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Cryptocurrency Red Flags for Financial Institutions | Cadwalader, Wickersham & Taft LLP
On May 23, 2024, the Joint Chiefs of Global Tax Enforcement (“J5”) issued a advisory note for financial institutions, identify red flags associated with illicit crypto-related activities. The J5 is a collaborative partnership between the tax authorities of the United States, United Kingdom, Canada, Australia and the Netherlands. The advisory note is not the first time the J5 has addressed cryptography; In 2022, the J5 released a set of warning indicators highlighting the risks associated with non-fungible tokens.
In the advisory, the J5 identifies risk indicators that it believes play a critical role in enabling financial institutions to detect and report money laundering, tax evasion, and other illicit activities involving cryptocurrencies. The risk indicators are numerous and include crypto asset layering, geographic risk, high-risk counterparties, new customer onboarding, ransomware, and cybercrime risk. One such risk indicator is that sending or receiving crypto mixers may suggest money laundering, a concern also expressed by OFAC, which we discussed here.
Publications such as the briefing note highlight the growing concerns of domestic and international tax authorities about the decentralized and anonymous nature of cryptocurrencies. Éric Ferron, Director General of the Criminal Investigations Branch at the Canada Revenue Agency, said of the briefing note: “We are operating in a borderless digital world, and it is more important than ever to raise awareness of the risk indicators related to crypto assets that may be indicative of criminal activity.” In light of the above, financial institutions may wish to consider the risk indicators outlined in the briefing note to take proactive measures.