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Tax authorities urge awareness of cryptocurrency risk factors
The Joint Chiefs of Global Tax Enforcement – a coalition of tax authorities comprising the Australian Tax Office, the Canada Revenue Agency, the Netherlands Tax Information and Investigation Service, Her Majesty’s Revenue and Customs of the United Kingdom and the Criminal Investigation Division of the Internal Revenue Service from the United States – issued a warning to financial institutions on risk indicators related to cryptocurrency activity, many of which have to do with privacy and anonymity.
“Identification and detection play a crucial role in fighting cybercrime globally,” Guy Ficco, head of IRS Criminal Investigation, said in a statement. “Whenever we can combine the resources of our J5 partners to provide relevant information to financial institutions on cybercrime indicators, we will seize the opportunity.”
The document, called “Crypto Assets Risk Indicators,” highlights how cryptocurrency asset layering, geographic locations, high-risk counterparties, unknown or obscured transaction recipients, and certain online behaviors may indicate criminal activity. It named 42 specific risk factors related to these areas.
Many of these risk factors have to do with someone attempting what authorities believe is a little too difficult to remain anonymous. They include things like “a disproportionate amount of the customer’s account activity involves buying and selling privacy coins or maintaining a large portfolio of privacy coins, the customer transfers Bitcoin in large volumes in exchange for privacy coins, attempts of the customer to provide as little identity as possible, including incomplete or insufficient identification information and the customer’s use of an anonymity-oriented email provider”, among others peer-to-peer platforms that bypass traditional financial institutions.
Many of these risk factors stem from one of the reasons cryptocurrency was developed, namely to bypass traditional financial institutions with a medium of exchange that, by design, was intended to be effectively untraceable. While much has been done to bring the cryptocurrency industry to light, which has weakened the presence of this ethic in the community, it remains a determining factor.
Other risk indicators are linked to specific activities, such as the “rapid movement of funds between accounts held at cryptocurrency exchanges with no apparent commercial motivation”, the origin of the activity, such as sending/receiving from gambling platforms or exchanges operating in high-risk countries jurisdictions identified as non-cooperative for anti-money laundering purposes and the nature of the counterparties such as financial institutions or individuals subject to sanctions or based in sanctioned states. Onboarding issues may include “the level or volume of transactional activity is inconsistent with the customer’s apparent financial profile, usual pattern of business, professional information, or stated business information.” Some activities are typically associated with ransomware and other cyber crimes, such as a digital currency account linked to or funded by multiple bank accounts at different institutions, or silence after an initial large transfer of digital currency.
Overall, J5 advises institutions to:
- Prioritize the identification of layering involving crypto-assets, the phase of money laundering in which transactions are intentionally made complex to hide the illicit origin of funds, throughout their relationship with customers;
- Exercise vigilance when dealing with cryptocurrency transactions linked to jurisdictions known for weak regulatory frameworks, inadequate anti-money laundering controls or high levels of corruption;
- Monitor unusual counterparties, particularly if they have exposure to darknet markets or mixing services;
- Practice learning your clients’ techniques to identify potential risks associated with cryptocurrency asset transactions and ensure compliance with regulatory measures; AND
- Detect and report ransomware-related financial flows and block ransomware payments because they are a key point where criminals interact with the legitimate financial system.