Crypto

Crypto suspicious activity reports are climbing. Here’s why.

WASHINGTON — As cryptocurrency’s popularity has grown, so have the flags of potential money laundering and fraud. 

As the Biden administration wraps its head around cryptocurrency and how to regulate it, cryptocurrency’s potential to be used for illegal purposes has come to the forefront of the conversation. President Biden’s executive order on crypto from March explicitly tasked the Treasury Department and other federal agencies with finding better ways of scrutinizing digital assets and the extent to which they’re being used for money laundering and fraud. 

But that’s a big, complicated task — and it’s not made simpler by the growing volume of cryptocurrency-related reports meant to identify that activity. 

The number of suspicious activity reports involving cryptocurrency reached roughly 92,000 in 2021, according to the Financial Crimes Enforcement Network, or Fincen. That figure is more than double the 42,782 crypto-related SARs the agency said that it received in 2020, which itself was quadruple the 10,377 SARs that mentioned crypto in 2017. 

It’s something that the Biden administration and the government are trying to figure out how to tackle. Fincen, the Treasury’s anti-money-laundering arm, is facing a fast-evolving landscape that calls for specialists and resources the bureau might not have. 

“[Fincen’s budget] constrains our ability to hire analysts, particularly in the cryptocurrency area, to be able to do the type of analytics that’s required to understand how cryptocurrencies are flowing and contributing to illicit finance,” acting Director Himamauli Das told Congress last week. “Our team is incredibly talented, but they’re incredibly small as well, and they’re just outmatched to the challenge not in competence, but in terms of resources alone.” 

Following the breadcrumbs

The 92,000 crypto-related SARs is a big number, and it’s larger than the number of SARs made by securities and futures companies and by casino/card club companies.

It takes a bit of educated guesswork to elucidate out where those cryptocurrency-related SARs might be coming from — there’s no specific category in the SAR paperwork to indicate that the suspicious activity is coming from a digital-asset company or whether it’s crypto-related at all. 

Most SARs filed by cryptocurrency exchanges (which are likely to be about digital assets) are categorized as a “money services business,” experts said.

Money services business SARs rose by about 220,000 from 2020 to 2021, the most of any category, according to the Fincen data. 

“If crypto companies are filing SARs, they’re probably registered as a money services business,” said Alison Jimenez, president of Dynamic Securities Analytics, an anti-money-laundering consultancy. “There’s a small chance that some of them are also registered as futures companies or broker-dealers.”

But “money services businesses,” or MSBs, is a broad category that includes, among other things, money transmitters like PayPal, providers and sellers of prepaid access such as gift cards, as well as cryptocurrency exchanges. Growth in the money services business category also hasn’t been as steep as growth in other categories in the last few years. 

Breaking down the MSB category into types of suspicious activity being reported reveals more clues about where that cryptocurrency jump might be coming from. There’s been a huge leap in SARs filed by registered MSBs about unregistered MSBs, according to Fincen data. Jimenez wrote about her the analysis of registered MSB SARs regarding their unregistered counterparts using Fincen data as of October 2021.

For the full-year 2021, registered MSBs filed nearly 67,000 SARs about unregistered MSBs more than triple the number the previous year. 

So what could be happening here?

Jimenez said what’s likely going on is that licensed crypto exchanges, filed under MSBs, are finding and flagging unlicensed entities. 

There are a few reasons to think this jump is related to crypto activities. In 2019, Fincen “heightened the imperative” for crypto exchanges to register as a MSB by issuing new guidance, Jimenez said, immediately before the first big increase in SARs coming from that category of registered entities.  

Most of the increase (65,397 of the total 66,751 SARs in 2021) can be traced to San Francisco County, California, according to the Fincen data. San Francisco County happens to be the legal address or headquarters for the largest cryptocurrency companies in the United States. 

“There’s this huge world of unregistered unlicensed exchanges or ATMs and other types of entities that are operating outside of the regulatory regime, and that’s something that the licensed exchanges are identifying,” Jimenez said. “I’m not sure why they’re detecting so many, but they are and they’re reporting many.” 

An example of what these licensed exchanges might be reporting, Jimenez said, would be what she called a parasitic exchange, or an unlicensed exchange operating through a licensed one, using the liquidity of the larger company. It could also be an unlicensed crypto ATM, which are considered to be MSBs by Fincen, she said. 

“It’s pretty crazy,” she said. As a point of comparison, Jimenz said that “if you had a bank saying I noticed all these unregistered banks, that’s a concerning thing.” 

‘Coming into the fold’

While the potential presence of a high volume of unlicensed cryptocurrency operations likely isn’t good news to regulators, some experts see the overall growth in crypto-related SARs as a sign the cryptocurrency industry is maturing. 

Although there have been high-profile cases of crypto firms, including banks, that lack robust anti-money-laundering protections, the growth in cryptocurrency-related SARs means that institutions are getting better at spotting suspicious activity, said Ian McGinley, a partner at the law firm Akin Gump Strauss Hauer & Feld LLP.

“I see it in general as a sign that crypto is coming within the fold of traditional finance, and you’ll see the increase in these reports as a kind of function of that,” said McGinley, a cryptocurrency fraud expert with more than a decade as an attorney with the U.S. Attorney’s Office for the Southern District of New York.

There are also more exchanges now, and more are required to report suspicious activity to Fincen, he said. With the growth of cryptocurrency, there’s simply more opportunity for nefarious activity, he added. 

“Some of it probably has to do with how mainstream cryptocurrency has become and how many institutions deal with it, including institutions that might have reporting obligations, and also just how many members of the public now touch cryptocurrency,” McGinley said. “Plus, exchanges and other players in the field have really increased their regulatory functions.” 

And just because SARs are being filed doesn’t mean that something like money laundering or fraud is actually happening, said Alma Angotti, a partner and anti-money-laundering expert at the consultancy Guidehouse who has also served with the Securities and Exchange Commission and Fincen. 

“It’s important to remember that the standard for filing a SAR is very low,” she said. “Does the institution have a reason to suspect that the activity is relating to something criminal or is not typical for that customer?” 

With crypto, Angotti said that it’s actually easier for financial institutions to trace, so there might be more opportunities for benign activities to be flagged as suspicious. 

“You know a lot more about a deposit of crypto than your bank does if you deposit $10,000 in cash,” she said. “They know where it came from, how long ago it was the proceeds of a ransomware hack, they know if it’s been broken up and put back together into a different wallet, [and] they know if it’s come from a wallet associated with a risky exchange.”

Like a dye pack in a wad of cash, Angotti said that crypto’s traceability makes it an easy target for SAR reports, and she expects them to continue climbing. 

“Because of that, there may be even more reasons for companies to file,” Angotti said. 



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