring is technology that detects and analyzes unusual transactions in real time, allowing businesses to verify the source and destination of funds and the possible connection of those funds to money laundering [9]. Some confuse transaction monitoring with AML monitoring, however the latter refers specifically to adverse media, blocklist, and sanctions screening processes.
In conclusion, as the crypto market continues to grow, it is essential for service providers to implement robust AML frameworks to maintain the integrity of the ecosystem and combat financial crimes such as money laundering, terrorist financing, fraud, and sanctions violations.
References: [1] FATF, (2020), Virtual Assets, Virtual Asset Service Providers and National Money Transmitter Businesses - Guidance for a Risk-Based Approach. [2] FATF, (2020), Guidance on a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. [3] FATF, (2019), FATF Recommendations on Wire Transfers - Interpretive Note to Recommendation 16. [4] FATF, (2021), Saudi Arabia's Virtual Asset Service Provider Regulation. [5] Chainalysis, (2022), 2021 Crypto Crime Report. [6] FATF, (2021), Updated Guidance: A Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. [7] New York State Department of Financial Services, (2021), Robinhood Crypto LLC Settlement. [8] CipherTrace, (2021), CipherTrace Crypto Intelligence Platform. [9] FATF, (2021), Glossary of Key AML/CFT and Virtual Asset Service Provider Terms.
- Crypto service providers, in response to FATF's guidance, should utilize technology that incorporates AML tools, such as automated transaction monitoring systems, to ensure timely detection and reporting of suspicious activities in line with international AML regulations.
- As the scope of FATF's guidance extends to stablecoins and decentralized finance, it is necessary for technology providers to focus on scalable and technologically advanced AML frameworks that can effectively monitor high-risk transactions and maintain transparency in the crypto asset movement.
