Alerting Customers of New Red Flags is a Strong Annual Outreach Strategy
The cryptocurrency world is moving faster than ever, and keeping up with Anti-Money Laundering (AML) compliance is no small feat. As we make our way through this tumultuous year of 2024, it’s crucial that we stay sharp and adaptable when it comes to spotting suspicious activities. Our annual red flags article will update you on 2004’s telltale red flags, how they’re evolving, and how to fine-tune detection. This is essential knowledge for effectively detecting and reporting suspicious and/or unusual activities lurking in the shadows of our digital economy.
FinCEN’s Latest Guidance: A Familiar Structure with Fresh Insights
If you’ve been keeping tabs on regulatory updates, you might have noticed a pattern in FinCEN’s recent alerts. Their consistent structure isn’t just for easy reading – it’s a blueprint for how we should approach red flags in our own operations.
FinCEN’s recent alert on “pig butchering” scams is particularly noteworthy. This sophisticated fraud scheme, where scammers build trust over time before exploiting their victims, requires a nuanced approach to detection. The alert included detailed and tailored red flags associated with various aspects of pig butchering schemes that address various potential touchpoints within both crypto and traditional financial institutions. The preparation and inclusion of red flags by FinCEN is a clear and obvious suggestion (read: mandate) to include them in one’s transaction monitoring and red flag strategy.
More recently, and not long after issuing its pig butchering alert, FinCEN published a supplemental advisory on activities associated with the illegal fentanyl trade. This advisory detailed new trends in the illicit fentanyl supply chain and urged vigilance in identifying and reporting suspicious activity associated with Mexico-based transnational criminal organizations and their illicit procurement of fentanyl precursor chemicals and manufacturing equipment from People’s Republic of China-based suppliers. As with the pig butchering alert, FinCEN provided detailed and targeted alert routines. Once again, an obvious must-add to one’s transaction monitoring and red flag strategy.
Bottom line: If FinCEN thought enough to create and share red flags, these should be immediately adopted and implemented by financial institutions.
While FinCEN’s guidance provides a solid foundation for identifying red flags, the real challenge lies in implementing and refining these indicators within your own operations. This brings us to a critical aspect of AML compliance, and that is the tuning of existing red flags to maximize their effectiveness.
The Art of Tuning: Refining Existing Red Flags
Sometimes, the most effective new red flags aren’t new at all – they’re refined versions of existing ones. In the world of AML, we call this process “tuning,” and it’s a critical part of maintaining an effective AML compliance program.
Consider this scenario: You’ve set an alert for three or more transactions in a 24-hour period. But what if adjusting it to four transactions totaling more than $25,000 could significantly reduce false positives while still resulting in as many, if not more, SAR filings? That’s the power of tuning.
As Mike Tyson famously said, “Everyone has a plan until they get punched in the mouth.” This wisdom applies where AML and red flags are concerned. Detection strategies might feel air-tight on paper but could very well falter when hit with the realities of the marketplace. The key to winning is to adapt your red flags based on real world, data-driven experiences—as a boxer would adjust to their opponent’s tactics in the ring.
If you have a bad red flag or two, say for example, one that flags almost every transaction under the sun or doesn’t seem to be flagging much of anything, or more likely something in between, your first reaction should be to tune or adjust the criteria, rather than mothball the flag altogether. Sometimes, a tweak of the object criteria here and there, as in our example, can do the trick.
Market Dynamics: When Crypto Prices Influence Red Flags
Here’s a factor that’s often overlooked: the impact of crypto prices on transaction patterns. When prices soar, transaction volumes typically follow suit. This can throw off volume-based and velocity-based red flags that seemed perfectly calibrated during quieter market periods. Additionally, increased prices for digital assets can impact dollar-denominated criteria (e.g., aggregate transaction amount), and deviations in past activity or expected activity.
For example, a threshold that triggers an alert for $10,000 worth of transactions might need to be adjusted in a bull market to avoid an overwhelming number of alerts resulting in false positives. Conversely, some red flags, like those detecting structuring attempts, remain relatively consistent regardless of market conditions.
The key is to build flexibility into your system. Regular reviews and adjustments ensure your red flags remain effective, regardless of whether we’re in a crypto winter or summer.
Rules-Based vs. Observational Red Flags: A Two-Pronged Approach
When it comes to red flags, it’s not just about the what, but also the how. Let’s break it down into two main categories:
1. Rules-Based Red Flags: These are your programmatic alerts, based on objective data points. Think “three transactions over $10,000 in 24 hours.” They’re consistent, scalable, and essential for handling large volumes of transactions.
2. Observational Red Flags: These rely on human insight and interaction. For instance, a customer asking probing questions about government reporting policies of your institution. While harder to automate, these can catch nuanced suspicious behavior that might slip through rules-based systems.
A robust AML program needs both. And while AI is making strides in mimicking human observation, there’s still no substitute for well-trained staff who can spot and act on subtle warning signs.
The BitAML Approach: Staying Ahead of the Curve
At BitAML, we’ve spent over nine years honing our approach to crypto AML. Our strategy? Constant vigilance and adaptation. We don’t just set red flags and forget them – we’re continuously analyzing transactional data, customer behavior, and regulatory updates to refine our approach.
This means staying on top of FinCEN advisories, industry trends, and emerging threats. But it also means working closely with our clients to understand their unique challenges and tailor solutions that work in the real world, not just on paper.
Looking Ahead: Your 2024 AML Strategy
As we navigate the complexities of crypto compliance in 2024, remember:
1. Flexibility is key. Be prepared to adjust your red flags as market conditions change.
2. Balance is crucial. Implement both rules-based and observational red flags for comprehensive coverage.
3. Stay informed. Keep up with regulatory guidance and industry trends to anticipate new threats.
4. Train your team. Especially for observational red flags, well-trained staff are your best defense.
The crypto space will undoubtedly continue to evolve, bringing new challenges and opportunities. By staying vigilant, adaptive, and informed, we can work together to create a safer, more compliant cryptocurrency ecosystem for all.
Remember, effective AML compliance isn’t just about ticking boxes – it’s about truly understanding and responding to the dynamic nature of crypto transactions. If you’re looking to refine your approach or need guidance on implementing these strategies, don’t hesitate to reach out to us at BitAML.
