Israel: How to Identify Suspicious Use of Virtual Currencies

Prompted by the use of digital currencies to fund terror and other illegal activity, the Israel Money Laundering and Terror Financing Prohibition Authority has published a document aimed at assisting financial bodies and law enforcement agencies to identify suspicious use of virtual currencies and improper activity in this field.

Red Flags

The “red flags” document is intended for providers of financial services in virtual assets, but may also assist different “outer circle” supervised bodies that provide services to such providers. In addition, this document may also help private individuals who hold virtual assets to recognize improper activity.

The more red flags present, the greater the concern the activity at hand constitutes money laundering or terror financing. The red flags are divided into a general and open list separating the client from the provider. Red flags include, inter alia, activity designed to circumvent identification or reporting duties, the purchase of virtual assets at large sums between private individuals (such as social networks or other forums) instead of through a supervised service provider, the transfer of virtual assets in wallets that have a negative indication or a transfer path that obscures tracing, and suspicious characteristics in the client’s or service user’s identity.

For end users, red flags regarding service providers in virtual assets may include that the service provider is operating without a license, the source of the funds is connected to a money laundering affair or a platform that was shut down by law enforcement agencies, or the use of peer-to-peer (P2P) platforms that are not subject to regulatory supervision. Conversely, service providers must pay attention to the following red flags: the client is not among the typical population operating in the area of virtual assets; the client refuses to provide a legitimate source or corroborating documents for the information given, or the client often changes his or her identity information; the client displays indifference to the terms of service, including a willingness to pay high fees; and the client applies pressure or displays urgency to receive the virtual assets.

White Flags

It is interesting to note that for the first time the Authority has also added a list of white flags – circumstances that mitigate risk and allow service providers and clients to perform a better risk assessment of activity in virtual assets in accordance with international standards. Examples of white flags include, inter alia, when the service provider who operates in virtual assets holds a license from a state with a low risk level of money laundering and terror financing, or when the virtual assets purchased and sold are from the same address as that client’s electronic wallet.

Virtual assets have unique characteristics that allow integrating innovation into the financial sector. At the same time, they also challenge law enforcement agencies and their technology often faces regulatory complications. This document is another step toward the standardization and adoption of the field of virtual assets, both by financial regulators and by financial institutions.

It should be noted that the document is the result of a regulation process in the field of virtual currencies and assets developed by the international organization FATF, whose objective is to develop and advance policy to combat money laundering and terror financing. The process includes the duty of each country to impose regulation toward the fight against money laundering and terror financing through virtual assets and providers of services in virtual assets. Many states are in the advanced stages of implementing the FATF’s recommendations.