On May 13, 2020, Financial Crimes Enforcement Network (“FinCEN”) Director Kenneth Blanco delivered remarks to the Consensus Blockchain Conference regarding the agency's recent observations in connection with virtual currencies, including the current risks of criminal exploitation of virtual currency, significant issues FinCEN anticipates for virtual currencies in the future, and the industry’s compliance with the Travel Rule.
Blanco began with a discussion of FinCEN’s efforts to identify and prevent illegal use of virtual currency. FinCEN previously issued notices on March 16, 2020 and April 3, 2020 that provided indicators of potential malicious or fraudulent transactions and guidance regarding anti-money laundering operations during the pandemic. The indicators, which include imposter scams where bad actors impersonate government agencies (e.g., Centers for Disease Control and Prevention) or international organizations (e.g., World Health Organization), investments scams involving promotions that falsely claim a product can prevent, detect, or cure coronavirus, and fraudulent marketing of COVID-19 supplies such as facemasks, are based on observations from prior natural disasters. Blanco confirmed that FinCEN will supplement these indicators with further guidance highlighting typologies used in fraud, theft, and money laundering activities related to the pandemic.
FinCEN has observed that cybercriminals predominantly launder their proceeds and purchase the tools to conduct their malicious activities via virtual currency (e.g., purchase of fentanyl, narcotics, cybercrime tools, and child pornography on darknet marketplaces). FinCEN also believes that initial coin offering investment scams are likely to grow during the pandemic in light of many recent, prevalent scams involving virtual currency payments that exploit COVID-19, from extortion and ransomware to the sale of fraudulent medical products. FinCEN cautioned virtual currency businesses to remain vigilant against attacks targeting their onboarding and authentication processes. He also encouraged these companies to consider revisiting the appropriate level of assurance needed for digital identity verification in light of the current higher-risk environment in order to mitigate criminal exploitation.
Blanco also provided a preview of several significant issues in the virtual currency space FinCEN anticipated, including the as yet unmitigated risks associated with anonymity-enhanced cryptocurrencies and a growing concern with foreign business failing to comply with FinCEN rules, such as maintenance of a risk-based anti-money laundering program.
In addition, Blanco discussed the Travel Rule, a provision of the Bank Secrecy Act requiring financial institutions to transmit biographic and background information in connection with funds transfers to other financial institutions. The Travel Rule was extended to virtual currency businesses in 2019. Blanco noted that recordkeeping violations were the most common, and that most challenges to compliance with recordkeeping obligations related to governance and process, rather than technologies. Blanco was optimistic that the various cross-sector organizations and working groups that were now focused on developing international standards and solutions pertaining to the Travel Rule would be able to devise workable solutions in the relatively near term.