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BSA/AML Hot topics: Cryptocurrency in 2018

By Emma Troupe, BSA/AML Investigator

Credit unions are required by regulators to monitor member transactions for signs of money laundering, which isn’t as easy once dollars are converted into digital coins. This month’s article examines recent trends associated with cryptocurrencies and why your credit union should be aware of the developing risks.

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Reviewing the basics

Cryptocurrencies, also known more commonly by names like “Bitcoin,” “Lite Coin,” and “Ethereum,” are a digital asset and currency that can be bought, traded, and sold in virtual markets. In recent months, the most mainstream cryptocurrency, Bitcoin, made headline news as a singular “coin” was briefly valued at approximately $19,783, up from approximately $1,000 a year ago (a tremendous jump in value).

Because Bitcoin was in such high demand, brokers such as Coinbase, a virtual wallet and cryptocurrency broker, were unable to keep up with purchases and trades. Cryptocurrency had never been so popular and seemingly took the media and credit union world by surprise as cryptocurrencies were typically associated with criminal activity.

Crime and cryptocurrency

To date, tax evasion has been a common problem with cryptocurrencies. For example, according to information retrieved from CNBC, in late 2017, a federal court ordered Coinbase to provide records from more than 14,000 users suspected of tax evasion, which affected users with capital gains over $20,000 between the years of 2013-2015.

Further, an overarching (and arguably larger) issue is the money laundering concerns cryptocurrencies pose. According to Business Insider, in December of 2017, British police warned that criminals (specifically drug dealers) had been using digital-currency ATMs located around London to deposit their drug money in exchange for various cryptocurrencies. During the same time frame, an article produced by NPR reported that a woman living on Long Island, New York, was arrested for having bought more than a dozen credit cards, some of which were fraudulent, to purchase around $62,000 worth of cryptocurrency to aid in terrorist financing abroad.

Criminals turn away from the mainstream

Bitcoin was created in 2009 and had been the most widely used digital currency by criminals for some time. However, since Bitcoin perked public interest within the past year as a potentially lucrative investment opportunity for every day Americans looking to make a quick dollar, alternative currencies, also known as “Altcoins,” have begun to surface as mainstream competitors become more well-known and regulated.

Anonymity is highly valued for criminals using these virtual currencies, and some Altcoins have found ways to create anonymous transactions. As technology advances, it is forecasted that blockchains, from which cryptocurrencies exist, will become untraceable and therefore aid in criminal activity.

In addition, Altcoins, much like any other cryptocurrency, can be used to evade physical cash transactions and reporting thresholds. Altcoins can easily be used in a variety of criminal activities and illegal exports with individuals being strictly paid in digital currency (i.e. Dark Web transactions). By doing so, individuals do not engage in true cash dealings and are able to convert illegal money into real currency if they so choose. Illegally obtained funds using cryptocurrency can also be “cashed out” in different countries, funding offshore accounts and creating easy access for criminals abroad. If, and when, blockchains do become untraceable, it will be difficult to track those who are involved and what interactions they had with the said illegal activity.

Takeaways for credit unions

The digital currency world is continually changing, and, as such, new risks can and will emerge occasionally. As time passes, it is certain that there will be policy changes on the digital currency world that will help credit unions combat the issues it brings. In the meantime, there are a couple of things your credit union can do to be proactive against these risks.

  • Evaluating your policies and procedures should be on your to-do list. Credit unions need to determine whether they want to participate in processing digital currency transactions because of the potential money laundering risks. Further, due to the market volatility of cryptocurrencies, a growing list of financial institutions are declining cryptocurrency purchases as they don’t want the credit risk associated with the transactions. Credit unions should carefully evaluate their cryptocurrency policies and determine if they want to follow suit.
     
  • Knowing your member is crucial. Credit unions need to have a firm understanding of what activity is normal and expected for their members. Any signs of suspicious account activity related to cryptocurrency or otherwise should be reported to FinCEN through the timely filing of complete Suspicious Activity Reports (SARs).
     

Check out these Tips on writing Suspicious Activity Report (SAR) narratives.