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Is it money laundering or just good business? Part 4: Crypto, NFTs, gems and art.

16 December, 2022
Join us as we delve deep into how compliance teams should approach the heady world of High Net Worth Individuals (HNWI) and anti-money laundering (AML).

Part 4: Crypto, NFTs, gems and art. 

Old money, easy laundry

It used to be easy. People made wealth through property, shares or a great salary. If they were really exotic they may have invested in fine art or gems. 

Money laundering through properties is fairly easy to do, same with conflict diamonds (just buff that Kimberley Process Certification Scheme (KPCS) mark off, change hands a few times and it’s untraceable).

But nowadays, crypto and NFTs are a whole new ball game. 

New wealth types, new laundromats

Like everything else on the internet, new wealth types favour anonymity. This is a problem for compliance officers trying to verify a source of wealth, or even a simple identity. 

These wealth types are so new, most compliance officers don't have the exposure or training to understand them.

These wealth types are so new, most compliance officers don't have the exposure or training to understand them. 

Crypto

Take Bitcoin as an example. As a compliance officer, if you’re looking at someone who made wealth from mining Bitcoin, you don't just want the statement from the Bitcoin provided that they sold it to. You might want to ask for electricity or server bills as proof that they actually mined those coins. Or perhaps they used alternative servers so you’d want to ask for proof of them.

Depending on where the HNWI cashed out their Bitcoin, you’d also want local bank statements or even just the portfolio statement.

But that’s not enough in this brave new world. You also need the knowledge that the exchange they used is reputable. There are hundreds of exchanges globally and even some of the most famous ones  (e.g. Binance) have actually been stung for poor AML practices. Unless you live and breathe crypto you’d never hear about this. Most compliance officers want to focus on conducting focused investigations, or quality assurance audits. Not staying up to date with a fringe, but influential, wealth type ecosystem.

A real one, in the wild.

Crypto may seem like an intangible threat, but because of the volume of cases we process here at First AML, we see it surprisingly frequently. Here’s how our most recent catch unfolded.

The individual engaged a well-known regional real estate firm to sell their rural property. The individual confirmed that his source of wealth and funds for the property was derived from various trades with a specific virtual coin/currency. All these transactions were completed with an offshore company, not the company that owned the property he was selling. 

The coin appeared legitimate at first glance, however as the evidence (a series of statements and spreadsheets confirming trades and sales) was reviewed it was deduced that: 

The coin was not run on an open ecosystem, like Bitcoin or Ethereum. Instead it was run on a closed ecosystem that had a number of controversies related to it. 
The trader was not identified using their legal name but a code identifier that could not be linked to the individual. 

Although the coin was technically legal and regulated, it had a lot of angry consumer feedback and discussion online. 
Due to the regulated status, the coin exchange attested to conducting KYC/AML checks and confirmed traders’ bank accounts. However, relying on another reporting entity’s due diligence, especially one with so many red flags, was a dangerous idea. 

Despite all this, the clincher was the fact that buried deep in the regulator documentation it was stated that trades of this coin were technically not possible until a certain date. Cross matching this against the records provided by the individual showed sales prior to that date. An impossibility, unless someone was lying. 

This ‘smoking gun’ coupled with the lack of publicly accessible and verified information meant that the individual and their entity were flagged as potentially high risk. 

NFTs

The other new wealth type on the block are NFTs. Unlike crypto, where there’s tangible proof, NFTs rely entirely on the online auction houses through which they’re bought and sold. 

We would hope that these auction houses vet their buyers and sellers. But for many companies compliance takes a backseat to commercial drivers. Like crypto exchanges, it’s the compliance officer’s task to not just understand the asset type, but also the entire ecosystem it sits in. Then based on that context and knowledge, make a risk-based call on the HNWI. It’s not easy and a common reason complex entity KYC is increasingly being outsourced to specialists.


About First AML

First AML streamlines the entire anti-money laundering onboarding and compliance process. Backed by real expertise, its cloud-based KYC Passport allows complex entities to share their verification across multiple companies and geographies, at their discretion.

Making an otherwise complex and manual onboarding process simple for clients and cost effective and compliant for businesses, First AML delivers efficiency and time savings, protecting reputations, and enabling companies to be on the right side of history in the face of global threats.

Keen to find out more? Book a demo today! No time for a long demo? No problem. See what First AML can do for your business in 2 minutes – watch the short demo here.