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  • Compliance & Business Integrity
  • 26-06-2018

On Thursday 7 June 2018 the ND Compliance & Supervision seminar was held, which focused on digitisation. As part of the seminar we organised a workshop titled ‘Cryptocurrency & the Money Laundering and Terrorist Financing (Prevention) Act’, which dealt with the impediments and opportunities of virtual currencies (‘cryptocurrencies’ or ‘cryptos’) facing institutions that are subject to supervision under the Act (Wet ter voorkoming van witwassen en financieren van terrorisme, ‘Wwft’). The crypto money laundering typologies known today can help align Wwft policy and procedures.

While the potential of cryptocurrencies to become serious competitors to regular currencies (and possibly replace them) is still a matter of great debate, it is already clear that crypto trading and investments are widespread phenomena. As a result, institutions subject to supervision under the Wwft, or ‘Wwft institutions’, are also compelled to recognise the risks and obligations facing them as their clients engage in such transactions, both in the area of customer due diligence (CDD) and regarding the reporting of unusual transactions. Published on the FIU website (in Dutch), the specific crypto money laundering typologies, as shown below, may provide some guidance. These possible indications of money laundering may of course be useful in monitoring and assessing transactions for irregularities as part of the reporting obligation (in terms of the subjective indicator), but may also give direction to the CDD questions to be posed to clients who trade/invest in cryptocurrencies (‘crypto clients’). 

 

Crypto money laundering typologies

1

The withdrawal of considerable amounts of cash from one or more bank accounts on multiple occasions within a relatively short period, as lump sums or in parts, without any apparent economic reason combined with multiple receipts of amounts via transfers (where those amounts, in relation to a trader in virtual currencies, apparently originate from the sale of virtual currencies).

2

The purchase of virtual currencies involving at least two of the following aspects:

Service through supply-and-demand sites

Payment in cash

High exchange fees

No KYC performed by buyer of seller’s ID

Not registered with the Chamber of Commerce

Transaction in public environment

Statement & exchange method

Amount of cryptocurrency versus average private use

Buyer conceals own ID

Unknown to the tax authorities

3

Use of a mixer/tumblr

 

Examples of these typologies can be found in the following court decisions: ECLI:NL:RBMNE:2017:5713, ECLI:NL:RBROT:2017:8989 and ECLI:NL:RBMNE:2018:234. In addition to these typologies, it is accepted as a generally known fact that 90% of the trade on dark markets (online trading platforms on the dark web) involve illegal products/services. Cryptocurrencies originating from a dark market therefore also give rise to suspicions of money laundering. This, in turn, prompts the question – as is the case with the use of mixers/tumblrs – of how far back Wwft institutions should trace the chain of crypto payments (if at all possible with the relevant crypto).

Although a number of these typologies cannot be identified by the Wwft institution itself, or can be identified/checked but only with much (disproportionately) much investigation, they do offer inspiration for a distinction in types of crypto clients, for CDD questions and parameters for transaction monitoring.

Type of crypto clients
Crypto clients can roughly be divided into three types of clients: 
I.    clients trading and investing in cryptocurrencies on their own behalf via regular exchange and trading platforms;
II.    ‘regular’ crypto exchange and trading platforms; and
III.    clients acting as ‘informal’ crypto exchangers/investors/traders.

The second and third types in particular will present the highest risks to Wwft institutions – obviously alongside the ‘regular criminals’ with a bank account who also use cryptocurrencies. The aforementioned criminal judgments, for example, relate to unofficial crypto businesses which often deliberately operate in the shadows, offer customers a certain degree of anonymity, exchange cryptos for cash and are unknown to the authorities. Regarding regular crypto platforms, the question arises whether those can sufficiently check – and whether they actually do check – the origin of the cryptocurrencies being offered to them, for example whether these currencies originate from a dark market.

CDD 
In view of the types of clients and the money laundering typologies, in any event the following CDD questions would be sensible to ask:
•    Are regular platforms or supply-and-demand sites used, and/or are exchanges made in cash? 
•    Private trade/investment, or (semi-)commercial and/or for third parties? 
•    If applicable: what is the bitcoin address (account)? 
•    If not private trade or investments:
o    KYC procedures?
o    AML procedures (safeguard of lawful origin)?
o    Chamber of Commerce registration and known to the tax authorities?
Also point out that clients receiving more than EUR 15,000 in cash from non-private trade/investment could qualify as a Wwft institution themselves (this threshold will be EUR 10,000 and will apply to both payments and receipts after implementation of the Fourth Anti-Money Laundering Directive in the Wwft).

Monitoring
Based on the money laundering typologies transactions can be monitored, for example on the presence of a combination of two or more of the following factors:
•    payments from (known) accounts of crypto exchanges and trading platforms;
•    payments with a reference to cryptocurrencies in the description;
•    cash withdrawals/deposits that appear to be related to cryptocurrency transfers; and/or
•    (forwarded) payments that appear to be related to the previous points (like the monitoring of ‘ordinary’ irregular, related (forwarded) payments).

As is always the case with the Wwft, the higher the risk, the more measures the Wwft institution will be required to take to mitigate the risk (more questions, more checking). If it proves impossible to complete the CDD (for example because insufficient insight is obtained into the origin of the money), based on the Wwft the business relationship must be terminated at the next opportunity. Please note that this obligation sometimes conflicts with an institution’s obligations towards its clients based on its duty of care and the arrangements made with its clients!

Please feel free to contact us if you have any questions about the Wwft.

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