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Crypto suspicious activity reports are climbing up. Here’s why.

WASHINGTON — As cryptocurrency’s appeal has actually grown, so have the flags of possible cash laundering and scams. 

As the Biden administration covers its head around cryptocurrency and how to manage it, cryptocurrency’s capacity to be utilized for unlawful functions has actually concerned the leading edge of the discussion. President Biden’s executive order on crypto from March clearly charged the Treasury Department and other federal firms with discovering much better methods of inspecting digital possessions and the degree to which they’re being utilized for cash laundering and scams. 

But that’s a huge, complex job — and it’s not made easier by the growing volume of cryptocurrency-related reports implied to recognize that activity. 

The variety of suspicious activity reports including cryptocurrency reached approximately 92,000 in 2021, according to the Financial Crimes Enforcement Network, or Fincen. That figure is more than double the 42,782 crypto-related SARs the firm stated that it got in 2020, which itself was quadruple the 10,377 SARs that discussed crypto in 2017. 

It’s something that the Biden administration and the federal government are attempting to find out how to deal with. Fincen, the Treasury’s anti-money-laundering arm, is dealing with a fast-evolving landscape that requires professionals and resources the bureau may not have. 

“[Fincen’s budget] constrains our ability to hire analysts, particularly in the cryptocurrency area, to be able to do the type of analytics that’s required to understand how cryptocurrencies are flowing and contributing to illicit finance,” acting Director Himamauli Das informed Congress recently. “Our team is incredibly talented, but they’re incredibly small as well, and they’re just outmatched to the challenge not in competence, but in terms of resources alone.” 

Following the breadcrumbs

The 92,000 crypto-related SARs is a huge number, and it’s bigger than the variety of SARs made by securities and futures business and by casino/card club business.

It takes a little informed uncertainty to illuminate out where those cryptocurrency-related SARs may be originating from — there’s no particular classification in the SAR documentation to show that the suspicious activity is originating from a digital-asset business or whether it’s crypto-related at all. 

Most SARs submitted by cryptocurrency exchanges (which are most likely to be about digital possessions) are classified as a “money services business,” professionals stated.

Money services company SARs increased by about 220,000 from 2020 to 2021, one of the most of any classification, according to the Fincen information. 

“If crypto companies are filing SARs, they’re probably registered as a money services business,” stated Alison Jimenez, president of Dynamic Securities Analytics, an anti-money-laundering consultancy. “There’s a small chance that some of them are also registered as futures companies or broker-dealers.”

But “money services businesses,” or MSBs, is a broad category that includes, among other things, money transmitters like PayPal, providers and sellers of prepaid access such as gift cards, as well as cryptocurrency exchanges. Growth in the money services business category also hasn’t been as steep as growth in other categories in the last few years. 

Breaking down the MSB category into types of suspicious activity being reported reveals more clues about where that cryptocurrency jump might be coming from. There’s been a huge leap in SARs filed by registered MSBs about unregistered MSBs, according to Fincen data. Jimenez wrote about her the analysis of registered MSB SARs regarding their unregistered counterparts using Fincen data as of October 2021.

For the full-year 2021, registered MSBs filed nearly 67,000 SARs about unregistered MSBs more than triple the number the previous year. 

So what could be happening here?

Jimenez said what’s likely going on is that licensed crypto exchanges, filed under MSBs, are finding and flagging unlicensed entities. 

There are a few reasons to think this jump is related to crypto activities. In 2019, Fincen “heightened the imperative” for crypto exchanges to register as a MSB by issuing new guidance, Jimenez said, immediately before the first big increase in SARs coming from that category of registered entities.  

Most of the increase (65,397 of the total 66,751 SARs in 2021) can be traced to San Francisco County, California, according to the Fincen data. San Francisco County happens to be the legal address or headquarters for the largest cryptocurrency companies in the United States. 

“There’s this huge world of unregistered unlicensed exchanges or ATMs and other types of entities that are operating outside of the regulatory regime, and that’s something that the licensed exchanges are identifying,” Jimenez stated. “I’m not sure why they’re detecting so many, but they are and they’re reporting many.” 

An example of what these certified exchanges may be reporting, Jimenez stated, would be what she called a parasitic exchange, or an unlicensed exchange running through a certified one, utilizing the liquidity of the bigger business. It might likewise be an unlicensed crypto ATM, which are thought about to be MSBs by Fincen, she stated. 

“It’s pretty crazy,” she stated. As a point of contrast, Jimenz stated that “if you had a bank saying I noticed all these unregistered banks, that’s a concerning thing.” 

‘Coming into the fold’

While the potential presence of a high volume of unlicensed cryptocurrency operations likely isn’t good news to regulators, some experts see the overall growth in crypto-related SARs as a sign the cryptocurrency industry is maturing. 

Although there have been high-profile cases of crypto firms, including banks, that lack robust anti-money-laundering protections, the growth in cryptocurrency-related SARs means that institutions are getting better at spotting suspicious activity, said Ian McGinley, a partner at the law firm Akin Gump Strauss Hauer & Feld LLP.

“I see it in general as a sign that crypto is coming within the fold of traditional finance, and you’ll see the increase in these reports as a kind of function of that,” said McGinley, a cryptocurrency fraud expert with more than a decade as an attorney with the U.S. Attorney’s Office for the Southern District of New York.

There are also more exchanges now, and more are required to report suspicious activity to Fincen, he said. With the growth of cryptocurrency, there’s simply more opportunity for nefarious activity, he added. 

“Some of it probably has to do with how mainstream cryptocurrency has become and how many institutions deal with it, including institutions that might have reporting obligations, and also just how many members of the public now touch cryptocurrency,” McGinley said. “Plus, exchanges and other players in the field have really increased their regulatory functions.” 

And just because SARs are being filed doesn’t mean that something like money laundering or fraud is actually happening, said Alma Angotti, a partner and anti-money-laundering expert at the consultancy Guidehouse who has also served with the Securities and Exchange Commission and Fincen. 

“It’s important to remember that the standard for filing a SAR is very low,” she said. “Does the institution have a reason to suspect that the activity is relating to something criminal or is not typical for that customer?” 

With crypto, Angotti said that it’s actually easier for financial institutions to trace, so there might be more opportunities for benign activities to be flagged as suspicious. 

“You know a lot more about a deposit of crypto than your bank does if you deposit $10,000 in cash,” she said. “They know where it came from, how long ago it was the proceeds of a ransomware hack, they know if it’s been broken up and put back together into a different wallet, [and] they know if it’s come from a wallet associated with a risky exchange.”

Like a color pack in a heap of money, Angotti stated that crypto’s traceability makes it a simple target for SAR reports, and she anticipates them to continue climbing up. 

“Because of that, there might be a lot more factors for business to submit,” Angotti stated. 



Gabriel

A news media journalist always on the go, I've been published in major publications including VICE, The Atlantic, and TIME.

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