By Gareth Vaughan
The real and potential money laundering and terrorism financing risks of virtual currencies have been highlighted by the Financial Action Task Force (FATF), an inter-governmental body established by the Group of Seven that sets policies and standards on anti-money laundering and combating terrorist financing.
In a report on virtual currencies FATF notes virtual currencies such as Bitcoin are potentially vulnerable to money laundering and terrorist financing for many reasons. FATF last year recognised "significant progress" by New Zealand in addressing previously identified deficiencies following the coming into force of our Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Act.
"Centralised virtual currency systems could be complicit in money laundering and could deliberately seek out jurisdictions with weak AML/CFT regimes. Decentralised convertible virtual currencies allowing anonymous person-to-person transactions may seem to exist in a digital universe entirely outside the reach of any particular country," FATF's report says.
The report also points out that decentralised systems are particularly vulnerable to anonymity risks, noting Bitcoin addresses that function as accounts have no names or other customer identification attached, and the system has no central server or service provider.
"The Bitcoin protocol does not require or provide identification and verification of participants or generate historical records of transactions that are necessarily associated with real world identity. There is no central oversight body, and no AML software currently available to monitor and identify suspicious transaction patterns. Law enforcement cannot target one central location or entity (administrator) for investigative or asset seizure purposes (although authorities can target individual exchanges for client information that the exchanger may collect)," says FATF.
"It thus offers a level of potential anonymity impossible with traditional credit and debit cards or older online payment systems, such as PayPal."
Global reach increases risks
FATF goes on to say the global reach of virtual currencies increases potential AML/CFT risks.
"Virtual currency systems can be accessed via the internet, including via mobile phones, and can be used to make cross-border payments and funds transfers. In addition virtual currencies commonly rely on complex infrastructures that involve several entities, often spread across several countries, to transfer funds or execute payments. This segmentation of services means that responsibility for AML/CFT compliance and supervision/enforcement may be unclear. Moreover, customer and transaction records may be held by different entities, often in different jurisdictions, making it more difficult for law enforcement and regulators to access them."
FATF says this problem is exacerbated by the quickly evolving nature of decentralised virtual currency technology and business models, including the changing number and types of participants providing services in virtual currency payments systems.
"And importantly, components of a virtual currency system may be located in jurisdictions that do not have adequate AML/CFT controls," adds FATF.
It also highlights major cases where law enforcement authorities are tackling the abuse of virtual currency for money laundering purposes involving Liberty Reserve, Silk Road and Western Express International.
Potential to improve efficiency & reduce cost
Nonetheless FATF also acknowledges virtual currency has the potential to improve payment efficiency and reduce transaction costs for payments and fund transfers. For example, it notes Bitcoin functions as a global currency that can avoid exchange fees, is currently processed with lower fees/charges than traditional credit and debit cards, and might potentially provide benefit to existing online payment systems such as PayPal.
"Virtual currency may also facilitate micro-payments, allowing businesses to monetise very low cost goods or services sold on the internet, such as one time game or music downloads," says FATF. "Virtual currency may also facilitate international remittances and support financial inclusion in other ways, as new virtual currency-based products and services are developed that may potentially serve the under and un-banked."
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