AUSTRAC wants banks to identify, report suspicious activity

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Decentralized finance (DeFi) and non-fungible tokens (NFTs) were singled out as emerging risks, with criminals attracted to anonymity and volatile pricing.

Senior lawyers say the fresh guidance points to DeFi and NFTs ultimately being regulated under the anti-money laundering (AML) and counter-terrorism financing (CTF) regime.

Banks and exchanges have been put on notice that AUSTRAC expects them to monitor activity and report dodgy crypto transactions via the “suspicious matter reporting” (SMR) regime, to help law enforcement authorities take legal actions. Commonwealth Bank and Westpac have previously been targeted by AUSTRAC for SMR failures.

Although AUSTRAC said it “recognises that most people engage with digital currency for legitimate purposes”, it wants banks and digital currency exchanges to improve surveillance of the $US2 trillion ($2.79 trillion) crypto market. Its more thorough guidance comes as the government prepares a new market licensing regime for digital currency exchanges to lift consumer protections.

Similar to what it does with banks via the Fintel Alliance to target criminal networks more broadly, AUSTRAC is keen to work closely with the private sector as it ramps up crypto policing.

It said criminals could “take advantage of conversion services, such as mixers, decentralized finance, or privacy coins to increase their anonymity and make tracing the movement of funds more difficult”.

However, AUSTRAC also recognizes the transparency of blockchain technology could help banks and regulators target illicit activity.

The public nature of most digital currency transaction data – where a full history of transactions and the provenance of coins is recorded on blockchain ledgers that are publicly accessible – “creates opportunities to identify, target and disrupt criminal activities using digital currencies,” it said.

Chain hopping red flag

Among the behavioral and financial indicators set out in the guide are “chain-hopping”, where customers attempt to obfuscate the source or destination of funds by using various ledgers.

Unusual transactions can be identified when customers use “mixers” resulting in multiple conversion, or “layering” via multiple exchanges before a customer cashes out into fiat. Other suspicious customers may attempt to provide as little identity information as possible, or use email accounts with high privacy features.

“Financial service providers need to be alert to the signs of criminal use of digital currencies, including their use in ransomware attacks,” AUSTRAC chief executive Nicole Rose said when the guide was released on Thursday.

Targeting NFTs, which have surged in popularity as traders speculate on things such as the value of digital cat pictures, AUSTRAC said the tokens could be created by anyone and presented an emerging risk that could enable criminal activity. “For example, the value of NFTs are subjective, so they can be purchased and sold for any value. This allows for criminal activities such as the laundering of funds which may have come from illicit activities,” it said.

By calling out DeFi and NFTs, Allens partner Simun Soljo said AUSTRAC was “flagging these as potential future targets for regulation under the AML/CTF regime”.

John Moss, deputy CEO of AUSTRAC, talks to The Australian Financial Review Cryptocurrency Summit on April 6 about criminal activity in the sector. Peter Braig

Release of the new guidance was foreshadowed by AUSTRAC deputy chief executive John Moss at The Australian Financial Review Cryptocurrency Summit on April 6.

AUSTRAC also issued a second financial crime guide last week for detecting and stopping ransomware, where crypto is being used to steal money from unsuspecting customers.

Commonwealth Bank was forced to respond to a crypto scam last week, after a link purporting to be a story from the ABC News website pointed to a false partnership with a cryptocurrency trading platform to encourage people to invest in crypto assets.

CBA said the article was “a scam designed to entice unsuspecting people to go to the scammer’s website and provide their personal details and money” and had been reported to Facebook and other authorities.

Tackling the issues

The new guidance by AUSTRAC came as the Australian Prudential Regulation Authority confirmed its new risk assessment framework for crypto assets, first reported by the Financial Review on April 7.

APRA told banks on Thursday that responsible supervisors should be notified if staff were undertaking activities associated with crypto assets. “While these activities can provide opportunities and benefits for the financial system and its customers, they also bring new risks that may be challenging for entities to identify, assess and manage,” APRA chairman Wayne Byres said in a letter sent to all regulated institutions.

At the Crypto Summit, Mr Moss’ detailed briefing included case studies on some criminal activity uncovered by authorities, including one involving terrorism sympathizers using crypto to buy weapons, uniforms and fund training for Taliban fighters and terrorists in Syria.

AUSTRAC does not want banks to adopt blanket bans on crypto, recognizing its potential to drive innovation and efficiencies in sectors including payments, logistics and healthcare.

“AUSTRAC discourages financial institutions from indiscriminate and widespread closure of accounts across entire sectors,” it said. “De-banking legitimate and lawful businesses can negatively impact individuals and businesses. It can also increase the risks of money laundering and terrorism financing and negatively impacts Australia’s economy.”

Treasury has asked the Council of Financial Regulators to provide advice on policy options to address the de-banking of crypto players by the end of June.

Blockchain Australia chief executive Steve Vallas said the AUSTRAC guide would “help ensure greater awareness of the risks associated with the sector are not an impediment to innovation and economic opportunity presented by this technology”.

“The use of digital currencies for criminal purposes has no place in our sector,” Mr Vallas said in AUSTRAC’s release. “Open dialogue, pro-active guidance and strong relationships between government and industry are necessary to ensure businesses can identify and report behavior that puts Australians at risk of harm”.

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