Demystifying Crypto for AML Compliance Professionals

Unravel the World of Crypto and AML Crypto Regulations With Our Panel of Experts

We totally get it – keeping up with every new type of crypto asset while maintaining compliance can feel like decoding an intergalactic language. But in a world where crypto is skyrocketing again, it’s time to strengthen your ability to easily identify and report suspicious activity related to crypto.

From exploring key regulations to sharing best practices, such as tips on how to detect risky wallets or transactions that have been mixed or tumbled, our panel of experts will be discussing what you need to know to help ensure compliance when it comes to crypto assets.

Meet the Presenters

• Brian Eustice, Homeland Security Investigations
• Mike Carter, FTI Consulting
• Holly Sais Phillippi, Alessa Inc

AML Crypto Compliance Q&A

Q: When does the panel think the subject of enforcement for NFT wash trades will become a more prominent topic?

Mike: Wash trading and market surveillance, market manipulation or anti-market manipulation tools have progressed subsequent to the traditional AML monitoring tools that are out there.

As a result, it’s a little bit trickier. It’s not your traditional market surveillance due to the sheer volume of transactions.

I think the SEC has a point here, where these are sort of broker-dealer-like in behavior. I’ll expand it from just NFTs to larger pump-and-dump and wash trade schemes.

Enforcement actions on a VASP or crypto financial institution would generally be made because that VASP failed to appropriately monitor, detect, and prevent that type of activity. However, with the way in which VASPs are regulated, they don’t necessarily have the obligation of monitoring, detecting and preventing that activity. Many of them, however, are still taking it upon themselves to incorporate solid third-party tools to conduct that oversight. As a result, this entire scenario is very nuanced. 

I think what you’re going to see more of, is actual developers who are the ones that are conducting this market manipulation, such as wash trading on certain platforms, pump and dump schemes, and the distribution of misinformation to artificially pump up a volume, a token or an NFT value. You’ll most likely see rug pulls, investment scams, and pyramid schemes. These schemes will mimic all of the old-fashioned, fraud that is currently thought of as crypto-agnostic.

As a result of this, I would guess that you’ll see some more DOJ-level clinical enforcement on the criminal side.

Ultimately, I think there are some regulations that need to be written for US exchanges, to specifically give them that obligation to conduct market surveillance similar to a broker-dealer.

Q: What skills should I be looking at when hiring someone to help with crypto compliance?

Brian: I think it’s more about character rather than industry knowledge. You also must be interested in this area and have the desire to be involved in this space. I have colleagues who are much younger than me, who have no interest in digital assets, and then I have other colleagues who are my age, who are really excited about it, and are really making an effort to learn.

I think you also need to have an investigative background and analytical skills. They are the same skills that are needed to be a compliance and AML professional, or an investigator at a financial institution. 

I really do think any AML compliance person that you would hire could also manage digital asset compliance for you without issues.

Mike: I think in addition to that, from an in-house perspective, you’re looking at somebody who can organize information. A lot of these investigations are complex. You may have 13 screens up at any given time trying to link various things together in order to create a clear concise narrative.

Another key characteristic is being able to write in a clear, concise, fact-based fashion. You need to write narratives and reports that are based on actual observations not just on what you think may have happened.

That’s especially important for writing SARS. Poorly written SARS can become useless to law enforcement.

From an organizational standpoint, if you’ve got a bunch of people writing poorly written SARS, and you’re submitting them as part of your regulatory obligation, somebody at a regulatory level is going to look at those reports and start asking you questions about your SARS from an examination and compliance oversight standpoint. Those can be really tough questions to answer if your SARS are poorly constructed.

Q: What sort of controls can companies implement to help combat market manipulation and wash trading?

Mike: Third-party surveillance is important. A level deeper from that is implementing market surveillance rules. It is extremely important to make sure you have accurate data throughput. It’s vital to ensure that all of the trades you are overseeing are being fed into your third-party system correctly.

Additionally, it’s vital to ensure that your rules are appropriate. Having rules that are too narrow, that do not catch certain types of potential market manipulation activity, is a risk. Having rules that are too wide, on the other hand, can lead to too many false positives, taking away focus from your highest risks as an organization. 

Consumer education is also very important in this space. Proactively providing information for your customers about the risks of investing in whatever digital asset product that you’re providing is vital. There’s no such thing as zero risk with digital assets.