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The IRS, FBI and other U.S. law enforcement agencies may be trumpeting their success in breaking up everything from child porn rings to al-Qaeda funders, but bankers are not so confident in their ability to even detect crypto-related transactions.
In a Dec. 9 webinar on detecting sanctions evasion, blockchain intelligence firm CipherTrace polled more than 500 attendees from financial institutions, and found that barely one in five “felt confident detecting cryptocurrency related payments flowing through their institutions.”
That’s a big problem, as it puts them at risk of unknowingly violating U.S. and international sanctions on doing business with countries like Iran or Chinese military-owned companies, the firm said.
The poll found that 78.2% were not confident that they could successfully detect crypto-related payments that would violate sanctions—which comes with harsh penalties.
Another 80% said they considered the possibility of sanctions violations even when deciding whether they or their clients can or should pay ransomware demands.
In a Dec. 10 blog post, CipherTrace said “the ability to accurately detect crypto-related payments and risk-rate addresses is a pivotal first step in understanding whether a ransomware payment poses a sanctions violation risk.”
Crackdown coming
Next year, bank regulators and the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) will be focusing on institutions’ exposure to virtual currency when they assess the effectiveness of bank’s anti-money-laundering (AML) procedures, CipherTrace said.
“Financial institutions must be able to identify institutional and peer-to-peer virtual currency-related transactions and understand how their institutions interact with emerging virtual asset service providers, or VASPs” it added. VASP is the preferred term used by international banking regulators for cryptocurrency exchanges, as well as custodians and hedge funds.
Despite Treasury Department Comptroller of the Currency Brian Brooks’ recent moves to allow and encourage banks to work with the cryptocurrency industry, few are, and that is unlikely to change until they feel comfortable with AML tools.
In October, CipherTrace reported that more than half of all cryptocurrency exchanges have know-your-customer (KYC) processes so weak they can be considered money-launderer friendly.
Crypto derivative exchange BitMEX recently discovered the danger of that, when CEO Arthur Hayes and three other executives were indicted by the U.S. on AML violations that carry sentences of up to 10 years in prison.
Decentralized finance may also face AML trouble, CipherTrace recently warned, as 90% of DeFi exchanges and projects had insufficient KYC standards, and 81% had little if any.
While law enforcement and regulators are getting better at tracing Bitcoin transactions, privacy coins like Zcash, Dash and, especially Monero are far more difficult. As a result, they are increasingly being kicked off of exchanges and even banned outright.
