AML CHALLENGES
regulation, especially across jurisdictions,
many online payment systems are not
subject to any recordkeeping, reporting or
AML compliance program requirements.
In June 2008, after e-gold’s indictment and not
long before its sentencing, the U.S. Department of Justice’s National Drug Intelligence
Center (NDIC) issued a report noting that
digital currencies are more convenient than
other methods of funds transfers because
digital currencies are easy to use, transactions can be conducted at any time without
regard to geographical boundaries, and they
are instantaneous and irreversible.
Elaborating on the Threat Assessment’s
concerns, the NDIC focused on how unregulated or under-regulated digital currency
systems heavily promote themselves as anonymous and unregulated. It noted users of
digital currency systems “can anonymously
fund digital currency accounts, send those
funds (sometimes in unlimited amounts)
to other digital currency accounts worldwide, and effectively exchange the funds for
foreign currencies — often while bypassing
U.S. regulatory oversight.”4
The FATF issued a similar report shortly
thereafter on “Money Laundering and Terrorist
Financing Vulnerabilities of Commercial
Websites and Internet Payments.”5 While
the section addressing digital currencies
appears to rely solely on the NDIC report
and the Threat Assessment, it provided a
good summary of red flags and other consid-
erations for evaluating the risks associated
with Internet payments generally.
Are the money laundering or terrorist
financing risks for digital currencies more
significant than other payment alternatives? Each new payments innovation presents its own set of unique opportunities and
risks of criminal abuse. Predictably, criminals are the first — or among the earliest —adopters of a new payments method, testing
how fast, how far and how much value can be
created or moved with as little interference
as possible for as long as possible. Given the
unique characteristics of digital currencies,
are they subject to greater criminal abuse
than other payments alternatives and thus
riskier than other payments alternatives?
Anecdotally, the Threat Assessment reported
that law enforcement observed that digital
currency systems “have become favorite
payment mechanisms for online perpetrators of illegal activity.” The NDIC report in
2008 said that digital currencies provide an
ideal money laundering instrument.” Such
comments however do not establish that they
are riskier than other payments alternatives.
FATF’s 2010 update to its 2006 Report on New
Payments Methods6 reported on its analysis
of 33 case studies involving NPMs. It found
that “while the analysis of the case studies
confirms that to a certain degree NPMs are
vulnerable to abuse for money laundering
and terrorist financing purposes, the dimension of the threat is difficult to assess.”
It concluded that money laundering and
terrorist financing risks “can be effectively
mitigated by several countermeasures taken
by NPM service providers” and suggested
that all risks factors and risk mitigants be
considered when evaluating the overall risk
of a NPM.
Nonetheless, a concern underlying all of
these reports is the general lack of regulatory
oversight and controls with respect to digital
currency systems. Although efforts have been
made in the U.S. to provide some formal regulatory guidance for digital currencies, most
digital currency systems are based outside
the U.S and the U.S.’s ability to reach those
operations is limited. The NDIC report stated
“it would be nearly impossible to legislate
regulatory controls that would allow the U.S.
government to prevent completely foreignbased digital currencies from being used in
the United States because these services are
available through the Internet.”
Part II of this article will discuss the efforts
in the U.S. to regulate digital currencies and
what impact that may have on criminal use
of such systems. It will focus in particular
on the experiences of e-gold, the pioneer in
digital currencies, the non-legislative regulation that has been set out for the industry
and the lessons of e-gold for other types of
emerging payments methods for all AML
compliance personnel.
Carol R. Van Cleef, CAMS, partner, Law firm
Patton Boggs LLP, Washington, D.C., USA,
[email protected]
U.S. Department of Justice, National Drug Intelligence Center, Money Laundering in Digital Currencies at 1 (2008), available at http://www.justice.gov/ndic/pubs28/28675/28675p.pdf.
Financial Action Task Force, Money Laundering and Terrorist Financing vulnerabilities of commercial websites and Internet Payment Systems (2008), available at http://www.fatf-gafi.
org/dataoecd/57/21/40997818.pdf .
6
Financial Action Task Force, Report on New Payment Methods (2008), www.fatf-gafi.org/dataoecd/30/47/37627240.pdf.
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