How to Investigate Crypto-related Financial Crime Risks
When cryptocurrency first started to gain popularity, financial institutions struggled to search for cryptocurrency exposure in accounts. Compliance officers often were stuck manually keyword searching for known cryptocurrency exchanges in hopes of finding potential exposure.
As cryptocurrency increases in popularity, compliance officers need better ways of understanding their exposure to cryptocurrency.
In this post, we cover 2 foundational questions compliance officers should ask themselves when investigating customers’ crypto-related transactions.
What should you think about while investigating cryptocurrency exposure?
The first important thing to know is that crypto-related transactions are not inherently suspicious.
You should ask yourself 2 questions when deciding if a customer’s crypto-related transactions are unusual or suspicious:
First, do the customer’s prior transactions with other products suggest the customer is merely changing products, but not changing activity?
If a customer previously interacted with a company offering similar services, albeit of the more traditional variety, new interactions with a cryptocurrency company could be nothing more than a shift in investment strategy or preferred medium.
For instance, perhaps a customer previously made weekly stock investments through a brokerage company, but now they’ve changed their investment strategy to include weekly payments to a cryptocurrency exchange.
Alternatively, a customer's interaction with a crypto service provider may be out of the ordinary based on the customer's prior activity. For example, say a customer has never used traditional investment services or remittance platforms, but is now remitting funds to numerous companies that offer crypto services – this could indicate the customer is falling victim to a crypto-enabled fraudulent scheme, like a romance scam or an investment scam.
Second, does the customer’s source of funding make sense for their transactions?
For example, is your customer using salary to make small withdrawals to bring to a crypto ATM for cryptocurrency purchases? Or, conversely, are they receiving lots of deposits from unrelated individuals and immediately transferring the funds to a cryptocurrency company or taking the funds out in cash to purchase crypto?
The latter case may indicate money muling – the transfer of illicit funds by one person on behalf of another person.
Recently, money mule typologies have shifted to include a cryptocurrency component. A red flag for individuals involved in money muling activity is a spike in deposits received from money transmission services or other individuals, followed by the funds quickly being withdrawn for the sole purpose of purchasing crypto. The individuals often believe that they are receiving and sending the funds on behalf of a new romantic partner, or that they are receiving the funds as part of a new job and investing on behalf of “clients.”
When investigating customers’ crypto-related transactions, compliance officers need to decide whether it is reasonable for the customer to use a particular crypto service provider and whether the frequency of the customer’s transactions makes sense. These 2 questions will help you drill down on the critical information needed to make these decisions.