Use of Privacy Coins to Layer Illicit Proceeds

Red Flag Point 1: Bitcoin associated with a large scale criminal event, such as a hack, ransomware, or other, is cashed out at an exchange that provides access to privacy coins. Criminals often use privacy coins to hide the source of funds obtained from illegal activities. Exchanging Bitcoin associated with criminal events for privacy coins can be an indication of money laundering attempts. Enhanced due diligence for customers transacting with privacy coins.(Financial Action Task Force (FATF) Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (2019), Section III, para 43-44.)

Red Flag Point 2: Bitcoin associated with high-risk address clusters move through a complex process of chain-peeling before being cashed out at an exchange that provides privacy coins.

Chain-peeling is a technique used to obscure the origin of funds by splitting and recombining them in multiple transactions. It’s a red flag when criminals use this method to launder money through privacy coins. Monitoring and reporting suspicious activity related to chain-peeling and privacy coins. (FATF Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (2019), Section III, para 45-46.)

Red Flag Point 3: The exchange in question may be unregulated or non-compliant, or located in a high-risk jurisdiction. Criminals may exploit unregulated, non-compliant exchanges or those in high-risk jurisdictions to launder money through privacy coins. Collaboration with law enforcement agencies and other stakeholders to identify and disrupt criminal networks.

(The Wolfsberg Group’s Statement on Cryptocurrency Due Diligence (2019), Section 2, para 1-2.)

Laundering Illicit-Origin Privacy Coins

Red Flag Point 4: Legitimate exchanges experience large volume transfers of Bitcoin from exchanges that offer privacy coins. Large volume transfers of Bitcoin from privacy coin-offering exchanges to legitimate exchanges can be an indication of attempts to legitimize illicit funds. Implementing Know Your Customer (KYC) procedures to collect and verify customer identity information.(FATF Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (2019), Section III, para 37-39.)

Red Flag Point 5: The customer engages in frequent transactions involving unregulated coinswap services. Coinswap services allow users to exchange one cryptocurrency for another without a centralized intermediary. Frequent usage of unregulated coinswap services can be a red flag for money laundering. Monitoring customer transaction patterns and conducting enhanced due diligence when necessary. (FATF Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (2019), Section III, para 51-52.)

Red Flag Point 6: A customer is unwilling or unable to provide information about the source of privacy coins they once held. Unwillingness or inability to provide information about the source of privacy coins can indicate an attempt to hide the origin of funds, raising suspicion of money laundering or other illicit activities. Implementing enhanced due diligence measures and escalating suspicious cases for further investigation. (FATF Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (2019), Section III, para 43-44.)