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CRYPTO CURRENCIES AND CRIMINAL CUSTOMERS:Taming the Crypto Wild West

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James Fanning

James Fanning is a Director at FTI Consulting, London 

As someone who spends most of his life helping banks in the fight against financial crime, I always enjoy stories of hapless criminals caught in the act trying to get money into the system.

There was the man who arrived at a building society with a bag of £50 notes, and exclaimed “I’m definitely not a drug dealer!” when questioned by staff. Then there was the gentleman who visited his safe deposit box in the city twenty times a day, whisking in and out on his motorbike to dispense with his illicit wares.

These crooks were, to put it kindly, unsophisticated. Or to put it bluntly, they were idiots. For every Vito Corleone there will be a hundred Del Boys. The real challenge for law enforcement, regulators and compliance professionals will always be the smart crooks, particularly those using new technologies and tools to disguise their behaviour.

Depending on your opinion, virtual currencies represent either the vanguard of a utopian future, or the latest speculative bubble just waiting to burst. Despite uncertainty about the future of virtual currencies, criminals have been quick to seize new technology, and benefit from the perceived anonymity, speed of transactions and ease of access to international markets.

 So what do crooks get from virtual currency that they don’t get from banks?

Let’s take a worked example. I’m a politician in a country with a high degree of corruption and I’ve been plundering the public purse. I want to buy a property offshore as an investment to house my collection of Bentleys, Kalashnikovs and football clubs.

I might struggle with getting my money into a bank in the UK. This is because any bank worth their salt will be carrying out Enhanced Due Diligence checks to determine my source of wealth and funds. The same is true for any lawyers or estate agents that might be involved in the transaction. Failure to carry out the measures could mean fines, business restrictions and public censure. Whilst there is no guarantee the bankers, lawyers and agents will do the right thing – and a significant of the world’s money laundering still goes through London – at least there is a framework in place to stop it from happening.

Currently, there are no such requirements for virtual currency traders. So I could place funds into an account in my country. I could then use the funds to purchase some Crypto Currency, let’s call it DodgyCoin. I then go to a currency exchange and convert it to CrookCoin, and on to Baddiecoin and Villaincoin before converting back to Dodgycoin.

I then approach a virtual currency exchange service, converting my virtual coins into hard currency. The result? I have successfully obfuscated the original proceeds and disguised the original funds.

The current state

The above may seem unnecessarily disparaging of the Virtual Currency world. Certainly, there are many exchanges that conduct AML checks to ensure that the above does not happen. But a recent study into Bitcoin Money Laundering, indicated that “this is out of choice rather than obligation…there are some who choose not to, possibly to attract business from criminals1”.

Of course, we know that regulated institutions will often flout the rules where there is money to be made. So it is likely that unregulated institutions will not take AML and sanctions controls as seriously as they could do.

 Is the money launderers dream over?

This brings us to the Fifth Money Laundering Directive (5MLD). The EU has determined that anyone converting virtual currency into hard currency, will now be subject to the same rules and regulations as other financial institutions. This is due for implementation by member states by October 2019.

The UK Government has indicated that the new Directive “may…be transposed in full, by the UK during the post-Brexit period2”. In addition, just this month the FCA has published a Dear CEO letter, advising financial institutions on measures to apply where dealing with crypto-exchanges. It seems virtual currencies are on the regulatory radar, and it would be surprising if the 5MLD requirements were not adopted by the UK government in full.

So maybe the dream isn’t over – but certainly, governments and regulators are taking steps to tame the Crypto Wild West. 

I offer cryptocurrency to fiat exchange services, what should I be doing?

The new legislative framework for crypto exchanges will mean adhering to the established rules laid down in the Fourth Money Laundering Directive, which has been incorporated into UK law in the Money Laundering Relations 2017.

It’s easy to reel off a list of Money Laundering Requirements, and simply state that Currency Traders now need to adhere to them. The basic measures involve:

  1. i) Customer screening for PEPs and sanctions;
  2. ii) Carrying out a financial crime risk assessment for each customer;

iii) Identifying individual and corporate customers and verifying that they are who they say they are;

  1. iv) Carrying out regular reviews of due diligence to confirm it is up to date, and carrying out additional reviews where anything about the relationship has changed;
  2. v) Carrying out enhanced checks for customers that pose a higher risk of Money Laundering or Terrorist financing, including more stringent checks on customer Source of Wealth and Source of Funds.
  3. vi) Monitoring accounts for unusual activity;

vii) Reporting any suspicions of Money Laundering or Terrorist Financing to the NCA.

The problem with this, however, is that this framework was largely designed with financial institutions in mind. Virtual Currencies are by their very nature different, and a tailored, specific approach is required.

The key starting point, therefore, is the Business Wide Risk Assessment. This means understanding the inherent financial crime risks across your business, in order to inform the designing of controls to mitigate those risks. Virtual currency risks may be entirely different to those in a retail banking, commodities trading or wealth management context, and so the controls designed need to reflect this.

Currency Exchanges should ask themselves the following:

  1. i) Are we converting coins for cash, for individuals or corporates? What is the proportion of individuals vs. corporates? Does the existence of corporates in our portfolio make it harder to understand who we are dealing with? Are the individuals PEPs? Are they based in high-risk locations, is there any negative information about them in the news?
  2. ii) What virtual currencies do we convert? Is it just well-known coins like Bitcoin, or do we trade in more unique, start-up offerings. Is there evidence any of the currencies have been used for criminal purposes?

iii) Are any of the currencies based in jurisdictions with a high risk of money laundering or terrorist financing? Can we determine where the currency was established and how?

  1. iv) What is the volume and value of the trades? How quickly can someone use us to convert virtual currency into cash? Does the speed of service make it difficult to monitor unusual or suspicious transactions?
  2. v) Can we always see a clear audit trail to the individual’s initial purchase of virtual currency?
  3. vi) Can our customers’ identities be clearly identified in the public blockchain? Do we have measures in place to confirm customer identity at the point of conversion to cash?

vii) What are our delivery channels?

The above framework should assist in developing an understanding of the core financial crime risks. It is then a case of developing the pre-existing MLREGS 2017 controls, in line with the identified inherent risks.

This is no easy exercise, and much of the published guidance will relate to more mainstream financial products and contexts. A good example of this is Source of Funds. For a retail bank, this is easy. You simply identify the account money has come from, and how that money was initially generated.

With virtual currency, the initial payment from a bank account might have happened years ago. The customer might have traded hundreds of times in different virtual currencies, before deciding to make the exchange to real money. In higher-risk cases, currency exchanges may wish to see verifiable records and a clear audit trail of all transactions to confirm the initial source of funds.

This is not easy to do, but if the crypto exchanges can’t do it, they will be in the same position as the building society approached by the man with a bag of cash. If you can’t tell where your client’s money has come from, then you shouldn’t be doing business with them.

There are no easy solutions, and new technologies mean new types of crime and new regulations. The application of existing regulation to new service providers will be a source of challenge for many years to come.

Finance

Hong Kong’s Cathay Pacific warns of capacity cuts, higher cash burn

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Hong Kong's Cathay Pacific warns of capacity cuts, higher cash burn 1

(Reuters) – Cathay Pacific Airways Ltd on Monday warned passenger capacity could be cut by about 60% and monthly cash burn may rise if Hong Kong installs new measures that require flight crew to quarantine for two weeks.

Hong Kong’s flagship carrier said the expected move will increase cash burn by about HK$300 million ($38.70 million) to HK$400 million per month, on top of current HK$1 billion to HK$1.5 billion levels.

Hong Kong is set to require flight crew entering the Asian financial hub for more than two hours to quarantine in a hotel for two weeks, the South China Morning Post reported last week, citing sources.

“The new measure will have a significant impact on our ability to service our passenger and cargo markets,” Cathay said in a statement, adding that expected curbs will also reduce its cargo capacity by 25%.

The airline, in an internal memo seen by Reuters, requested for volunteers among its crew who could fly for three weeks, followed by two weeks of quarantine and 14 days free of duty, adding it will be a temporary measure and not all its flight will require such an operation.

“We continue to engage with key stakeholders in the Hong Kong Government,” the memo said.

The government did not immediately respond to a request for comment.

Separately, a company spokeswoman said the airline could not detail the impact on vaccine transport specifically in terms of cargo shipments.

The aviation industry has been hit hard by the COVID-19 pandemic as many countries imposed travel restrictions to contain its spread.

In December, Cathay’s passenger numbers fell by 98.7% compared to a year earlier, though cargo carriage was down by a smaller 32.3%.

($1 = 7.7512 Hong Kong dollars)

(Reporting by Shriya Ramakrishnan in Bengaluru; Additional reporting by Jamie Freed in Sydney and Twinnie Siu in Hong Kong; Editing by Bernard Orr and Arun Koyyur)

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Travel stocks pull FTSE 100 lower as virus risks weigh

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Travel stocks pull FTSE 100 lower as virus risks weigh 2

By Shashank Nayar

(Reuters) – London’s FTSE 100 fell on Monday, with travel stocks leading the declines, as rising coronavirus infections and extended lockdowns raised worries about the pace of economic growth, while fashion retailers Boohoo and ASOS gained on merger deals.

The British government quietly extended lockdown laws to give councils the power to close pubs, restaurants, shops and public spaces until July 17, the Telegraph reported on Saturday.

The blue-chip FTSE 100 index dipped 0.1%, with travel and energy stocks falling the most, while the mid-cap index rose 0.1%.

“Stock markets are crawling between optimism around the rollout of vaccines and worries that a jump in virus infections and fresh local lockdowns could further affect recovery prospects,” said David Madden, an analyst at CMC Markets.

Britain has detected 77 cases of the South African variant of COVID-19, the health minister said on Sunday while urging people to strictly follow lockdown rules as the best precaution against the country’s own potentially more deadly variant.

Prime Minister Boris Johnson had earlier warned that the government could not consider easing lockdown restrictions with infection rates at their current high levels and until it is confident that the vaccination programme is working.

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy.

Online fashion retailers Boohoo and ASOS surged 4.8% and 5.9%, each. Boohoo bought the Debenhams brand, while ASOS was in talks to buy the key brands of Philip Green’s collapsed Arcadia group.

Recruiter SThree Plc gained 0.9% after its profit, which nearly halved, still managed to beat market expectations and the company said it had resumed dividends.

(Reporting by Shashank Nayar in Bengaluru; editing by Uttaresh.V)

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Top 8 Tax Scams to Watch Out For

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Top 8 Tax Scams to Watch Out For 3

It is tax time and that means finding the best way to file your taxes and to get a refund of any amount you’ve overpaid. Unfortunately, tax time also means plenty of scammers are thinking of new and clever ways to try and get their hands on your money or on your personal information (which they can use to get money).

Those who specialize in IRS tax scams are clever and can be very convincing. Your first line of defense is to always know what to be looking for in terms of common tax fraud in order to avoid being another victim.

8 Most Common Tax Scams

Protecting yourself from IRS tax scams can be tricky if you’re not aware of what the threats are. A good tax scam seems legitimate, and that is what makes them dangerous. Always be on the lookout for the eight most common tax scams, including:

  • IRS Phone Scams
  • Fake IRS Emails
  • Fraudulent Tax Preparers
  • Fraudulent Tax Refunds
  • Fake Charities
  • Set Up Offshore Accounts
  • Empty Promises
  • Frivolous Returns

To know what exactly you need to watch out for, let’s look at them in more detail.

1. IRS Phone Scams

If someone calls you claiming to be from the IRS, it is almost certainly one of many IRS phone scams. The IRS will never call you to demand money for back taxes or to confirm your personal information, so be immediately alert. Never give personal information over the phone, and don’t head to the bank to follow the demands for money.

If you do wind up on the end of an IRS phone scam, don’t become flustered by aggressive tactics by the fake “agent”. They are good at sounding threatening and demanding information or payments. Remain calm and ask for contact information. Tell the scammer you’ll call them back with the information. Either the scammer will give you fake information or he will work to avoid leaving any information at all. Regardless, don’t call him back. Simply report the call to the local police or the IRS.

2. Fake IRS Emails

Another very common fake IRS scam is phishing, or sending fake IRS emails, in a ploy to gather personal information. Fake emails will look authentic and will ask you to click on a link or to log in to a fake IRS website. The purpose of these emails is to simply gather your personal information to be used for other fraudulent purposes.

Just like with IRS phone scams, you should be immediately wary if the IRS appears to send you an email. The IRS does not contact citizens through email. All official IRS communication will come through standard mail. If you do find a fake IRS email in your inbox, forward it to the IRS. The IRS investigates these scams and has a dedicated email address for this very purpose: [email protected].

3. Fraudulent Tax Preparers

Some scam artists show up in a suit, open a storefront and offer to prepare your tax return for you. These tax preparers appear by all accounts to be absolutely legitimate, and many go to great lengths to convince customers of their years of experience and authenticity.

As a fraudulent tax preparer, however, the person is not legitimate. The scam artist can use your tax return in many ways for his own benefit. He can inflate your refund and skim off the top. He can charge outrageous fees for filing on your behalf. He can file your return correctly this year and gather all of your information to make a fake return for his benefit next year.

If you are going to have someone else prepare your taxes, be sure to look carefully through tax service reviews. Tax service reviews are available on many different websites that offer feedback on companies and services. These reviews will give you a very good idea about the legitimacy of the business and the reliability of the preparer. If a company doesn’t have any tax service reviews on any website, like e.g PissedConsumer.com, or BBB, that may be a sign that it’s a pop-up company that will disappear as soon as the scammer has what he wants.

4. Fraudulent Tax Refunds

Another very popular tax scam starts well before the tax season. To file a fraudulent tax return, the scammer must gather all pertinent personal information including a social security number. He then uses the information he gathered to file a fake tax return on your behalf. Naturally, he’s not going to send you the refund he’s claiming – that goes into the scammer’s pocket.

The best way to prevent a fake tax return is to guard your personal information close at all times. If nobody is able to steal your identity, they can’t file a tax return. Another good step is to file your own tax return as early as possible. That way, even if your information was stolen somehow, you will get your refund correctly and the IRS will be alerted when someone files a second return using your information.

5. Fake Charities

Charitable donations are tax-deductible if you’re itemizing your deductions. This creates possibilities for scammers to take advantage of others who are looking to reduce their tax burden and increase their refund by making donations. Fake charities can take on many shapes and forms.

Some may appear conveniently around tax time or be affiliated with fraudulent tax preparers. The claim is that by donating to a fake charity you will help others and reduce your own tax liability. Instead, you’re giving someone free money and you won’t be able to deduct the donation as it’s not a real charitable organization. Other fake charities involve you in a scam by promising to give you back your donation as soon as the tax return is filed, for example. It goes without saying that claiming a donation you didn’t actually make is tax fraud and highly illegal.

At the advice of his tax preparers, a famous country singer Willie Nelson moved some of his money into tax shelters and charities to help reduce his tax bill. The IRS grew suspicious of the moves and investigated. In one of the most famous IRS cases in the United States, Willie Nelson was hit with a tax bill in the millions when his charities and shelters were found to be invalid.

Willie didn’t have the funds to make the payments, so the bill continued to grow until the IRS finally grew so frustrated they raided and seized all of Willie Nelson’s properties including a recording studio, a ranch, and his home. Even that wasn’t enough to pay the bill, so eventually, Willie made a deal with the IRS. He recorded an album and all proceeds from that album went directly to the IRS to whittle away his debt. Willie did file suit against the accounting firm that advised the tax shelters in the first place, but the two parties settled out of court.

6. Set Up Offshore Accounts

Some tax scams sound good but require your participation in illegal activities. For example, you may meet an unscrupulous tax “professional” who offers to help you move some of your money into an offshore account.

This sounds legitimate as many people use offshore accounts for valid reasons, but by moving your funds into an offshore account with the intent of hiding that income from the IRS, you’re committing tax fraud. Additionally, if you’re working with a shady professional, it’s highly likely that neither you nor the IRS will see your extra income ever again. And you can still wind up with a legal case with your money stolen and gone.

7. Empty Promises

The tax preparer who encourages you to sign a blank tax form is nobody you want to work with. These preparers encourage you to simply sign the form because he or she is going to work out the numbers for you so that you can get the highest possible refund. If you do this, you are almost certainly subjecting yourself to tax filing scams.

Signing a blank tax form is potentially worse than simply signing a blank check for a stranger. Not only are you at risk of losing your personal information and any refund you might be owed, but you are also at risk of legal action by the IRS for signing your name on a refund that is almost certainly going to contain false and fraudulent information.

8. Frivolous Returns

The IRS sees a ridiculous number of what they call “frivolous returns” every year. A frivolous return is a tax return that is filed with the intent of simply wasting time. These frivolous claims have already been thrown out in court, so filing a tax refund making a frivolous claim is simply opening yourself up to additional action by the IRS including fines of at least $5,000. The top “frivolous claims” include:

  • Refusing to pay taxes on moral or religious grounds
  • “Opting out” of paying taxes
  • Invoking the First Amendment to “protect” you from taxes
  • Claiming only Federal Employees pay federal taxes
  • Claiming you have no income and therefore no tax liability (when you clearly do)

Top 3 Tips on How to Protect Yourself from IRS Tax Scams

Protecting yourself from tax fraud is a matter of being vigilant and mindful that there is always a possibility of something going wrong. Work with a trusted advisor or study up and file taxes yourself to avoid the uncertainty of allowing others to handle your financial matters. Often a bit of knowledge goes a very long way.

1. Know How the Tax System Works

One of the most common negative IRS reviews is that the tax refunds aren’t released immediately. In many IRS complaints, customers complain that they don’t get their refunds immediately.

While frustrating to wait, the IRS is usually very clear about processing times and has never sent refunds immediately after the filing window opens. The government doesn’t move quickly and reviews of documents and financial information submitted in your returns are necessary.

Additionally, relying on others to help you file your taxes every year can open you up to the possibility of fraudulent activities. Reviewing the tax codes and reading through the laws and requirements may not be exciting, but it will give you at least a basic understanding of how the process works so that you can look out for problems if you are trusting someone else with your information and money.

2. Always Read Carefully

The safest way to file your taxes is to do them by hand on the original IRS paper forms and to mail them using certified mail. Many people don’t choose to do this, however, as it can be very tedious and confusing if you do not know the tax system backward and forwards.

Instead, many filers rely on tax software and paid tax preparers. When using software or allowing someone to use the software on your behalf, it never gets too comfortable. There might be hidden fees in the software or glitches to overcome.

Reviewing choices carefully as the software takes you from screen to screen is a good way to avoid accidentally accepting hidden fees. Another option to avoid paying for fees you aren’t comfortable with is to simply abandon the return on one piece of online software and to try again with another – there are multiple tax return software options available.

3. Always Look for Tax Filing Scams

If you always expect to find a scam, you’ll never be surprised when one appears. Even tax preparers who have been in business for years can have some deceptive business practices that others assume are necessary or haven’t noticed them at all.

Tax time can be exciting if you’re entitled to a large refund, but it can be stressful if you don’t feel in control of the tax filing process. Educate yourself on the risks and tax scams that exist, and always exercise caution when choosing a method to file your taxes. Your personal information is closely tied to your money, so protecting both of them is often simply a measure of keeping your eyes wide open and using your knowledge to avoid traps and scams.

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