Financial Crimes Enforcement Network Research Articles

The role and importance of financial intelligence in identifying and tracing criminal assets

The paper examines the basic principles of improving efficiency and providing law enforcement officers, as well as authorized bodies, in whose management the seized property is transferred, with instructions on the legal grounds, procedural and tactical features of detection, search and seizure of property. It was determined that financial intelligence is a complex system aimed at detecting operations related to the legalization of proceeds obtained through crime. This system can act as a component of the pre-trial investigation in criminal proceedings related to the research. Asset search activities should include elements of economic and monetary intelligence. It has been established that in Ukraine, the State Financial Monitoring Service, subordinate to the Ministry of Finance of Ukraine, is entrusted with the functions of financial intelligence, which implements the state policy in the field of prevention and countermeasures against the legalization (laundering) of proceeds obtained through crime, the financing of terrorism, and the proliferation of weapons of mass destruction. It is argued that financial intelligence is not a function of the National Agency of Ukraine for detection, search and management of assets obtained from corruption and other crimes. In turn, the DSFM collects, processes and analyzes information on financial transactions subject to mandatory financial monitoring and other transactions related to money laundering. It was investigated that the bodies of foreign countries are similar: Financial Crimes Enforcement Network (FinCEN) - the US financial intelligence agency; Financial Transactions and Reports Analysis Center (FINTRAC), Canada's financial intelligence agency; Zentralstelle für Verdachtsanzeigen – German financial intelligence agency; TRACFIN – financial intelligence unit of the French Republic; The Inland Revenue Service NCIS/ECU is the UK's financial intelligence agency. Having analyzed the relevant legislation of ARMA and the State Financial Monitoring Service, we come to the conclusion that the terms "asset discovery" and "asset search" are explicitly defined at the legislative level only for ARMA. The profile legislation of the State Financial Monitoring Service does not reflect or explain the essence of these terms, however, in the course of implementing measures to prevent and counter the legalization (laundering) of proceeds obtained through crime, the State Financial Monitoring Service conducts financial investigations with the aim of finding information about the assets of questionable origin.

Navigating the Complexity of Money Laundering: Anti–money Laundering Advancements with AI/ML Insights

Abstract This study explores the fusion of artificial intelligence (AI) and machine learning (ML) methods within anti–money laundering (AML) frameworks using data from the US Treasury’s Financial Crimes Enforcement Network (FinCEN). ML and deep learning (DL) algorithms—such as random forest classifier, elastic net regressor, least absolute shrinkage and selection operator (LASSO) regression, gradient boosting regressor, linear regression, multilayer perceptron (MLP) classifier, convolutional neural network (CNN), random forest regressor, and K-nearest neighbor (KNN)—were used to forecast variables such as state, year, and transaction types (credit card and debit card). Hyperparameter tuning through grid search and randomized search was used to optimize model performance. The results demonstrated the efficacy of AI/ML algorithms in predicting temporal, spatial, and industry-specific money-laundering patterns. The random forest classifier achieved 99.99% average accuracy in state prediction, while the gradient boosting regressor and random forest classifier excelled in predicting year and state simultaneously, and credit card transactions, respectively. MLP and CNN showed promise in the context of debit card transactions. The gradient boosting regressor performed competitively with low mean squared error (MSE) (2.9) and the highest R-squared (R 2) value of 0.24, showcasing its pattern-capturing proficiency. Logistic regression and random forest classifier performed well in predicting credit card transactions, with area under the receiver operating characteristic curve (ROC_AUC) scores of 0.55 and 0.53, respectively. For debit card prediction, MLP achieved a precision of 0.55 and recall of 0.42, while CNN showed a precision of 0.6 and recall of 0.54, highlighting their effectiveness. The study recommends interpretability, hyperparameter optimization, specialized models, ensemble methods, data augmentation, and real-time monitoring for improved adaptability to evolving financial crime patterns. Future improvements could include exploring the integration of blockchain technology in AML.

Does decentralised finance equal deregulated finance?

DeFi is a fast-growing sector of the blockchain ecosystem. In this paper, readers are introduced to key concepts in DeFi, including use cases for the technology, differences between permissionless and permissioned DeFi, and the respective advantages of participating in DeFi vs. CeFi platforms. Unlike CeFi, in which a central platform or party acts as an intermediary to facilitate crypto asset transactions, DeFi protocols and platforms rely on self-executing smart contracts to perform their functions and do not custody their users' assets. Accordingly, there are open questions as to how DeFi can be regulated. Indeed, some declare that DeFi should not be regulated. This paper analyses the key arguments in favour of and against regulation of DeFi in the context of the recent crypto asset market instability, including a breakdown of various theories of liability under which regulators seek to identify bad actors and penalise harmful activity. It then synthesises recent statements and enforcement activity by US regulators, including the Commodity Futures Trading Commission, Securities and Exchange Commission, Department of Justice, Financial Crimes Enforcement Network and legislative activity, including President Biden's recent executive order, and the Lummis–Gillibrand Responsive Financial Innovation Act. To date, US lawmakers and regulators have viewed the label ‘decentralised’ with scepticism, applying a functional analysis to identify participants exerting various degrees of control over DeFi protocols in order to enforce regulations.

The anti-money laundering act of 2020

Purpose The purpose of this article is to inform stakeholders about the Anti-Money Laundering Act of 2020 (AMLA), explain its impact on the U.S. anti-money laundering (AML) regime, and highlight critical updates for financial institutions. Design/methodology/approach The article provides an overview of the AMLA, and specifically addresses three key components: (1) the development of uniform beneficial ownership requirements and the creation of a beneficial ownership registry at the Financial Crimes Enforcement Network (FinCEN); (2) the expansion of FinCEN’s powers and the Bank Secrecy Act/AML program requirements; and (3) new subpoena powers with potential extraterritorial effect granted to the U.S. Secretary of the Treasury and the U.S. Attorney General for documents located at foreign banks that have a correspondent banking account in the U.S. The article also notes the purpose and goals of the AMLA. Findings The AMLA is the first major overhaul of the U.S. AML regime since the 2001 USA PATRIOT Act, and is designed to strengthen national security, protect the financial system, and simplify compliance obligations. The beneficial ownership reporting requirements represent an effort to combat illicit financial activity conducted by shell companies formed and registered in the U.S. Originality/value The article provides financial institutions with a brief overview of a lengthy new law that will impact their AML compliance obligations. Financial institutions should be on alert for forthcoming regulations.

The Federal Corporate Transparency Act - Waiting for Answers

The federal Corporate Transparency Act, adopted on January 1, 2021 over President Trump's veto, is the product of two decades of proposed federal legislation to combat money-laundering and terrorist financing through anonymous business organizations. When rules are finalized, newly-formed and existing business entities will have to file reports with the Department of the Treasury's Financial Crimes Enforcement Network identifying control persons and beneficial owners of more than 25% of the entity. Unfortunately, and despite the very long gestation period for the Corporate Transparency Act, the act itself raises a large number of questions for which we are awaiting answers. Hopefully the answers will come in rulemaking which must be completed by December 31, 2021. This paper describes a number of the questions for which we are awaiting answers.

Why Business and Real Estate Lawyers Need to Worry About the 2021 National Defense Authorization Act

Colorado, specifically, and the United States, generally, allow free formation of for business and non-business purposes, with few and many times no obligation to disclose the underlying beneficial owners. This purportedly allows these to be used for money-laundering and terrorist financing operations. The William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 is another step to change this, following international attention focused from the international Financial Action Task Force, almost twenty years of effort in Congress, and the geographical targeting orders issued by the Department of the Treasury’s Financial Crimes Enforcement Network. This paper discusses the Federal Corporate Transparency Act requiring that the Department of Treasury develop disclosure obligations for existing and newly-formed businesses in the United States. While the Corporate Transparency Act is not effective immediately but must wait for rule-making, it will change the method that business lawyers and real estate lawyers advice their clients when the rules are adopted and involves ethical implications for the lawyers who intentionally or inadvertently assume their client's obligation to make the reports required under the Corporate Transparency Act. While waiting for rulemaking, those who form are waiting for answers. - Do you want to risk being an applicant as defined in the Corporate Transparency Act and therefore possibly responsible for the entity's filing obligations at the potential risk of criminal and civil liability? - What fundamentally will be companies? We know that it includes corporations, LLCs, and similar entities - but what will be defined as a similar entity? - How will the reporting companies gather the necessary information? Should there be language in articles of incorporation, articles of organization, bylaws, operating agreements, partnership agreements, and buy-sell agreements (among others) requiring the control persons and owners provide the necessary information? This paper gives a detailed background on the history that went into the Corporate Transparency Act. This paper does not answer those questions, but raises and discusses those questions and a number of other questions, including the attorney's ethical obligations that arise from the Corporate Transparency Act.

Countering money laundering and terrorist financing: A case for bitcoin regulation

Bitcoin was created in 2008 to serve as an alternative payment mechanism for both the under-banked and un-banked, or those in regions where the formal financial system suffers from broad corruption and efficient regulation. However, criminals and terrorists quickly exploited Bitcoin's unique properties, namely its peer-to-peer nature and pseudo-anonymity, to facilitate extensive terrorist financing and money laundering schemes. Government reactions to safeguard national security interests have been extremely varied, ranging from outright bans to passive tolerance. This inconsistency stems from how to effectively classify Bitcoin. On one side are those who argue Bitcoin is a currency, and on the other are those who claim it is a type of asset. In the US alone, these discrepancies have led to a bureaucratic turf war between different regulatory bodies, namely the Financial Crimes Enforcement Network, the Commodity Futures Trading Association, the Securities and Exchange Commission, and the Internal Revenue Service. This study seeks to move beyond the existing legal frameworks, arguing that Bitcoin should be classified as a technology and regulation should rest with private sector technology companies.

A Safe Harbor for Ransomware Payments: Protecting Stakeholders, Hardening Targets, and Defending National Security

The United States is under ransomware siege. Victims range from small municipalities to non-profits to multi-national corporations and governments. The law is struggling to respond. Few entities, crippled by a ransomware attack, can refuse to pay. Not paying the ransom may result in significant harm, including financial ruin or even loss of life. Paying a ransom, however, is likely to generate attacks on other targets. Paying may not even lead to recovery of the data as promised. By definition, paying ransoms transfers value to criminals, and that is against many laws. But more than simple illegality is at issue. While ransomware hackers may be lone criminals or infamous cyber-gangs, they may also be hostile foreign countries, or non-state actors such as terrorist groups. Ransomware and other digital threats have the potential to compromise U.S. critical infrastructure. Strategically significant economic transactions have long been prohibited or highly regulated. In the wake of the September 11th attacks, the discovery and prevention of terrorist financing became a key pillar of U.S. security architecture. Under this regime, paying a ransom, thereby aiding the “enemy,” may trigger liability. Regulators have threatened enforcement of sanctions and anti-money laundering laws not only against ransomware victims who pay, but also against third-party service providers who facilitate payment. Both the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN) have issued advisories emphasizing their strict policies against paying prohibited persons or transmitting funds without required procedures. How to steer between the Scylla of legal liability and the Charybdis of a cyberattack? Sometimes ransoms should be paid as the lesser evil. Confronted with the potential damages of a ransomware attack, people may rightly choose to pay. On the other hand, society cannot allow itself to be held hostage. Those who endanger individual lives, enterprises, and core social functions must be resisted. That is, the status quo, in which many enterprises simply pay off cybercriminals, thereby incentivizing more cyberattacks, is unsustainable. This article argues that the threat of legal liability for ransomware payments, with no positive incentive for potential victims, is unlikely to spur adoption of sound security measures or even to stop payments, and may be counterproductive if it leads victims to conceal attacks. Instead, this article suggests the creation of a safe harbor for ransomware payment that (i) enables the victim and those who assist the victim to pay when necessary (protecting stakeholders), but that also (ii) deters attacks (hardening targets) and (iii) facilitates interdiction of attacks that do occur (defending national security).

Ehi’s Predictions for the Anti-Money Laundering Sector in 2021

The year 2020 witnessed the introduction of new rules and regulations by the United Kingdom for virtual asset service providers, and for the first time, a Bitcoin “Mixer” was Penalized by the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) for Violating Anti-Money Laundering Laws. The anti-money laundering landscape also witnessed a shift from documentation based procedures to electronic evidence. This was as a result of the COVID-19 pandemic. The year 2021 will likely continue from where the year 2020 stopped with more regulations and enforcement actions.This paper provides an in-depth review and analysis of the topics that are likely to trend on the anti-money laundering space in 2021. This paper predicts that countries around the world will introduce more rules and regulations for virtual asset service providers along with the adoption of an appropriate mix of on-site and off-site supervision of dealers in precious metals, precious stones or jewels, including the introduction of corporate transparency and register reforms. This paper also predicts that financial institutions will enhance their anti-money laundering systems and controls to accommodate application programming interfaces during the customer onboarding process, and upgrade their anti-money laundering surveillance monitoring systems to a new system that can detect highly suspicious transaction patterns including possible layering schemes, transactions not commensurate with the business’s purpose, and commingling of funds between two independent check cashing entities. This paper concludes that the combined power of robotic process automation, machine learning technology and human intelligence will help to deter and detect money laundering.

Dirty Money: How Banks Influence Financial Crime

On September 21st, 2020, a consortium of international journalists leaked nearly 2,500 suspicious activity reports (SAR) obtained from the U.S. Financial Crimes Enforcement Network, exposing nearly $2 trillion of money laundering activity. The event raises important questions regarding what role banks play in facilitating financial crime and the effectiveness of SAR reporting. In this study, we examine the incentives that banks face to report money laundering activity via SAR reports, and the implications of a bank’s reporting strategy for criminal activity. We first analyze banks' SAR reporting decisions using a stylized model, which predicts that banks facing depressed revenues from their routine business lines and more profit-seeking pressure adopt more lax reporting policies. These reporting policies help to attract criminals, thus increasing the underlying amount of suspicious activities that banks need to examine and report. Empirically, we test the relation between risk-taking incentives and SAR volume at the county level. We find that counties in which banks face higher competition and lower profitability generate higher volumes of SAR activity. To provide further support for the underlying mechanism, we incorporate a maximum likelihood estimation that uncovers a highly elastic demand from criminal customers with respect to banks' reporting stringency. We establish causality using shale gas expansion in unrelated states. Consistent with risk-taking incentives influencing SARs, we find that banks experiencing higher (lower) shale growth generate fewer (more) SAR reports. Overall, our results provide important insights regarding the role of banks in influencing financial crime, and suggest that a bank’s reporting policy has indirect implications for local criminal activity.

Cryptocurrency Regulation: Countering Money Laundering and Terrorist Financing

Bitcoin was created in 2008 to serve as an alternative payment mechanism for both the under-banked and un-banked, or those in regions where the formal financial system suffers from broad corruption and efficient regulation. However, criminals and terrorists quickly exploited Bitcoin’s unique properties, namely its peer-to-peer nature and pseudo-anonymity, to facilitate extensive terrorist financing and money laundering schemes. Government reactions to safeguard national security interests have been extremely varied, ranging from outright bans to passive tolerance. This inconsistency stems from how to effectively classify Bitcoin. On one side are those who argue Bitcoin is a currency, and on the other are those who claim it is a type of asset. In the US alone, these discrepancies have led to a bureaucratic turf war between different regulatory bodies, namely the Financial Crimes Enforcement Network, the Commodity Futures Trading Association, the Securities and Exchange Commission, and the Internal Revenue Service. This study seeks to move beyond the existing legal frameworks, arguing that Bitcoin should be classified as a technology and regulation should rest with private sector technology companies.

Comment Letter on Fincen's Advance Notice of Proposed Rulemaking on Anti-Money Laundering Program Effectiveness

We submitted these comments in response to the Financial Crimes Enforcement Network's advance notice of proposed rulemaking on the definition of an effective and reasonably anti-money laundering program applicable broadly to financial institutions. Our comments highlight industry-specific obligations of brokers and dealers in securities to have reasonably designed anti-money-laundering programs. We argue that in undertaking future rulemaking, FinCEN should account for industry-specific statutory requirements, and how these bear on regulators’ experiences implementing AML program obligations analogous to those the advance notice of proposed rulemaking contemplates. Regulators’ experience enforcing compliance with FINRA's informal guidance under the Securities Exchange Act of 1934, for instance, raises questions about whether FinCEN’s proposals to elaborate on AML obligations through periodic guidance would impose obligations enforceable at all. In particular, FinCEN should carefully consider whether essential enforcement regimes will require additional rulemaking because simply issuing official guidance may not create fully enforceable obligations in all regulatory frameworks. For self-regulatory organizations overseen by the SEC, guidance alone may not suffice to create an enforceable obligation. In instances where the SEC reviews SRO enforcement actions, it considers whether conduct violated the SRO's “rules,” meaning rules approved by the SEC. As explained in greater detail below, official guidance may not meet this standard, creating doubt, enforcement challenges, and likely inhibiting FinCEN’s compliance objectives.

The Cost of Doing Business: Corporate Crime and Punishment Post-Crisis

For many years, law and economics scholars, as well as politicians and regulators, have debated whether corporate criminal enforcement overdeters beneficial corporate activity or in the alternative, lets corporate criminals off too easily. This debate has recently expanded in its polarization: On the one hand, academics, judges, and politicians have excoriated enforcement agencies for failing to send guilty bankers to jail in the wake of the 2008 financial crisis; on the other, the U.S. Department of Justice has since relaxed policies that encouraged individual prosecutions and reduced the size of fines and number of prosecutions. A crucial and yet understudied piece of evidence in this debate is to understand how corporate crime rates have responded to changes in enforcement practices. And yet, unlike most other types of crime, the government does not provide data about corporate crime levels. Therefore, we cannot easily determine whether these policy changes are effectively deterring future incidents of crime. In this paper, we take important first steps in determining whether corporate crime, and financial institution crime in particular, is on the rise. Specifically, we proxy for corporate crime using three novel sources: the Financial Crimes Enforcement Network (FinCEN) Suspicious Activity Reports (SARs), consumer complaints made to the Consumer Financial Protection Bureau (CFPB), and whistleblower complaints made to the Securities and Exchange Commission (SEC). Each source reveals an increase in complaints or reports indicative of corporate misconduct in the wake of the 2008 financial crisis. We also examine levels of public company recidivism and find that they are also on the rise. And we document a potential explanation: recidivist companies are much larger than non-recidivist companies, but they receive smaller fines than non-recidivist companies (measured as a percentage of market capitalization and revenue). Put simply, for large companies, criminal penalties may be just another cost of doing business—and quite a low cost at that. We conclude by offering recommendations for enforcement agencies and policymakers. In particular, our results suggest that enforcers are unlikely to achieve optimal deterrence using fines alone. Enforcement agencies should therefore consider other ways of securing deterrence, such as by seeking penalties against guilty individuals and the top executives who facilitate their crimes.

FinCEN issues long-awaited guidance on the customer due diligence rule

PurposeTo highlight pertinent points in the frequently-asked questions (FAQs) issued on April 3, 2018 by the US Treasury Department Financial Crimes Enforcement Network concerning its Customer Due Diligence Requirements for Financial Institutions (“CDD Rule”), which were published on May 11, 2016 and became effective on May 11, 2018.Design/methodology/approachDiscusses clarification and guidance in the FAQs concerning beneficial ownership requirements for administrative and internal accounts, claims for exclusion from the definition of legal entity customer, information requirements for pooled investment vehicles, the requirement for beneficial ownership information from foreign publicly-traded companies, information requirements for existing customers, certification of beneficial ownership information when existing accounts are renewed, requirements for refreshing existing beneficial ownership information, retention of beneficial ownership records, aggregation for currency transaction reporting, and requirements to understand the nature and purpose of a customer relationship.FindingsCovered financial institutions and industry associations have sought clarification and guidance on a range of topics, several of which have been addressed in the FAQs.Originality/valueExpert guidance from lawyers focused on regulatory, compliance and transactional issues for financial institutions.

Anti money laundering compliance and the new standards on beneficial ownership

This paper discusses the new Financial Crimes Enforcement Network (FinCEN) rule on beneficial ownership and the general due diligence challenges currently facing financial institutions. Covered financial institutions must comply with these rules by 11th May, 2018, and should consider the most effective means to take immediate steps to modify their anti money laundering (AML) compliance programmes to accommodate this latest expansion of the AML regulatory regime (specifically the USA’s BSA, AML and Counter-Terrorist Financing (CTF) regulations and associated guidance). Although narrated from a US jurisdictional perspective, non-US financial institutions and regulatory regimes (eg, European Union [EU] under the purview of the European Union’s Anti-Money Laundering Directive) are considered within the scope of discussion. It is acknowledged that non-US financial institutions may be required to adapt their compliance programmes to account for the new US beneficial ownership standards. Therefore, possible approaches toward development of universal operational solutions will be presented and assessed. Finally, this paper observes that the misuse of limited liability companies (LLCs) and offshore financial centres (OFCs) can serve as a harbinger of criminal activity and seeks to encourage further the discussion of due diligence governance and controls within the AML compliance community.

Is your anti-money laundering program ready for FinCEN’s Customer Due Diligence Rule?

Purpose The purpose of this paper is to bring broker-dealers’ attention to the upcoming deadline for compliance with the Financial Crimes Enforcement Network’s (FinCEN’s) final rule on Customer Due Diligence Requirements for Financial Institutions (the CDD Rule). Design/methodology/approach The paper explores the origins of the anti-money laundering (AML) requirements and then explores the new CDD Rule requirements as outlined by FINRA Regulatory Notice 17-40. Findings Firms are likely largely already in compliance with most aspects of the CDD Rule. Practical implications Most firms likely will not need to make any significant changes to their AML polices. However, for some they will need to evaluate and modify their AML policies and procedures. Originality/value Practical guidance is obtained from experienced broker-dealer, investment adviser, securities litigation and compliance lawyers.

Is tackling Trade Based Money Laundering (TBML) through stricter reporting regulation the most effective response?

PurposeThis paper (written in August 2015) aims to discuss the regulatory approach to detecting and preventing trade-based money laundering (TBML) by using the example of Financial Crimes Enforcement Network (FinCEN) and its use of geographic targeting orders.Design/methodology/approachThe paper uses both theoretical and empirical reports on TBML to explore whether increased regulation will ultimately achieve the ends it claims to offer.FindingsThe main findings from the analysis are that increased regulation has been found to have a negative impact on improving TBML detection. There is evidence that it causes an over-defensive response from banks that leads to a decrease in useful information to financial intelligence units.Research limitations/implicationsThe research topic is very new and an emerging topic; therefore, analysis papers and other academic writing on this topic are limited.Practical implicationsThis paper has implications for both the regulatory and the banking/financial service sectors.Originality/valueThe originality of this paper is the deeper analysis of a specific TBML case, and the focus is on both the theoretical and empirical implications of the approach being used.

Bitcoin, Virtual Currencies, and the Struggle of Law and Regulation to Keep Pace

At less than a decade old, Bitcoin and other virtual currencies have had a major societal impact, and proven to be a unique payment systems challenge for law enforcement, financial regulatory authorities worldwide, and the investment community. Rapid introduction and diffusion of technological changes throughout society, such as the blockchain that serves as Bitcoin’s crypto-foundation, continue to outpace the ability of law and regulation to keep pace. During 2017 alone, the market price of Bitcoin rose 1,735 percent, from about $970 to $14,292, causing an investor feeding frenzy. As of March 31, 2, a total of 1,595 cryptocurrencies are reported, having an approximate market capitalization of $266.97 billion at that date. A brief history of the fast moving adoption of blockchain-based technology is provided, along with a look at the efforts of regulators to keep up with the staggering worldwide growth in the usage of virtual currencies. In the United States, enforcement actions for violations of law involving virtual currencies are brought primarily by: The Commodities Futures Trading Commission (CFTC); The Securities and Exchange Commission (SEC) and The Department of The Treasury through the Financial Crimes Enforcement Network (FinCEN). This Article contributes to the literature and our understanding of the constant struggle of law and regulation to keep pace with rapid technological developments.

Cryptocurrency: A Challenge to Legal System

Virtual Currency (VC) is an electronic currency that is neither government-funded nor backed by central bank. VC offers potential benefits over traditional currencies, including lower transaction fees and faster transfer of funds for services provided. In 2013, Financial Crimes Enforcement Network (FinCEN), defined virtual currency as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction”. Some virtual currencies are used as a currency in online games or a digital world, however, there is no equivalent value in fiat currency for them, so named non-convertible. In the other side, a virtual currency that can be bought with and sold back for legal tender is called a convertible currency. One of the most popular type of convertible VCs is cryptocurrencies. They use security mechanisms such as cryptography for creating units of the currency and controlling the transactions. Cryptocurrency works based on Blockchain technology. Its main property is to provide anonymity for the transactions. Bitcoin, as an instance, is a cryptocurrency that has gained much attention in the market since 2009 when it was initially introduced. Since the focus of this paper is on cryptocurrency, which is a convertible virtual currency, we will use the term cryptocurrency and virtual currency or VC interchangeably with the cryptocurrency meaning. Unlike earlier digital currencies, like e-gold, that had centralized architecture, the newer virtual currency networks are completely decentralized, with all parts of transactions performed by the users of the system. So usually cryptocurrencies use peer-to-peer technologies and no traditional financial institutions involved in transactions. This unique property provides different levels of anonymity for the users. The emergence of virtual currencies presents challenges to federal agencies responsible for financial regulation, law enforcement, consumer and investor protection. These challenges stem partly from certain characteristics of virtual currencies, such as the higher degree of anonymity they provide and the ease with which they can be sent across borders. VC also has raised concerns that they might be used to finance terrorism and to engage in other criminal activities such as money laundering and tax evasion. In this paper, we present our research on the legal issues of the cryptocurrency by analyzing the current regulations and discuss about possible solutions for the future of cryptocurrency.

Challenges in implementing the ‘Fifth Pillar’

Since the Financial Crimes Enforcement Network (FinCEN) published the customer due diligence (CDD) ‘Fifth Pillar’ rule on 11th May, 2016, there have been a number of articles that have summarised the primary requirements and some have even listed key interpretive challenges and issues. There are many nuances with both design and implementation that are easy to overlook, however. This paper, written from the perspective of the person responsible for writing the business requirements and supporting processes, outlines several key interpretation issues and design/implementation challenges; it also highlights new governance standards and processes that should be constructed to identify ‘triggering events’ and ensure proper due diligence following such an event. At a minimum, this paper may serve as a high-level checklist to help ensure that a covered institution has identified and addressed the key issues driven by the new CDD rule well in advance of the 11th May, 2018 deadline.