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Crypto Red Flags for Financial Institutions | Cadwalader, Wickersham & Taft LLP
On May 23, 2024, the Joint Chiefs of Global Tax Enforcement (the “J5”) released a advisory note for financial institutions, identifying warning signs associated with illicit cryptocurrency-related activity. The J5 is a collaborative partnership between the tax authorities of the United States, United Kingdom, Canada, Australia and the Netherlands. The notice is not the first time J5 has addressed cryptocurrencies; in 2022, the J5 released a series of red flag indicators highlighting the risks associated with non-fungible tokens.
In the advisory note, the J5 identifies risk indicators that it believes play a critical role in enabling financial institutions to detect and report money laundering, tax evasion, and other illicit activities involving cryptocurrencies. The risk indicators are numerous and include cryptocurrency layering, geographic risk, high-risk counterparties, new customer onboarding, ransomware, and cybercrime risk. One such risk indicator is that sending to or receiving from cryptocurrency mixers may suggest money laundering, a concern also supported by OFAC, which we discussed Here.
Publications such as the advisory note shed light on the growing concern among domestic and international tax authorities regarding the decentralized and anonymous nature of cryptocurrencies. Eric Ferron, director general of the Criminal Investigations Directorate at the Canada Revenue Agency, speaking in the briefing note, said, “We operate in a borderless digital world and it is more important than ever to raise awareness of the risk indicators associated with cryptocurrency assets that may be indicative of criminal activity.” In light of this, financial institutions may want to consider the risk indicators outlined in the briefing note for proactive measures.