Putting a Face on Anonymous Financial Crime

Hosted by Dubai Police, the World Police Summit (WPS) will be taking place from 7-9 March 2023 at the Dubai World Trade Centre, Dubai, UAE and in this, its second edition, will provide a platform to explore the current challenges facing police forces and the latest technology advances, strategies, and innovations across the law enforcement and security spectrum.

One of the topics under discussion will be ‘Financial Crime and Money Laundering’; with one area attracting particular attention – how can you verify the identity of cryptocurrency users?

Cryptocurrencies are digitally generated and stored currencies that enable users to trade tokens. The tokens are exchanged anonymously through a decentralised payment system: the blockchain. To maintain anonymity, the parties to cryptocurrency transactions are identified by a unique string of random numbers rather than by a name or other personally identifiable information.

The attraction of anonymity in financial transactions is obvious – you don’t want others to know what you do with your money. It’s what many see as the reason for the enduring attraction of cash.

There is however, according to a recent article published in the ‘Fordham Intellectual Property, Media & Law Journal’ ¹, a dark side to this anonymity. It makes it easier for criminals and terrorists to launder money and otherwise transact illegal business. For example, anonymous tokens provide terrorists with access to cash that is essential to organising attacks without dependency on financial intermediaries, such as banks, that could block the transfer.

The misuse of anonymity has prompted the US Congress to move toward expanding the obligation of cryptocurrency exchanges to identify their customers. The Anti-Money Laundering Act of 2020 broadens the Bank Secrecy Act’s (BSA) definition of financial institution to cover businesses that exchange cryptocurrencies. Exchanges must now verify the identity of their users, develop customer risk profiles, and monitor transactions to submit suspicious activity reports.

In Europe, amendments to the Anti- Money Laundering Directive ² require cryptocurrency exchanges and custodian crypto-wallet providers to follow the same regulatory requirements as banks and other financial institutions.

But it is not just the risk of anonymous cryptocurrency transfers fuelling terrorist and other illegal activities that is causing concern to police and regulatory authorities. The US Treasury is calling for stricter cryptocurrency compliance with the Internal Revenue Service (IRS) revenue codes.

The Treasury Department is already taking steps to crack down on cryptocurrency markets and transactions and said it will require any transfer worth $10,000 or more to be reported to the IRS.

‘Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion,’ the Treasury said in a release ³. ‘Within the context of the new financial account reporting regime, cryptocurrencies and crypto-asset exchange accounts and payment service accounts that accept cryptocurrencies would be covered. Further, as with cash transactions, businesses that receive crypto-assets with a fair market value of more than $10,000 would also be reported on.’

But, of course, to tax an individual (or corporation for that matter) you need to be able to identify them and serve them notice of their tax liabilities. US legislation governing cryptocurrency exchanges varies by state and the US continues to progress in developing federal cryptocurrency legislation. The Financial Crimes Enforcement Network (FinCEN) does not consider cryptocurrencies to be legal tender but does consider cryptocurrency exchanges to be money transmitters on the basis that cryptocurrency tokens are ‘other value that substitutes for currency’.

Similarly, the Internal Revenue Service (IRS) does not consider cryptocurrency to be legal tender but defines it as ‘a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value’ and has issued tax guidance accordingly.

In December 2020, FinCEN proposed a new cryptocurrency regulation to impose data collection requirements on cryptocurrency exchanges and wallets. The rule is expected to be implemented by the end of 2022, and would require exchanges to submit suspicious activity reports (SARs) for transactions over $10,000 and require wallet owners to identify themselves when sending more than $3,000 in a single transaction.

Cryptocurrency fraud and money laundering is an area of crime that is being fuelled by actor secrecy and the lack of properly regulated secure documentation. To meet these growing threats, law enforcement is considering not only new technologies to identify the online perpetrators but also new policing strategies. Many forces are rapidly enhancing their technical skillsets and tactical capabilities to apprehend these criminals that hide behind the veil of secrecy – which makes for a fascinating session at the WPS.

Either by good fortune or good planning, Reconnaissance International (RI) will be running the HSP EMEA™ Conference in Dubai (hsp-emea.com) concurrently with the WPS Conference. As a sign of the increasing importance that police forces around the world are placing on identity and secure documentation, RI has been named as a media partner to the summit and is in negotiation with the WPS organisers to run other partnering activities.

1 - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3828970 

2 - https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018L0843 

3 - https://home.treasury.gov/system/files/136/The-American-Families-Plan-Tax-Compliance-Agenda.pdf