Cryptocurrency is becoming the go-to technology for money launderers around the world. Here’s how to be prepared.
Money laundering with cryptocurrency is nothing new. But in 2021, a new report by blockchain data company Chainalysis, found criminals laundered $8.6bn (£6.4bn) of cryptocurrency, up by 30% on the previous year. Governments around the world, including China, the US and UK are scrambling to catch up and grapple with this growing problem.
It’s a complex area but one that law firms need to understand, Master of the Rolls Sir Geoffrey Vos said recently. “Major developments are imminent. They will mean that every lawyer will require familiarity with the blockchain, smart legal contracts and cryptoassets”. Vos was speaking at the launch of new guidance on the legal and regulatory aspects of the technologies underpinning digital currencies and non-fungible tokens (NFTs).
It’s not just about crime; there are benefits to these technologies too. Founder of the TLA Blockchain Legal and Regulatory Group, Anne Rose from Mishcon de Reya said the updated guidance would provide clarity around the legal implications of using blockchain and similar technologies, “so we can continue to work together in unlocking the benefits”.
Decentralisation and smart contracts, for example, are changing the way financial, property and legal services are operating forever.
According to the guidance, specific anti-money laundering (AML) risks arising in the cryptoassets sector include:
- Darknet and blacklisted addresses
- Links to multiple jurisdictions
- Dealing with funds originating from decentralised systems
- The use of outsourced service providers or agents
More regulation is coming
There is undoubtedly more regulation needed in this area. Decentralised virtual currencies make it difficult to trace payments thanks to encryption techniques, which are used to generate units of the asset and verify their transfer.
But the Financial Conduct Authority (FCA) has made it clear this is an area it’s increasingly interested in. As of 10 January 2020, under the Money Laundering Regulations 2017, the FCA has taken supervisory responsibility for UK firms undertaking cryptoasset activities, and those firms must be registered with the FCA to operate.
The FCA has been keen to point out that those investing in cryptocurrencies need to be aware of some key risks:
- Cryptoassets are very high risk, speculative investments
- They’re unlikely to have access to the Financial Services Compensation Scheme (FSCS) if something goes wrong
- There is no guarantee cryptoassets can easily be converted back into cash
Impact on law firms
For law firms, the widespread adoption of this technology increases the risk of poor AML and fraud practices. There is potential for illicit funds to move through the blockchain with total anonymity. Some red flags include where the bulk of a client’s source of wealth is derived from investment in virtual assets, initial coin offerings (ICOs), or other virtual asset service providers (VASPs) that lack appropriate AML controls.
But there are a number of steps that can help:
Robust AML checks
Screen your customers thoroughly, particularly if they’re from sanctioned or high-risk countries. That includes collecting beneficial ownership for businesses, conducting risk analysis on public records, monitoring transactional activity, and adverse media screening. Thirdfort’s platform identifies politically exposed people (PEPs) and sanctions across jurisdictions, and uses artificial intelligence to automatically capture any updates.
Cryptoassets are a growing area but one that many in the legal profession aren’t familiar with. Make sure you work with your teams to provide regular training, and keep your organisation up to date with any regulatory changes.
Update risk assessments
Any law firm dealing with transactions involving cryptocurrencies will need to update its practice-wide risk assessments, or note that it has decided not to deal with such transactions.
Consult with insurers
Some professional indemnity insurers have said due to the high risk associated with transactions involving cryptocurrencices, firms that operate in this space would be at risk of not being able to obtain cover at renewal. Firms should therefore consult with their insurers before taking on any such transaction.
Blockchain and cryptoassets are unlikely to be going anywhere. As Anne Rose from Mishcon de Reya pointed out, there are real benefits to the future of this technology. But there are risks too and law firms need to have the best tools at their fingertips to protect themselves and their clients.
Forward thinking legal firms are embracing change and their businesses are benefiting greatly.
By bringing in simple, user-friendly solutions like Thirdfort for compliance management, these firms are successfully navigating the evolving regulatory landscape with the tech they now need to stay compliant and speed up client onboarding times.
If you’d like to learn more about how your firm can automate AML and ID verification using Thirdfort, book a demo with one of our team here.
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