Money Laundering, Terrorist Financing and Sanctions Risks for Cryptocurrencies

The increasing acceptance of digital assets and their integration into the financial landscape mean it is imperative for financial institutions (“FIs”) to recognise and manage the associated money laundering (“ML”), terrorism financing (“TF”) and sanctions risks posed from such digital assets.  

In July 2023, the Association of Banks in Singapore released the Industry Perspectives on Best Practices – Management of Money Laundering, Terrorism Financing and Sanctions Risks from Customer Relationships with a Nexus to Digital Assets. The paper highlights the ML, TF, and sanctions risks for FIs who have customers with a nexus to digital assets, red flags to be considered and provides helpful best practice examples as to how FIs may manage such risks. 

The paper primarily focuses on cryptocurrencies among the different types of digital assets. Cryptocurrencies are identified as having the greatest risk in terms of ML/TF and sanctions, mainly due to their widespread public acceptance, significant market value, and ease of conversion into traditional currencies.

Furthermore, the paper outlines additional risk factors that fall into three categories: customer risk, products and services risk, and geographic risk. Financial institutions  are advised to take these factors into account in addition to their existing know-your-customer (KYC) risk factors.

Some of the best practices covered in the paper include:

• The need to consider the materiality of risk arising from cryptocurrency nexus when establishing the level of due diligence to be applied to Digital Payment Token Service Providers, legal entities and natural persons at onboarding and for ongoing monitoring
• Corroboration of Source of Wealth/Source of Funds obtained from cryptocurrency related activities
• Ongoing transaction monitoring through the use of on-chain screening and also to assess on-chain counterparty risk which will strengthen overall holistic due diligence and surveillance capabilities

As highlighted in the paper, it is crucial for FIs to establish their respective risk appetite before formulating and defining their acceptance criteria when transacting with customers with a nexus to cryptocurrencies. Not only does this help to mitigate potential risks to the firm, it enables FIs to comply with regulatory requirements and also enhances customer protection.

This paper's release is well-timed, coinciding with FI's efforts to find a harmonious equilibrium among customer protection, innovation promotion, and their presence in the cryptocurrency realm. It is crucial for these institutions to establish a strong anti-money laundering and combating the financing of terrorism ("AML/CTF") programme in order to safeguard themselves against inadvertently facilitating money laundering, terrorism financing, or sanctions evasion while engaging with customers closely associated with cryptocurrencies.

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