Identifying cryptocurrency red flags by investigating cryptocurrency financial crime incidents. By these means, red flags and related indicators are essential in cryptocurrency financial crime investigations.
There is currently no golden source that has comprehensively identified all the red flags and indicators relating to using cryptocurrencies, but there are several lessons learned.
Identifying Cryptocurrency Red Flags
Let’s first look at some of the more technical red flags:
- Firstly, you might look for discrepancies between the submitted customer identification and the IP address. For example, if a user provides documentation on an account indicating an address in the UK. Then, all IP addresses associated with the customer’s activity are noted as being from Japan which you can count as a red flag.
- Secondly, suspicious IP addresses in conjunction with suspicious usernames, including nicknames or ICQ numbers, are another red flag that would help detect potentially criminal money flows.
- Thirdly, you also want to look at logins or logins attempted from the non-trusted IP address or from a user’s IP that was previously identified as associated with suspicious activity.
Now concerning the more financial red flags, let’s consider the following:
- First of all, watch out for many bank accounts or wallets held by the same administrator or exchange, which can sometimes happen in different countries and is an indicator for flow-through accounts, potentially indicating layering activity. To double-check this one, look if a business rationale for such a structure is available and makes sense.
- Secondly, check if your cryptocurrency customer or if a cryptocurrency exchange is located in one country but holding their accounts and wallets in other countries where they do not appear to have a reason for being. In addition, look for unexplained business rationales that could be suspicious.
- Thirdly, be wary of the back and forth movement of cryptocurrency funds between bank accounts held by different customers or virtual currency exchange companies in different countries. This instance may also indicate layering activity if it does not fit the business model.
- Last but not least, check if the volume and frequency of cash transactions, which might sometimes be structured below reporting thresholds, conducted by the owner of a cryptocurrency wallet make economic sense.
The presence of a single red flag may not be enough to warrant suspicion of criminal activity. Companies should continue to monitor user activity in cases like this to put this red flag into context.
If a combination of red flags is discovered, the company is required to freeze the suspicious assets and file a Suspicious Activity Report with a financial intelligence unit.
As cryptocurrency usage grows, cryptocurrency service providers must deal with a broader range of threats from money launderers who take advantage of the speed and anonymity associated with the online exchange of virtual assets.
Users must have access to online wallets and exchanges in order to buy and sell cryptocurrencies or virtual assets. These services enable high volumes of cryptocurrency transactions, allowing for the rapid transfer of assets and funds around the world outside of traditional banking and finance systems. The lack of regulatory oversight is appealing to money launderers, who frequently convert illegal funds into cryptocurrency to avoid AML checks imposed by traditional financial institutions.