Cryptocurrency transactions and exchanges are increasingly coming under the microscope of regulators and law enforcement agencies as the popularity of virtual currencies grows.
Canada’s anti-money laundering watchdog sent 61 cryptocurrency-related incidents to law enforcement agencies for investigation in the past fiscal year – more than triple the number of such disclosures it made in the previous year, according to data obtained by The Globe and Mail through an Access to Information request. The agency’s most recent fiscal year ran from April 1, 2018, to March 31, 2019.
Experts predict that the number of cryptocurrency-related disclosures by the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) will skyrocket next year, when virtual currency exchanges officially come under the agency’s watch.
The surge comes amid the growing popularity of virtual currencies such as bitcoin and ether, which allow users to exchange assets online without the use of intermediaries such as banks. Virtual currency transactions are considered to be at high risk of exploitation by criminals because they allow users to transact directly with one another without any oversight, sometimes using currencies designed specifically to provide anonymity. Additionally, digital currency exchanges vary in how much identification they require from their users and, although some of them voluntarily report suspicious incidents to FinTRAC, they are not legally required to do so.
The cryptocurrency sector has come under greater regulatory scrutiny in recent months, in the wake of the dramatic unravelling of QuadrigaCX, once Canada’s largest cryptocurrency exchange. The beleaguered exchange filed for bankruptcy earlier this year after its CEO Gerald Cotten died while travelling in India last December, leaving customers unable to access millions of their cash and cryptocurrency holdings. Meanwhile, the price of bitcoin has been steadily climbing, surpassing $15,000, after a protracted downturn last year.
There may be a number of reasons for the surge in disclosures related to cryptocurrencies, FinTRAC told The Globe in an e-mail exchange, but the agency is prohibited from discussing specific cases or any of the financial intelligence it receives.
“Generally speaking, with the expansion of the cryptocurrency market over recent years, it is expected that cryptocurrencies would be increasingly present in suspicious transaction reporting received by FinTRAC,” spokeswoman Renée Bercier said.
The number of suspicious incidents involving cryptocurrencies that FinTRAC has passed along to law enforcement has been steadily climbing in recent years, the data show. During its 2013-14 fiscal year, the agency only made one such disclosure to its law enforcement partners. In fiscal 2016-17, that figure rose to 12, and the following year it climbed to 19.
The agency notes that the disclosures vary in nature. Some were made to flag suspicious transactions, while others refer more broadly to cryptocurrency exchanges or dealers.
Canada’s anti-money laundering and counterterrorist financing laws require a number of entities – including financial institutions, money services businesses, casinos and realtors – to report suspicious or large cash transactions to FinTRAC. Some of these reports may contain references to cryptocurrencies, FinTRAC said. In other instances, FinTRAC’s cryptocurrency-related intelligence may come from exchanges themselves who are flagging suspicious transactions, despite not being required to do so. RCMP Staff Sergeant Stephen Dibblee said the police agency has received a number of such voluntary disclosures through FinTRAC.
The anti-money laundering agency passes along the financial intelligence it has gathered to its law enforcement and national security partners if it has “reasonable grounds” to believe that the information may assist with investigating or prosecuting a case involving money laundering or terrorist financing, Ms. Bercier said.
“Often based on hundreds or even thousands of financial transactions, the Centre’s financial intelligence disclosures may show links between individuals and businesses that have not been identified in an investigation, and may help investigators refine the scope of their cases or shift their sights to different targets,” Ms. Bercier said.
“They are also used by police and law enforcement to put together affidavits to obtain search warrants and production orders.”
Garry Clement, a compliance consultant who spent 34 years with the RCMP and specialized in financial crimes, said the number of cryptocurrency-related disclosures being made by FinTRAC is likely rising as awareness about money-laundering risks and red flags grows.
“Everybody’s getting better at knowing what they should be disclosing,” Mr. Clement said.
The volume of such disclosures is expected to “skyrocket” after cryptocurrency exchanges come under FinTRAC’s watch next year, said Staff Sgt. Dibblee. As of June 1, 2020, virtual-currency dealers – the online marketplaces where users go to buy and sell cryptocurrencies – will be required to register with FinTRAC, keep detailed records of clients and transactions and report suspicious activity to the watchdog.
Training its staff on virtual currencies is currently a “top priority” for the RCMP’s financial crime unit, Staff Sgt. Dibblee added.
"It’s something we’re actively working on – training, getting ourselves as far as we can to the forefront of it.”
In one recent case, the RCMP seized 22.1 bitcoins at the home of a 25-year-old Toronto resident who, under the alias “Mr Hotsauce,” was selling a slew of illegal drugs – including fentanyl, heroin, cocaine and methamphetamine – on an encrypted online network that cannot be accessed through traditional search engines. George Anthony Athanasiou was found guilty of drug-related offences earlier this year.
“We’re seeing success in seizing cryptocurrency,” Staff Sgt. Dibblee said. “It’s certainly newer in our business, but we’re actively pursuing it."
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