Canada’s financial intelligence agency expects more criminals to start using cryptocurrency to raise, move and hide funds outside of the traditional banking system as adoption of the technology expands.
In a report released on Monday, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) said the most common form of criminal activity involving cryptocurrencies is hiding and cleaning profits from fraud, as well as ransomware attacks.
Fintrac built on the funding received in the budgets of the past two years to further its expertise and understanding of the risks and vulnerabilities associated with virtual currencies through its strategic intelligence program.
“Fintrac continues to operate in a challenging environment with new and evolving technologies and financial products, rapidly shifting global financial systems and geopolitical events constantly shaping our work,” agency director Sarah Paquet says in the report.
The agency electronically sifts through millions of pieces of information each year from banks, insurance companies, money services businesses, securities dealers, real-estate brokers, casinos, and others to identify money linked to illicit activities. It then actively shares intelligence about the suspected cases with police and other law-enforcement agencies.
Businesses that exchange foreign currencies, transfer money, cash or sell money orders or traveller’s cheques, or deal in virtual currency must register with Fintrac before they can offer these services to the public.
The report warns that the continued use of unregistered money services businesses poses challenges for those seeking to detect money laundering and terrorist financing through traditional financial channels.
“Suspicious transactions reported to Fintrac have highlighted the significant role of third-party intermediaries, such as professional money launderers and money mules, in facilitating underground banking and the laundering of criminal proceeds,” the report says.
#FINTRAC published its 2022–23 #AnnualReport today. Read about the critical results that FINTRAC is producing for its partners and Canadians. https://t.co/MjIseJWniq pic.twitter.com/YIO69MWwZ0
— FINTRAC_Canada (@FINTRAC_Canada) December 4, 2023
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Cryptocurrency trading via decentralized finance represents a new challenge
While the majority of illicit transactions through cryptocurrency pertain to the laundering of the proceeds of crime— which constitute a small proportion of overall virtual transactions—Fintrac has noted that terrorist groups worldwide are increasingly using virtual currencies to finance their activities.
This trend is particularly evident among those linked to ideologically motivated violent extremism, as they harbour distrust toward regulated and centralized financial systems. In recent years, there has also been a rise in loosely connected entities within expansive movements that transcend national boundaries, along with the persistence of cross-border funding networks and online fundraising efforts.
The report noted a significant dependence on mixing services and high-risk exchanges for the purpose of laundering cryptocurrency and converting ransoms back into fiat currency.
Additionally, centralized exchanges are common for laundering and cashing out smaller amounts, and Decentralized Finance (DeFi) services that pose substantial risk to Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime.
Decentralized finance refers to a blockchain-based alternative financial system that operates without traditional intermediaries and protections, enabling peer-to-peer transactions, lending, and other financial services through decentralized applications (DApps) and smart contracts. It aims to provide more open, inclusive, and permissionless access to financial products and services.
It’s considered to be high risk due to the lack of any traditional protections common to the banking system, such as Canadian deposit insurance or protections under the Federal Deposit Insurance Corporation (FDIC) in the United States.
The organization cautions those who facilitate the use and adoption of DeFi services to exercise greater due diligence.
DeFi does not grant complete anonymity. Although transactions do not disclose an individual’s name, anyone with the requisite knowledge can trace them, mostly based on blockchain analytics. This capability extends to governments and law enforcement, which may need it at times to safeguard an individual’s financial interests.
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