Emerging technologies such as blockchain, cryptocurrencies, artificial intelligence (AI), and privacy tools have created a huge disruption in our financial crime landscape. Threats have shifted without limits in today’s globalized economy, and the increasing risks posed by financial crime have caught the attention of public and private sector leaders around the world. Although the priority of mitigating these threats is increased, their complete eradication is a formidable challenge that requires international cooperation. Such cooperation is particularly essential to small and open economies such as the Netherlands and Singapore, whose ambitions to achieve global status as smart nations and leading technology hubs are being hampered by these threats. Encouragingly, the same emerging technologies that facilitate new criminal tactics also provide mechanisms to combat these crimes more effectively.
How encryption is abused and abused
Compared to traditional financial channels that are highly regulated and legally protected globally, cryptocurrencies provide criminals with an effective means of concealing the source of illegal proceeds. The majority of wallet providers and cryptocurrency exchanges offer services with little or no anti-money laundering (AML) or know-your-customer (KYC) procedures in place, amplifying the ease and anonymity of money laundering. Cryptocurrencies are becoming an increasingly important channel for cross-border money laundering thanks to their global nature, false anonymity, convenience and speed of processing.
Lax regulatory oversight of cryptocurrencies has increased their popularity as payment for criminal activities such as ransomware attacks and illegal online gambling. An alarming report from CipherTrace, a blockchain analytics company, found that major crypto thefts, hacking and fraud during the first seven months of 2021 totaled $681 million, with crime related to decentralized finance (DeFi) continuing to grow quarter by quarter. By their very nature, DeFi platforms like Decentralized Exchanges (DEXs) seem to go against basic principles of regulation, underscoring the extent of the challenges they face.
Singapore and the Netherlands partner to fight crypto-related financial crime
Effective governance and collaboration are critical to combating crypto-related financial crimes. However, building trust and cooperation across different cultures, methodologies, and jurisdictions, and overcoming regulatory or information-sharing obstacles can be daunting. In this regard, Singapore and the Netherlands held an ongoing round table discussion under the International Business Partners (PIB) program to facilitate knowledge exchange between the two countries. A hub of global wealth, Singapore is one of the most tech-driven digital countries in the world and is currently seeking to establish itself as a leading player in the global crypto economy. The Netherlands has also proven to be a leader in the field of blockchain and digital assets, with a vibrant crypto ecosystem, proficiency in cyber criminal investigations, and a wealth of experience developing use cases and proof of concepts. As cyber-enabled crime poses challenges to multiple stakeholders, it makes sense for practitioners from both countries to join forces in combating it.
Given that crypto-related financial crime involves diverse functional areas ranging from expertise in criminology to deep technological knowledge, the Roundtable brings together experts from the triple helix of government, industry and academia, has defined the intelligence of virtual assets, information sharing with privacy and security through design, Stronger KYC facilities, collaborative mechanisms and good practices, regulatory challenges and opportunities, technology complexity and data volume as key considerations in combating these crimes.
Virtual asset intelligence related to financial crime
As highlighted in the roundtable, governments should prioritize strengthening virtual asset intelligence sites. Some of the key tools they can adopt include anti-money laundering red flag indicators, dark web intelligence, smart analytics and artificial intelligence, and mass transaction monitoring.
Regarding the fight against money laundering using virtual assets, the Dutch authorities have developed around 100 warning indicators that have been shared nationwide with all banks, payment processors and related service providers to better prepare them against financial crime related to cryptocurrency. Several of these indicators were subsequently adopted by the Financial Action Task Force (FATF) in its report titled “Red Flag Indicators for Virtual Assets for Money Laundering and Terrorist Financing” as guidelines for international best practice.
Dark Web Intelligence, which includes cryptocurrency addresses, IP addresses, and intelligent analytics on the relationships between cyberattacks and financial crimes such as ransomware attacks are other powerful tools for intelligence gathering. Large amounts of data require AI capabilities that can bypass blacklists and whitelists and extract strategic insights and operational perspectives from large, distributed data sets in an efficient and interpretable manner.
Collective mechanisms and information exchange
New tools designed to detect crypto-enabled financial crimes may require data to be shared and synthesized by regulated entities such as financial institutions. Mass transaction monitoring channels such as Transaction Monitoring Netherlands (TMNL) have helped improve the possibilities of detecting criminal money flows and networks by providing a platform for member banks to jointly monitor their payment transactions for signs of money laundering. Due to the highly sensitive and confidential nature of this data, as well as the regulations that limit its transmission, data exchange between entities and industries – not to mention at the transnational level – remains arduous.
To mitigate these challenges, countries can use new privacy-enhancing technologies such as Multilateral Accounting (MPC), which provides them with opportunities to gather insights and detect financial crimes based on sensitive data from multiple banks without the need for the banks to physically share the data. As such, the MPC ensures privacy and security by design, balancing the regulatory need for data confidentiality and confidentiality with the detection and investigation needs of complex data.
The importance of correct checks and balances
Appropriate checks and balances for the virtual asset space are essential, and both countries have taken strong measures in this regard. In Singapore, these take the form of the Payment Services Act, which is a primary regulation for processing cryptocurrency and virtual assets, while in the Netherlands, the Financial Services Authority, the Dutch Anti-Money Laundering Act and prospectus regulation define the regulatory framework for cryptocurrency, cryptocurrency services, and cryptocurrency providers. To foster technological innovation in financial services, the Financial Technology Regulatory Environment Framework of the Monetary Authority of Singapore enables financial institutions and fintech players to pilot innovative financial products or services in a live environment but within a well-defined space and duration.
Strong KYC practices are also essential to protect against misuse or misuse of cryptocurrencies. In particular, competent methods of intelligence gathering, incorporating comprehensive perspectives and factual identifiers, would yield benefits that flow downstream and accrue to transaction monitoring. Working with national identity facilitators such as DigiD (Netherlands) and Singpass (Singapore) to integrate real-world identifiers can also help ensure regulatory compliance. An architecture with integrated KYC warning indicators and transaction monitoring to provide data relevant to suspicious transaction reports as well as advanced technology-based analytics to process large volumes of such reports will reap significant benefits for investigators, operators and analysts.
Towards a safe and healthy growth of the crypto-asset industry
Due to the cross-border and anonymizing nature of cryptocurrencies as well as the restrictions related to sharing sensitive data, it will not be easy to fight or win cyber-enabled financial crime. Effective governance and cooperation between countries will go a long way to deter such crimes. In this regard, devising robust and collaborative solutions and adopting stronger anti-money laundering and “know your customer” regulations by financial institutions, wallet providers and cryptocurrency exchanges will be critical to ensuring the safe and healthy growth of the cryptocurrency industry.