Banks urged to increase money laundering scrutiny of digital currency use

Banks should tighten their anti-money laundering (AML) controls following the charges of money laundering this week against digital currency company Liberty Reserve, industry experts are warning.

The Costa Rican-based company is believed to have laundered more than $6 billion in criminal proceeds, according to the US Attorney’s Office for the Southern District of New York, which described the firm as a “financial hub of the cybercrime world”.

“This news is likely to increase the scrutiny on AML and sanctions screening measures that banks have in place already,” says Hamish Thomas, director in the financial services practice at Ernst & Young. “It may also raise questions as to whether existing measures are sufficient in the face of emerging methods of making payments and transferring value.”

Micah Willbrand, director of risk and payments within Europe, the Middle East and Africa at data and software provider BankersAccuity, says financial institutions need to respond to the money laundering challenges posed by digital currencies.

“Within the UK, it is being reported that 5% of all transactions are done via digital currencies – totalling over 500 million transactions. Liberty Reserve ‘dollars’ would be in this same class, thus financial institutions need to start considering how to apply appropriate risk controls for these types of transactions.”

Other digital currencies include Bitcoin and Amazon Coins. Financial institutions need to ensure they know what type of payments their corporate customers are accepting, says Willbrand.

“If the corporates are accepting digital currencies, they need to investigate what methods are used to exchange those digital currencies into national currencies,” he says, adding that firms also need to decide which digital currency exchanges they will or will not work with.

In the US, firms also need to determine if the organisation is registered as a Money Services Business (MSB), as required by the US Financial Crimes Enforcement Network (FinCEN).

“For consumer accounts, additional due diligence will need to occur on the source of funds,” says Willbrand. “This could include asking if the funds in local currency were sourced from digital currency outlets.”

Ernst & Young’s Thomas suggests that banks test the robustness of existing measures by running potential scenarios in the context of new modes of money transfer. He argues, however, that the issue is not just a banking challenge.

“Participants in new methods of money transfer across industries, governments and regulatory bodies must address pressing questions around regulatory oversight of these new forms of payment,” he says.

“This includes agreeing who should be responsible for implementing the necessary checks to prevent new methods being abused for criminal enterprise, and to what extent these controls should be applied across the different activities and businesses that support the flow of money.”


This article was first published on Risk

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