The Effectiveness of Regulatory Regimes in Combating Virtual Currencies’ Money Laundering Activities

Table of Contents

Abstract

Introduction

Chapter 1: An overview on Money Laundering and Virtual Currencies
Introduction
The definition of money laundering
The economic and social effects of money laundering
The use of virtual currencies in money laundering activities
The effect of virtual currencies on the financial system
Conclusion

Chapter 2: An Evaluation on the FATF
Introduction
An overview on the FATF
A critique on the FATF's regulatory approach
An evaluation on the FATF's enforcement mechanism
a) The process of black-listing
b) The effectiveness and the economic implications of black-listing
c) The limitations of black-listing
The FATF and the regulation of virtual currencies
An evaluation on the Virtual Assets and Virtual Asset Service Providers Guidance Paper
a) The limitations of the guidance paper
b) The advantages of the guidance paper
Conclusion

Chapter 3: An Evaluation on Different Regulatory Approaches
Introduction
The banning approach
a) An overview on the banning process
b) The effectiveness of the banning process
c) The implications of banning virtual currencies
The ‘wait and see' approach
An action-based regulatory approach
a) An evaluation on the EU's action-based regulatory approach
Conclusion

Chapter 4: Recommendations to Effectively Regulate Virtual Currencies
Introduction
The incorporation regulatory collaboration into the AML regime
a) The effectiveness of a hybrid regulatory approach
b) A solution to regulating decentralised virtual currencies
c) The effectiveness of regulatory sandboxes in enhancing the AML regime
The creation of national virtual currencies
The FATF's standards as the only viable AML regime for virtual currencies
Conclusion

Conclusion

Bibliography

Abstract

This paper will evaluate the effectiveness of different virtual currency regulatory approaches in combating money laundering activities. The objective behind this evaluation is to determine the most suitable AML regime for virtual currencies. The limitations of these approaches is used create an enhanced AML regime that eliminates these weaknesses. This paper has determined that the current risk of virtual currencies pose on financial markets require the implementation of a regulatory framework that will assist in mitigating them. It was also concluded that regulatory collaboration with virtual currency platforms will significantly enhance the AML regime. This collaboration will assist in regulating decentralised virtual currencies, which is the main challenge experienced by the existing regulations. In addition, the effectiveness of regulation is dependent on international harmonization. Only a uniform international AML regime will be successful in combating money laundering activities through virtual currencies.

Introduction

This dissertation will examine money laundering activities through virtual currencies. The development of technology in these past years has created a new financial medium known as the virtual currency market¹. The use of virtual currencies has become wide-spread, due to the development of this financial market². As a result, virtual currencies are in the process of becoming an international financial instrument that may hold significant economic value to the global financial market in the future. Regulations have only started responding to virtual currencies, due to their novelty. The instant growth of this financial instrument and its virtual element is bound to create unique regulatory challenges³. For this reason, this paper intends to study the different approaches regulating virtual currencies. These different regulatory approaches will be evaluated to ensure their effectiveness as Anti-Money Laundering (AML) regimes. Money laundering activities without the virtual element are already considered a global economic concern⁴. Virtual currencies have the ability of amplifying this issue, because they pose a serious threat to functioning of financial markets if they are employed in money laundering activities⁵. Jurisdictions only recently have comprehended the implications of this issue, which resulted in developing this new area of law that regulates virtual currencies. The emergence of virtual currency regulations provides a conducive field of study, that is relevant to the current changes undergoing the financial system.

The purpose of this paper is to evaluate the existing national and international regulatory approaches in detecting and preventing money laundering activities through virtual currencies. The objective of this evaluation is to determine if these current regulatory approaches require modifications to enhance their effectiveness. The evaluation of these different approaches will also be used to determine the most suitable regulatory approach for virtual currencies that acts as an effective AML regime. As stated previously, virtual currency regulation is a developing area of law. Hence, the majority of regulations discussed in this paper has not come into effect. As a result, the evaluation on the effectiveness of these regulations is only a projection based on academic sources. The recent reform on this area also means that there is a limited number of academics that evaluated these regulations.

The paper will start by providing background information on money laundering and virtual currencies. Even though money laundering and terrorist financing are two different financial crimes, they are usually regulated under the same regime. This is because they undergo the same investigative process for their risk assessment and management, so it is efficient to group them under the same regime⁶. However, this paper intends to solely focus on one financial crime which is money laundering. The first chapter will also explain the relationship between money laundering activities and virtual currencies. The economic effect of both these entities will also be studied in this chapter to determine if regulation is a necessity. The second chapter will be an evaluation on the Financial Action Task Force's (FATF) AML regime in relation to virtual currencies. This is the only international regulatory approach that will be addressed by this paper. This is due to the fact that the FATF is currently the only international body that created an AML regime specifically for virtual currencies. The third chapter will focus on the different regularity approaches implemented by individual jurisdictions in response to virtual currencies. These approaches will also be assessed to determine their effectiveness as AML regimes. The last chapter of this paper will provide recommendations that will enhance the effectiveness of virtual currencies regulatory approaches. This was achieved by identifying the weaknesses of the current regulatory approaches, then attempting to find solutions that will assist in eliminating these shortcomings. This comprehensive evaluation was produced by referring to regulations, academic writings, consultation papers and the publications of financial authorities.

Chapter 1: An overview on Money Laundering and Virtual Currencies

Introduction

This chapter aims to provide introductory information about money laundering activities through virtual currencies. First, the general process of money laundering will be explained in detail. After that the focus will move on to the financial and societal impact of money laundering activities. Then the chapter will exclusively address virtual currencies. The features of these virtual currencies are studied along with their association to money laundering. The purpose of this chapter is to determine if virtual currencies are an effective tool that is used to launder money. This is an important step, because a deeper understanding of this issue needs to be gained, before attempting to address it from a legal perspective.

The definition of money laundering

Money laundering is the process of making money that was generated from criminal activities to appear legitimate⁷. This process is described as laundering because the criminal origin of the money is basically cleaned. As a result, the proceeds would no longer be associated to the crime that generated it⁸. This process is complex and consists of three stages⁹. The initial stage to laundering money is called placement. In this stage, the illegal earnings are introduced into the financial system in a manner that would not give rise to detection. In the USA any deposit exceeding $10,000 must be reported as a 'significant cash transactions' to the authorities¹⁰. This shows that large transactions are investigated more thoroughly than smaller transactions. Hence, money in the placement stage is usually broken up then deposited in numerous bank accounts or used to buy financial instruments to avoid any detection¹¹. The second stage is known as layering, this entails complex transactions that would further dissociate the money from its criminal source¹². The aim of this stage is to provide anonymity. This is achieved by passing the money through multi-layers of financial transactions.

Money could be used in various investments or it could also be transferred to numerous banks based in different jurisdictions¹³. Launderers often choose jurisdictions that have lax AML regulation¹⁴. This shows that money laundering has a transnational effect. Consequently, this makes it an issue that effects the global financial system. The final stage to laundering money is integration. In this stage, the money can no longer be traced to its origin¹⁵. As a result, it is re-introduced to the financial system as legitimate money. The money is then used in various legitimate investments such as real estate or other business ventures¹⁶. In this stage it is difficult to distinguish between the legitimate and illegitimate proceeds as they are completely integrated.

The economic and social effects of money laundering

Money laundering is a financial crime so it will consequently have a negative impact on the financial market and its participants. One of the main objectives of financial systems is to preserve the integrity of the market¹⁷. Money laundering has the ability to undermine the efficiency of financial markets, therefore affecting its integrity. For example, money laundering can disturb the allocation of money in the financial system¹⁸. The previous section has shown that this crime introduces illegitimate money into the market. The integration of laundered money will subsequently affect the accuracy of economic statistics¹⁹. Furthermore, money laundering can also disturb the pricing system of financial markets²⁰. Businesses used in money laundering activities such as shell companies have different priorities than legitimate businesses²¹. Their aim is not to generate profit from their legitimate transactions, because their profits are subsidised from the proceeds of criminal activities²². As a result, these businesses have the ability to lower their prices, this means that there will be no fair competition in the market²³. Consequently, money laundering has the indirect effect of bankrupting legitimate businesses²⁴. Furthermore, financial markets that are associated with money laundering activities will likely discourage investors²⁵. It is challenging to overcome a tarnished reputation in the global financial market. For example, international investors are often reluctant to deal with Russian businesses, because they associate all entities operating in that region with organised crime and money laundering activities²⁶. This negative reputation will not just affect private businesses, but also the interest and currency exchange rates of the financial market²⁷. All these factors will diminish the financial market's economic development²⁸.

Financial institutions can also be negatively affected by money laundering activities. A banking system that is heavily infiltrated by organised crime may experience liquidity issues²⁹. Large sums may disappear or appear without notice, due to their criminal origin³⁰. Money laundering enables criminals to have to financial assets. If these assets have significant monetary value, then these transactions have the ability to impact the jurisdiction's economy³¹. These repercussions illustrate that money laundering distorts the effectiveness of the whole financial system. It should be noted that money laundering also affects the global financial market. Financial markets around the world interconnected due to globalisation³². The fact that the financial crises of 2008 has affected financial markets in different states is evidence if the interlinked relationship between these markets. Consequently, the global exchange rate and capital flow will be distorted by money laundering activities³³. Moreover, these activities will also affect the functioning of society, because money laundering proceeds stem from organised crimes such as drug trafficking³⁴. Ineffective AML regimes will encourage criminals to generate more profit, which will result an increase of criminal activity³⁵. The damaging effects of this financial crime on individuals, societies and economies demonstrate that effective international and national AML regulations are an absolute necessity³⁶.

The use of virtual currencies in money laundering activities

It should be noted that there is no fixed method to launder money. Money laundering is a crime that relies on the non-detection of financial authorities across the globe. The nature of money laundering as a crime makes is difficult to evaluate the extent of this problem^{37 38}. The most recent evaluation on the extent of global money laundering was conducted in 2009 by the United Nations Office on Drugs and Crime (UNODC) which reported that approximately 1.6 trillion US Dollars were globally laundered 38. This estimate shows that a significant portion of the money in the financial market is not legitimate.

Furthermore, criminals are constantly discovering new channels to launder their proceeds, this further complicates the detection of this crime³⁹. These new channels are often unregulated due to their novel nature⁴⁰. Consequently, criminals will exploit any loopholes in the regulatory system. It is believed that virtual currencies which are also known as digital or cryptocurrencies are one of these relatively new channels. In 2014, an FBI investigation found that the administrator of the Silk Road website was engaged in money laundering activities through Bitcoins⁴¹. The amount of money laundered was around 4 million US Dollars⁴². Even though the Silk Road was dismantled by the authorities, other websites on the dark web similar to this black market have appeared and are using Bitcoins as their currency⁴³. This is real-world evidence that confirms that money laundering activities are occurring in virtual environments.

Cryptocurrencies differ from fiat currencies because they are not issued by a public or governmental authority.⁴⁴ Virtual currencies come in different formats they can be centralised or decentralised⁴⁵. Centralised virtual currencies are controlled by a central authority or organisation that would facilitate the transactions between different parties⁴⁶, an example would be the Linden Dollar. While decentralised virtual currencies such as the Bitcoins do not have a centralised organisation, server, or website⁴⁷. This means that transactions do not pass through any central virtual entity. It could be described as a self-operating software⁴⁸. In addition, Bitcoin transactions are known to have a degree of anonymity. The Bitcoin software contains a ledger that records all the transaction by referencing the Bitcoin's address⁴⁹. However, there is no information about the parties that participated in that transaction⁵⁰. Consequently, this encouraged criminals to use Bitcoins as a money laundering method, because it allows individuals to hold numerous accounts without any detection⁵¹. Furthermore, the conversion from fiat currency to Bitcoins and vice versa is instantaneous, users are only required to download the Bitcoin software⁵². This shows that Bitcoins can be used in the initial stage of money laundry. It could also be used for layering because Bitcoins can continuously be moved between different accounts till it becomes difficult to link it to its criminal origin. It is important to note Bitcoins and other virtual currencies are not bound by logistical and geographical limitations such as fiat currencies⁵³. As stated previously the majority of money laundering activities depend on having a transnational nature in order to further obscure the money trail. Virtual currencies undisputedly provide this required feature. In fact, an empirical study that aimed to assess the risk of money laundering in virtual environments concluded that money laundering activities conducted through virtual currencies have a significantly lower chance of detection⁵⁴. This is due to the fact that the virtual environment eliminates some of the risks associated with laundering physical money. A primary example is that cryptocurrency transactions are not scrutinised by regulatory authorities in the same manner as fiat currency⁵⁵. It is suitable to state that money laundering in virtual environments further complicates the detection of this already undetectable crime.

The effect of virtual currencies on the financial system

It could be argued that virtual currencies can only minimally affect the financial market because it is still a niche market⁵⁶. This is because the majority of places of business do not accept virtual currencies as a method of payment⁵⁷. The reluctance of private business to accept virtual currencies is likely due to the association of these virtual payments with illegitimate markets such as the Silk Road⁵⁸. This could indicate that money laundering through virtual environment is not a serious threat to the financial market and its participants, due to this isolation. However, Bitcoins have integrated with the fiat currency without the acceptance of most private businesses. As stated previously, virtual currencies can be exchanged with fiat currency very easily⁵⁹. This currency exchange builds a relationship between virtual currencies and fiat currencies. As a result, money laundering activities in virtual environments would eventually disturb the financial market. In addition, the same externalities that would affect stock market prices also affect the value of Bitcoins⁶⁰. The fact that Bitcoin prices can fluctuate due to inflation, economic development and oil prices proves that there is a link between virtual currencies and the financial market⁶¹. Furthermore, the USA's Bitcoin transactions and market capitalisation have exceeded 5 Billion US dollars in 2015⁶². Statistic has also shown that the number of venues accepting Bitcoins has been annually increasing⁶³. All these factors illustrate that virtual currencies are in the process of becoming a recognised financial instrument, which makes it an integral part of the global financial system. This means that it is critical to address their involvement in money laundering activities, before organised crime completely infiltrates the virtual currency market.

Conclusion

Overall, this chapter has illustrated the complexity of money laundering as a financial crime. The money laundering process consists of three stages that aim to obscure the money trail of the criminal proceeds. Subsequently, this makes it challenging for financial authorities to detect money laundering activities. This chapter has also explained the detrimental effect money laundering has on the financial system and society. This signifies the importance of effective regulation in combating money laundering activities. Finally, the relationship between money laundering activities and cryptocurrencies is studied. This chapter has concluded that virtual currencies are one of the mediums used by organised crime to launder their criminal proceeds. The features of virtual currencies have the ability to further complicate the detection of money laundering activities. Furthermore, virtual currencies have to potential of becoming a prevalent international financial instrument, this shows that this issue can negatively impact the global economy. Therefore, it is critical to effectively regulate cryptocurrencies in order to avoid the economic damage that would flow from them being used as a channel for money laundering activities. The subsequent chapters will focus on the international and national approaches used to regulate money laundering through virtual currencies.

Chapter 2: An Evaluation on the FATF

Introduction

This chapter will study the international standards that regulate money laundering activities. The focus will be on the FATF's regulation, because this organisation's primary function is to combat money laundering activities in a global level. The purpose of this chapter is to evaluate the effectiveness of the FATF's approach in relation to money laundering through virtual currencies. This chapter will start by providing an introduction on the FATF. The methods of operations used by the FATF will also be explained in this section. Then the focus will move onto critiquing the FATF's risk-based approach. The advantages and limitations of this approach will be studied in order to evaluate the overall effectiveness of the FATF. Then the black-listing process is explained and assessed. It is important to study the general elements of the FATF's operation before moving onto the focus of this paper, which is virtual currencies. The FATF's view on virtual currencies will be explained as well the guidance papers regulating this area of law. Lastly, the recently passed guidance paper on the regulation of virtual assets will be dissected in detail in order to showcase the positive and negative aspects of the new standards.

An overview on the FATF

The FATF is an intergovernmental organisation that combats money laundering activities and terrorist financing by promoting an international AML regime⁶⁴. The FATF consists of 37 member states, however there are nine intergovernmental bodies that replicate the FATF's regime⁶⁵. They ensure that the standards set by the FATF are enforced in regions such as the Middle East and Western Africa⁶⁶. Consequently, there are more than 180 jurisdictions that adhere to these international standards⁶⁷. This shows this organisation has a strong influence on the national AML regimes across the globe. The FATF operates by publishing guidelines that all states should enforce in order to obtain a strong AML regime⁶⁸. The official guidelines are known as the FATF 40 Recommendations. The recommendations operate by setting out objectives. For example, the 9th recommendation states that “countries should ensure that financial institution secrecy laws do not inhibit implementation of the FATF Recommendations”⁶⁹. This means that member states must draft regulations that can successfully meet this outcome. These recommendations are periodically revised to enhance their effectiveness in combating money laundering activities⁷⁰. It is also amended to ensure that the AML regime is compatible to any trends or technological developments related to money laundering activities⁷¹. The overall aim of these recommendations is to have stable and transparent financial markets, because the FATF believes that these features are integral to obtain an effective AML regime⁷². The international standards set by the recommendations are not legally binding⁷³. However, the FATF has mechanisms that ensure the compliance of all jurisdictions. The FATF individually assesses the national regulation of each member state, this process is called mutual evaluations⁷⁴. After the evaluation process, the countries must submit progress reports to the organisation to ensure that inadequacies found in their regulation are being amended⁷⁵.This shows that member states are continuously monitored by the FATF. When member states continuously fail to adhere to the standards, they are labeled as non-cooperative countries or territories⁷⁶. In other words, they are black-listed which means that they are globally known as regions with poorly regulated money laundering activities.

A critique on the FATF's regulatory approach

The FATF requires countries to adopt a risk-based regulatory approach⁷⁷. This means that member states should understand and asses the money laundering activities occurring within their jurisdiction⁷⁸. They should also implement tailored mechanisms that still comply with the FATF's standards in order to mitigate any risk. Countries that identify a high risk of money laundering activities should allocate more resources and prioritise the importance of creating a regime that will lower this risk⁷⁹. This shows that each country's response must be proportionate to the risk within its territory. There are many advantages to adopting a risk-based approach. This approach allows countries with low risk levels not to over regulate which will reduce the excessive compliance costs⁸⁰. Furthermore, a risk-based approach would reduce the high capacity of currency transaction reports and suspicious activity reports⁸¹. This will in turn increase the investigative capacity of the relevant financial authority⁸², as a result a more pragmatic system is implemented. As stated in the previous chapter, money launderers often look for loopholes in the regulatory system that would allow their activities to remain undetected. This approach will decrease the risk of any gaps in the regulatory system, because a risk-based approach calls for a constant assessment on the financial system⁸³.

The FATF also requires bodies other than financial institutions such as designated non-financial businesses and professional bodies (DNFBPs) to be proactive in relation to the mitigation of risks⁸⁴. This approach allows to take into account the views of market participants that have different economic backgrounds⁸⁵. The exposure to experienced professionals will only assist in enhancing the effectiveness of the AML regime. Despite its benefits a risk-based approach may cause uncertainty. There is a level of vagueness on how the risks should be defined and the methods used to assess these risks and respond to them⁸⁶. In addition, this whole approach will fail if member states prove to be ineffective in detecting money laundry activities or risks. However, the benefits provided by this approach outweigh this potential risk. Money laundering is a crime that is constantly changing, so it requires a flexible approach that will swiftly detect and adapt to any developments.

An evaluation on the FATF's enforcement mechanism

a) The process of black-listing

The FATF's general mechanism of compliance must also be studied before addressing the effectiveness of the AML regime in relation to virtual currencies. This is because compliance by all member states is an essential tool to combat money laundering activities in a global level. The FATF's enforcement mechanism is based on member states' fear of being labelled as high-risk countries. All countries periodically undergo a review process in order to ensure that their regulation does not pose a risk on the global AML regime⁸⁷. Countries may also be reviewed if they are not a member of the FATF or its regional bodies⁸⁸. Cooperative Countries may still be reviewed, because the results of their evaluation have shown that they have a weak AML regime⁸⁹. Furthermore, states can also be nominated for the review process if there are specific money laundering and terrorist financing threats brought to the attention of the FATF⁹⁰. After being reviewed member states are usually allowed a 12­month period to work with the FATF in order to address the deficiencies of their regulatory system⁹¹. If countries fail to adhere to the FATF's acceptable standards after this period passes, then they are placed on the list⁹².

b) The effectiveness and the economic implications of black-listing

Being labelled as a high-risk country comes with detrimental economic implications, which makes this process a very effective compliance mechanism. In 2001,23 countries were placed in the black-list⁹³.

After a period of 3 years all the countries were removed from the list, except for Burma and Nigeria⁹⁴. The list also had the indirect effect of encouraging other jurisdictions modify any deficiencies in their AML regime, that may initiate the review process⁹⁵. This is evidenced by the fact that only Iran and North Korea are currently on the list⁹⁶. This shows that list can also act as an effective AML preventive measure. The member states apprehension to being placed on the black-list is very legitimate. Currently, Pakistan is one of many countries that are undergoing the review process⁹⁷. The Pakistani government fears that being black-listed will stunt its financial market's economic growth. It is predicted that Pakistan's remittance flow will be primarily affected by the potential black-listing. There is approximately more than 1 billion US Dollars flowing into Pakistan's economy, due to the large labour force residing oversees⁹⁸. This means that this is a significant revenue to the country's economy. The black-listing will have the effect of limiting the money transfer channels⁹⁹. This will not only affect the economy, but also the citizens of Pakistan. Furthermore, a black-listed country does not have the support of international organisations such as the International Monetary fund (IMF). The IMF as well as other international organisations have an observer status in the FATF¹⁰⁰. This means that other than their primary functions, these organisations also work to promote effective AML regimes. This indicates that these international organisations fully support the FATF decisions. In fact, Pakistan is currently negotiating with the IMF for an interim lending arrangement¹⁰¹. It is predicted that FATF's review will be used against Pakistan in the negotiation process. The arrangement might be rejected or stringent conditions to the lending agreement may be enforced¹⁰². There are other economic implications of being black-listed such as inflation and global reputational damage that will disturb all international business ventures¹⁰³. The consequential effects of back-listing show that jurisdictions have no choice but to adhere to the FATF's standards, regardless of the fact that it has no legally binding authority.

c) The limitations of black-listing

Even though black-listing is an effective enforcement method it still has its shortcomings. The results of an imperial study on black-listed countries has determined that countries with the highest GDP per capita and large financial service sectors responded the quickest to being black-listed¹⁰⁴. In 2002, 15 countries were placed on the black-list; 5 countries were removed from the list within a period of 12 months¹⁰⁵. Coincidentally, these 5 countries have the highest GDP per capita on the list. Meanwhile, the developing countries were black-listed for a period exceeding 3 years¹⁰⁶. This can also be evidenced by the fact that in 2019 there are 12 countries undergoing the review process, and they are all developing countries¹⁰⁷. Another study has shown that the majority of black-listed countries attempt to pass regulations that are in compliance to FATF's standards¹⁰⁸. However, the implementation of these regulations fails to achieve the desired outcome, so member states obtain poor results in their mutual evaluation¹⁰⁹. This can be attributed to the complexity of FATF standards and the limited resources of these countries that prevent them from assimilating to these standards¹¹⁰. In addition, the FATF's standards implementation process requires an established regulatory framework, which these countries do not possess¹¹¹. The FATF should take into account the regulatory capabilities of these countries when drafting international standards¹¹². Additional technical assistance¹¹³ and longer implementation time periods¹¹⁴ should also be provided to developing countries.

However, the current regime chooses to black-list these countries even though these factors are the reason they fail to meet these standards. As stated previously black-listing will ostracise countries from the international financial market. If countries remain on the black-list the likelihood of an increase in corruption and poverty is high. It is improbable that countries in that state will be capable of passing an effective regimes, that will remove them from the back-list. In this situation, it could be stated that black-listing process has amplified the issue instead of fixing it.

The FATF and the regulation of virtual currencies

As established previously, money laundering is a crime that often relies on technological developments in order to remain undetected by financial authorities. Due to this reason, the FATF believes that understanding and accepting new technological development is an essential tool in implementing an effective global AML regime¹¹⁵. The importance of accepting technological development is verified by its inclusion in Recommendation 15. Cryptocurrencies are considered by the FATF as a new technology known as virtual assets. These are defined as “digital representations of value that can be digitally traded, or transferred, and can be used for payment or investment purposes.”¹¹⁶. In the past few years, the FATF has published guidance papers that are solely focused on an AML regime for virtual assets.

The guidance papers drafted by the FATF regarding virtual assets states that all member states should adopt a risk-based approach¹¹⁷. This means each member state must understand the virtual currency activities and transactions occurring within its jurisdiction. In order to mitigate any risk in relation to money laundering. The FATF believes that this will be achieved by setting out regulatory standards. As a result, all virtual assets service providers (VASP) should be registered or obtain license that is provided the country's financial regulatory authority¹¹⁸. VASPs are defined by the FATF as businesses, legal or natural persons that conduct transactions or operations associated with virtual assets¹¹⁹. These activities may consist of the exchange between fiat currency and virtual currency, the exchange or transfer between different forms of virtual assets, the administration and record keeping of virtual assets¹²⁰. It also includes all other service transactions associated with virtual currencies¹²¹. Furthermore, each member state's regulation should restrict individuals that are associated with criminal activities from dealing with virtual currencies by rejecting their registration¹²². Countries must also impose punitive sanctions on unregistered individuals and platforms dealing with virtual currencies¹²³. This means that the VASPs will be continuously monitored by relevant financial authorities. The guidance paper also stresses the importance of tasking competent public authorities that have powers delegated by the state to supervise and ensure compliance¹²⁴. Virtual asset transactions will also be treated with the same scrutiny as fiat currency transactions. The details of customers involved in transactions that exceed 1000 US Dollars should be verified and recorded, because it is considered a large transaction in terms of virtual currency¹²⁵. Lastly, the standards encourage global cooperation between member states regarding the exchange of information, in order to mitigate any global risks in a swift manner¹²⁶. It should be noted that these rules are issued in the interpretive note to Recommendation 15. This interpretive note is parallel to the Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers Guidance Paper, which was passed in June 2019¹²⁷.

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¹ Saleh Alghamdi and Natalia Beloff, 'Virtual currency concept its implementation, impacts and legislation' [2015] Science and Information Conference 175

² Ibid

³ Ibid

⁴ Peter Alldridge, Money Laundering Law (1st edn, Hart Publishing 2003) 31

⁵ Lars Haffke and others, 'Virtual currencies and anti-money laundering: The shortcomings of the 5th AML Directive (EU) and how to address them' [2019] Journal of Banking Regulation 2

⁶ FATF, 'Money Laundering & Terrorist Financing Risk Assessment Strategies' (FATF, n.d) <https://www.fatf- gafi.org/publications/methodsandtrends/documents/moneylaunderingterroristfinancingriskassessment strategies.html> accessed 10 September 2019

⁷ FATF, 'What is Money Laundering?' (FATF, n.d) <https://www.fatf-gafi.org/faq/moneylaundering/> accessed 15 July 2019

⁸ Duncan Alford, 'Anti-money laundering regulations: a burden on financial institutions' [1994] 19(3) North Carolina Journal of International Law and Commercial Regulation 439

⁹ Financial action task force, 'What is money laundering?' (FATF, n.d) <https://www.fatf- gafi.org/faq/moneylaundering/> accessed 15 July 2019

¹⁰ Electronic Code of Federal Regulations 1938 (revised 2019), § 1010.311; Duncan Alford, 'Anti­money laundering regulations: a burden on financial institutions' [1994] 19(3) North Carolina Journal of International Law and Commercial Regulation 439

¹¹ Friedrich Schneider and Ursula Windischbaue, 'Money laundering: Some facts ' [2008] 26(3) European Journal of Law and Economics 393

¹² Ibid p.395

¹³ Financial action task force, 'What is money laundering?' (FATF, n.d) <https://www.fatf- gafi.org/faq/moneylaundering/> accessed 15 July 2019

¹⁴ Ibid

¹⁵ Ibid

¹⁶ Friedrich Schneider and Ursula Windischbaue, 'Money laundering: Some facts ' [2008] 26(3) European Journal of Law and Economics 395

¹⁷ John McDowell and Gary Novis, 'The Consequences Of Money Laundering And Financial Crime' [2001] 6(2) The Economic Perspective 6

¹⁸ Peter Alldridge, Money Laundering Law (1st edn, Hart Publishing 2003) 32

¹⁹ Ibid

²⁰ John McDowell and Gary Novis, 'The Consequences Of Money Laundering And Financial Crime' [2001] 6(2) The Economic Perspective 7

²¹ Ibid

²² Peter Alldridge, Money Laundering Law (1st edn, Hart Publishing 2003) 34

²³ John McDowell and Gary Novis, 'The Consequences Of Money Laundering And Financial Crime' [2001] 6(2) The Economic Perspective 7

²⁴ Peter Alldridge, Money Laundering Law (1st edn, Hart Publishing 2003) 34

²⁵ John McDowell and Gary Novis, 'The consequences of money laundering and financial crime' [2001] 6(2) The Economic Perspective 8

²⁶ Peter Alldridge, Money Laundering Law (1st edn, Hart Publishing 2003) 39

²⁷ John McDowell and Gary Novis, 'The consequences of money laundering and financial crime' [2001] 6(2) The Economic Perspective 8

²⁸ Ibid

²⁹ Ibid p.7

³⁰ Ibid p.7

³¹ Peter Alldridge, Money Laundering Law (1st edn, Hart Publishing 2003) 32

³² René Stulz, 'The limits of financial globalization' [2005] 60(4) The Journal of Finance 1595

³³ John McDowell and Gary Novis, 'The Consequences Of Money Laundering And Financial Crime' [2001] 6(2) The Economic Perspective 8

³⁴ FATF, 'What is Money Laundering?' (FATF, n.d) <https://www.fatf-gafi.org/faq/moneylaundering/> accessed 15 July 2019

³⁵ Ibid

³⁶ Peter Alldridge, Money Laundering Law (1st edn, Hart Publishing 2003) 29

³⁷ Financial action task force, 'What is money laundering?' (FATF, n.d) <https://www.fatf- gafi.org/faq/moneylaundering/> accessed 15 July 2019

³⁸ Ibid

³⁹ Catherine Christopher, ‘Whack-a-mole: Why prosecuting digital currency exchanges won't stop online money laundering' [2014] 18(1) Lewis and Clarke Law Review 10

⁴⁰ Ibid

⁴¹ Andy Greenberg, 'End of the Silk Road: FBI says it's busted the web's biggest anonymous drug black mark' (Forbes, 2 October 2013)<https://www.forbes.com/sites/andygreenberg/2013/10/02/end- of-the-silk-road-fbi-busts-the-webs-biggest-anonymous-drug-black-market/#9c63dcf5b4f9> accessed 15 July 2019

⁴² Ibid

⁴³ Jonathan Lane, 'Bitcoin, silk road, and the need for a new approach to virtual currency regulation' [2014] 8(4) Charleston Law Review 511-556

⁴⁴ Danton Bryans, 'Bitcoin and money laundering: mining for an effective solution' [2014] 89(1) Indiana Law Journal 443

⁴⁵ Ibid

⁴⁶ Ibid

⁴⁷ Ibid p.444

⁴⁸ Catherine Christopher, ‘Whack-a-mole: Why prosecuting digital currency exchanges won't stop online money laundering' [2014] 18(1) Lewis and Clarke Law Review 11

⁴⁹ Ibid p.14

⁵⁰ Ibid p.14

⁵¹ Ibid p.20

⁵² Danton Bryans, 'Bitcoin and money laundering: mining for an effective solution' [2014] 89(1) Indiana Law Journal 447

⁵³ Catherine Christopher, ‘Whack-a-mole: Why prosecuting digital currency exchanges won't stop online money laundering' [2014] 18(1) Lewis and Clarke Law Review 20

⁵⁴ Angela Irwin and others, 'Money laundering and terrorism financing in virtual environments: a feasibility study' [2014] 17(1) Journal of Money Laundering Control 70

⁵⁵ Ibid

⁵⁶ Catherine Christopher, ‘Whack-a-mole: Why prosecuting digital currency exchanges won't stop online money laundering' [2014] 18(1) Lewis and Clarke Law Review 22

⁵⁷ Ibid

⁵⁸ Ibid

⁵⁹ Danton Bryans, 'Bitcoin and money laundering: mining for an effective solution' [2014] 89(1) Indiana Law Journal 447

⁶⁰ Pavel Ciaian and others, 'The digital agenda of virtual currencies: can Bitcoin become a global currency?' [2016] 14(4) Information Systems and e-Business Management 898

⁶¹ Ibid

⁶² Ibid p.884

⁶³ Ibid p.884

⁶⁴ Ben Hayes, 'Counter-terrorism, "policy laundering," and the FATF: Legalizing surveillance, regulating civil society' [2012] 14(2) The International Journal of Not-for-Profit Law 11

⁶⁵ FATF, 'FATF Members and Observers' (FATF, n.d) <https://www.fatf- gafi.org/about/membersandobservers/> accessed 10 August 2019

⁶⁶ Ibid

⁶⁷ Ben Hayes, 'Counter-terrorism, "policy laundering," and the FATF: Legalizing surveillance, regulating civil society' [2012] 14(2) The International Journal of Not-for-Profit Law 13

⁶⁸ Ibid

⁶⁹ FATF (2012-2019), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF, Paris p.12

⁷⁰ Ben Hayes, 'Counter-terrorism, "policy laundering," and the FATF: Legalizing surveillance, regulating civil society' [2012] 14(2) The International Journal of Not-for-Profit Law 13

⁷¹ Ibid

⁷² Ross Leckow, 'Virtual currencies: The regulatory challenges' [2016] 109(1) Legal developments in the ESCB central banking functions 141

⁷³ Ben Hayes, 'Counter-terrorism, "policy laundering," and the FATF: Legalizing surveillance, regulating civil society' [2012] 14(2) The International Journal of Not-for-Profit Law 16

⁷⁴ Ibid p.17

⁷⁵ Ibid p.17

⁷⁶ Ibid p.16

⁷⁷ FATF (2012-2019), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF, Paris p.9

⁷⁸ Ibid

⁷⁹ Ibid

⁸⁰ Stuart Ross and Michelle Hannan, 'Money laundering regulation and risk-based decision-making' [2007] 10(1) Journal of Money Laundering Control 107

⁸¹ Ibid

⁸² Ibid

⁸³ Ibid p.108

⁸⁴ FATF (2012-2019), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF, Paris p.9

⁸⁵ Stuart Ross and Michelle Hannan, 'Money laundering regulation and risk-based decision-making' [2007] 10(1) Journal of Money Laundering Control 108

⁸⁶ Ibid p.106

⁸⁷ FATF, 'Review Process' (FATF, n.d) <http://www.fatf-gafi.org/countries/#high-risk> accessed 13 August 2019

⁸⁸ Ibid

⁸⁹ Ibid

⁹⁰ Ibid

⁹¹ Ibid

⁹² Ibid

⁹³ Ben Hayes, 'Counter-terrorism, "policy laundering," and the FATF: Legalizing surveillance, regulating civil society' [2012] 14(2) The International Journal of Not-for-Profit Law 17

⁹⁴ Ibid

⁹⁵ Ibid p.16

⁹⁶ FATF, 'High-risk and Other Monitored Jurisdictions' (FATF, n.d) <http://www.fatf- gafi.org/countries/#high-risk> accessed 13 August 2019

⁹⁷ Ibid

⁹⁸ Usman Chohan, 'The FATF in the global financial architecture: Challenges and implications' [2019] 1(1) Centre for Aerospace & Security Studies 12

⁹⁹ Ibid p.13

¹⁰⁰ FATF, 'FATF Members and Observers' (FATF, n.d) <https://www.fatf- gafi.org/about/membersandobservers/> accessed 10 August 2019

¹⁰¹ Usman Chohan, 'The FATF in the global financial architecture: Challenges and implications' [2019] 1(1) Centre for Aerospace & Security Studies 13

¹⁰² Ibid

¹⁰³ Ibid p.12

¹⁰⁴ Jackie Johnson, 'Repairing legitimacy after blacklisting by the Financial Action Task Force' [2004] 7(1) Journal of Money Laundering Control 43

¹⁰⁵ Ibid

¹⁰⁶ Ibid

¹⁰⁷ FATF, 'High-risk and Other Monitored Jurisdictions' (FATF, n.d) <http://www.fatf- gafi.org/countries/#high-risk> accessed 13 August 2019

¹⁰⁸ Omar Normah and Zulaikha Johari, 'An international analysis of FATF recommendations and compliance by DNFBPS' [2015] 28(1) Procedia Economics and Finance 22

¹⁰⁹ Ibid

¹¹⁰ Neil Jensen and Cheong-AnnPng, 'Implementation of the FATF 40+9 Recommendations: A perspective from developing countries' [2011] 14(2) Journal of Money Laundering Control 114

¹¹¹ Ibid p.115

¹¹² Ibid p.115

¹¹³ Ibid p.114

¹¹⁴ Ibid p.117

¹¹⁵ FATF (2012-2019), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF, Paris 15

¹¹⁶ Ibid p.126

¹¹⁷ FATF (2019), Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, FATF, Paris 19; FATF (2015), Guidance for a Risk-Based Approach to Virtual Currencies, FATF, Paris 3

¹¹⁸ FATF (2012-2019), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF, Paris 70

¹¹⁹ Ibid p.126

¹²⁰ Ibid p.126

¹²¹ Ibid p.126

¹²² Ibid p.70

¹²³ Ibid p.70

¹²⁴ Ibid p.70

¹²⁵ Ibid p.71

¹²⁶ Ibid p.71

¹²⁷ FATF, 'Public Statement on Virtual Assets and Related Providers' (FATF, 21 June 2019) <http://www.fatf-gafi.org/publications/fatfrecommendations/documents/public-statement-virtual- assets.html> accessed 10 August 2019