terrorist financing

G7 Bank Sector Higher Money Laundering Risk than Crypto Industry, Reports Mexico Financial Intelligence

According to an official report released by the Financial Intelligence Unit (FIU) of Mexico, the G7 banking sector comprising of major banks Santander, BBVA, Citibanamex, Banorte, HSBC, Scotiabank, and Inbursa—was the most prone to money laundering operations, despite being the most regulated.

Who is most at risk of money laundering?

Banks connected to exchange activity were also as highly ranked in terms of money laundering schemes. The report, which depicted the results of the second National Risk Assessment (NRA), discussed money laundering and terrorist financing. It detailed that there were four sectors within the financial industry that were most at risk of money laundering illicit activities.

The four categories were G7 banking, brokerage houses, exchange houses, and multiple banking institutions with commercial operations, as shared by El Economista. Among the four sectors outlined, the one with the highest risk of fraudulent activity was the G7 banking sector, which translated to approximately 80% of the banking sector’s assets.

The report by the FIU of Mexico also separated risk levels for money laundering and terrorist funding into four categories, depending on the magnitude of fraud – low, medium, medium-high, and high risk. The most regulated finance sector, the “G7 banking group,” ranked among the highest risk for money laundering.

Crypto scams easier to track than fiat

Though there appears to be increasing skepticism that fintech and crypto industries are always leveraged for money laundering schemes and monetary scams, the two sectors were surpassed by the traditional banking sector in terms of money laundering risk. The 2020 Financial Intelligence Unit of the Ministry of Finance and Public Credit report did not allocate a risk classification for the fintech industry.

During an ongoing panel hosted by the Association of Certified Financial Crime Specialists in August, Paxful Chief Compliance Officer Lana Schwartzmann mentioned that there are advantages to adopting cryptocurrency in a traditional fiat world. She referenced the infamous Twitter Bitcoin hack and stated that due to the digital trail left by crypto, digital assets fraud is easier to track than fiat. Had it been a traditional money heist, the investigation would not have been resolved as quickly.

Twitter Bitcoin heist

The Twitter Bitcoin (BTC) hack, which held the media spotlight in July, revolved around the narrative of three men who overtook Twitter by storm and generated over $100,000 worth of Bitcoin funds by hacking the accounts of world-known figures such as Elon Musk, Bill Gates, Kanye West, Joe Biden and more.

EU Proposes Cap on Anonymous Crypto Transfers

The European Union has taken a step towards greater financial transparency with a proposal to limit anonymous crypto transfers to 1,000 euros ($1,083) to combat money laundering and terrorist financing. According to a statement from the European Parliament published on March 28, the new limit would apply to transfers where a customer cannot be identified. Cash transactions would also be capped at 7,000 euros ($7,585).

The proposal is part of the Anti-Money Laundering and Countering the Financing of Terrorism package and is expected to be confirmed in a plenary session in April. Negotiations on the final shape of the bills will then begin. The new regulations will be enforced by the European Anti-Money Laundering Authority (AMLA), which was formed in June 2022.

The AMLA’s co-rapporteur, Emil Radev, stressed the importance of close cooperation between the new authority and national supervisors. He also called for the AMLA to directly supervise the riskiest crypto asset service providers and companies in the financial sector that operate in several member states.

Lawmakers overwhelmingly approved the text relating to anonymous instruments, including crypto assets, with 99 votes in favor, eight against, and six abstentions. The move is part of a wider push towards greater transparency in the financial sector, with the EU seeking to tackle the threat of money laundering and terrorist financing.

Crypto assets have long been seen as a potential haven for illicit activities due to the ease with which they can be transferred anonymously. The new regulations seek to address this issue by increasing transparency and accountability in the crypto sector.

The proposal is part of a wider push by the EU towards greater financial regulation. The European Central Bank has previously called for a global approach to regulating cryptocurrencies, warning that they could pose a threat to financial stability. The EU’s proposals also follow recent moves by other countries, such as China, to tighten regulations on crypto assets.

While the EU’s proposals have been welcomed by many in the financial sector, some have raised concerns about the potential impact on privacy and the practicalities of enforcing the new regulations. Nonetheless, the EU remains committed to tackling money laundering and terrorist financing, and the new regulations are just one step towards achieving this goal.

FinCEN Issues Alert to Counter Financing to Hamas and its Terrorist Activities

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an alert on October 20, 2023, aimed at assisting financial institutions in identifying funding streams that support the terrorist organization Hamas. This move comes after a devastating attack on Israel on October 7, 2023, orchestrated by Hamas, which resulted in significant casualties, including U.S. citizens.

Hamas employs a multifaceted approach to raise funds for its operations. According to the U.S. Department of the Treasury, the organization receives support from Iran, estimated at times to be as high as $300 million per year. Additionally, Hamas utilizes private donations, a global portfolio of investments, and diverts aid from legitimate charities. They also control border crossings and avenues of commerce, engage in racketeering, and run extortionary practices around local populations. Notably, Hamas has been involved in fundraising campaigns that use both fiat and virtual currencies.

FinCEN has outlined specific red flag indicators to help financial institutions detect, prevent, and report potential suspicious activity related to Hamas’s terrorist financing. These indicators include transactions with OFAC-designated entities, transactions indicating support for terrorist campaigns, and transactions involving high-risk jurisdictions tied to Hamas activity. Financial institutions are urged to include the key term “FIN-2023-TFHAMAS” in Suspicious Activity Reports (SAR) to indicate a connection with the alert.

As part of a whole-of-government response, the Treasury is engaging with foreign counterparts to deny Hamas the ability to raise and use funds worldwide. Numerous Hamas members and financial facilitators have been designated by the Office of Foreign Assets Control (OFAC) in various countries, including Sudan, Türkiye, Algeria, and Qatar.

FinCEN has also expressed concerns over the use of virtual currencies and online platforms in financing terrorist activities. The alert specifically mentions that Hamas has been involved in fundraising campaigns involving virtual currency and fictitious charities. Financial institutions are advised to be vigilant in monitoring transactions that involve virtual currencies, especially those that originate from or are directed to high-risk jurisdictions.

Given the evolving nature of terrorist financing methods, FinCEN is continuously updating its guidelines and working closely with international partners to curb the flow of funds to terrorist organizations. Financial institutions are advised to stay updated on FinCEN’s alerts and guidelines to ensure compliance and contribute to national security efforts.

US House Committee to Probe Crypto Crimes in November Hearing

The Financial Services Committee (FSC) of the United States House of Representatives is gearing up for a critical hearing on November 15, 2023, diving deep into the shadowy corners of cryptocurrency. Entitled “Crypto Crime in Context: Breaking Down the Illicit Activity in Digital Assets,” this session aims to unravel the complexity of illegal activities within the digital asset ecosystem.

At the forefront are notable witnesses including Mr. Bill Hughes from ConsenSys, Ms. Jane Khodarkovsky from Arktouros, and Mr. Jonathan Levin from Chainalysis, each bringing a unique perspective from their extensive experience in both the crypto industry and legal enforcement.

The hearing’s central theme emerges from the FSC’s intent: comprehending the extent of illicit activities in digital assets to effectively counteract them. Discussions will revolve around identifying gaps in the current system and exploring tools to prevent and detect criminal activities.

Highlighting the gravity of the situation, the FSC will delve into the concerning trends of money laundering and the funding of terrorist organizations through cryptocurrencies. The hearing will utilize data from Chainalysis, which indicates a surge in illegal crypto transactions despite increased sanctions and hacking attempts.

A significant part of the discussion will be dedicated to assessing the anti-money laundering and counter-terrorist financing measures employed by crypto exchanges and decentralized finance providers. Moreover, the roles of the Financial Crimes Enforcement Network, the Office of Foreign Assets Control, and the Department of Justice (DOJ) will be under scrutiny.

In parallel, the hearing will also touch upon legislative efforts, notably the markup of legislation for stablecoin regulation. Simultaneously, the DOJ is intensifying its focus on crypto-related crimes, merging two of its teams to form a specialized unit targeting ransomware offences.

This hearing marks a pivotal moment for the crypto industry, as it faces stringent scrutiny from lawmakers and regulators. The outcome could significantly influence the future regulatory landscape for digital assets.

EBA Issues Updated Guidelines for Crypto Asset Service Providers

The European Banking Authority (EBA) has made significant strides in the regulation of crypto asset service providers (CASPs), issuing updated guidelines aimed at mitigating risks associated with money laundering and terrorist financing. This move, announced on January 16, 2024, is part of a broader effort to harmonize regulatory approaches across the European Union and integrate crypto companies into the existing financial regulatory framework.

The amended guidelines extend the European Union’s Anti-Money Laundering and Counter-Terrorist Financing measures to encompass all European crypto companies. CASPs, including exchanges, wallets, and custodians, are now required to comply with stringent anti-money laundering (AML) and know-your-customer (KYC) financial regulations. The EBA’s primary aim is to standardize crypto regulations to prevent these platforms from being used for illicit activities.

With the rapid growth of the crypto industry, the EBA recognizes the increased risks due to the nature of crypto transactions. These risks are amplified by the speed of crypto asset transfers and features that can obscure users’ identities. To address these risks, CASPs are advised to utilize tools like blockchain analytics and consider risks related to anonymity-enhancing features, self-hosted wallets, and decentralized platforms. The guidelines include detailed risk assessment directives for CASPs, particularly focusing on the potential dangers associated with various products and services that facilitate transfers between companies and users.

This comprehensive approach by the EBA aligns with the European Union’s recent regulatory developments in the crypto sector, such as the Transfer of Funds Regulation (ToFR) and the Markets in Crypto Assets (MiCA) legislation. The enforcement of these guidelines is scheduled to coincide with the launch of MiCA, set for December 30, 2024. MiCA introduces specific investor protections for crypto users and offers an 18-month transitional period for CASPs to adapt to these new regulations.

Moreover, the guidelines extend beyond CASPs, affecting legacy financial institutions that interact with crypto services or customers. This reflects the EBA’s recognition of the interconnectedness within the financial system. Financial firms and credit facilities dealing with digital asset service providers or customers exposed to virtual assets are also subject to the new guidelines.

In summary, the EBA’s updated guidelines represent a crucial step towards a more secure and regulated crypto environment within the European Union. By harmonizing AML measures and extending their reach to include crypto firms, the EBA aims to mitigate the risks of financial crimes and integrate crypto assets more securely into the financial system.