FinCEN Alerts Financial Institutions to Convertible Virtual Currency Fraud
Commentary by Gage Raju-Salicki
FinCEN warned financial institutions that criminals are increasingly exploiting convertible virtual currency ("CVC") kiosks—crypto ATMs that exchange fiat and digital currencies—for scams and money laundering.
In a Notice, FinCEN warned that non-compliant operators of CVC kiosks are undermining anti-money laundering safeguards by failing to register as money services businesses ("MSBs"), neglecting customer due diligence, and facilitating illicit activity. FinCEN reported that many kiosk operators misrepresent their regulatory status, evade Bank Secrecy Act ("BSA") obligations and enable scams.
FinCEN identified several red flags to help financial institutions detect suspicious activity involving CVC kiosks, such as: (i) customers structuring cash deposits just below reporting thresholds; (ii) multiple individuals sending funds to the same wallet from different locations; (iii) customers with limited history rapidly transferring large deposits across wallets; (iv) older customers with no prior CVC activity conducting high-value kiosk transactions; and (v) kiosk operators failing to register as MSBs, or advertising services that allow anonymous transactions.
FinCEN reminded financial institutions of their obligations under the BSA, including requirements to file Suspicious Activity Reports and to retain supporting documentation for five years. FinCEN also encouraged use of information-sharing tools like Section 314(b) ("Cooperative Efforts to Deter Money laundering") of the USA PATRIOT Act and highlighted other reporting requirements, such as Currency Transaction Reports and Form 8300 ("Report of Cash Payments Over $10,000 in a Trade or Business").
Commentary
Crypto kiosks are a kind of hybrid tool compared to something like a crypto exchange: the user scans their wallet address, inserts money and the ATM transfers funds to their wallet address. In this way, it acts as a gateway to self-custodial activities, but it has fewer barriers to entry (such as, in certain respects, identity verification). This development appears to be part of a larger development around crypto ATM regulation, (see, for example, Illinois' SB 2319, which is aimed at creating more rigorous consumer protections for crypto ATM users).
The common issue expressed in both FinCEN's advisory and state law concerns the potential for fraud from instantaneous settlement. The red flags FinCEN names are helpful—but further education regarding crypto may be needed, particularly for those most susceptible to these schemes.