J5 Warns Financial Firms of Red Flags for Illicit Crypto Transactions

News | June 7, 2024 By:

On Thursday, May 23, 2024, the Internal Revenue Service and four international tax authorities issued an advisory warning financial institutions about potential money laundering risks associated with cryptocurrency transactions.

The Joint Chiefs of Global Tax Enforcement (J5) – which consists of tax enforcement agencies from the United States, Canada, the Netherlands, United Kingdom, and Australia – released a notice highlighting five indicators that cryptocurrency transactions may be related to illegal activity such as money laundering, cybercrime, tax evasion or corruption.

The advisory, entitled “Crypto Assets Risk Indicators,” was developed by a team of cyber experts from each J5 member country. It outlines how financial flows involving cryptocurrencies like bitcoin that include layering, connections to high-risk jurisdictions or counterparties, unknown recipients, or certain online behaviors could be red flags for financial institutions.

Layering involves conducting multiple transactions to obscure the origin of illegally obtained funds. The advisory calls on institutions to pay special attention to crypto transactions that appear intended to mask where the money is coming from.

It also warns about transactions tied to countries with weak financial regulations, lack of anti-money laundering controls, or pervasive corruption. Institutions are advised to monitor any counterparties, such as exchanges or services, that may be involved in darknet marketplaces where illegal goods are sold or “mixing” that conceal digital currency trails.

Proper know-your-customer practices can help identify potential criminal risks from cryptocurrency dealings, according to the J5 alert. It additionally tells institutions to watch for payments related to ransomware attacks, given this interface with cybercriminals represents a key juncture for authorities.

The heads of each J5 member’s tax enforcement division emphasized the importance of cooperation across borders to combat threats in the digital economy like cryptocurrency-enabled money laundering. They said sharing intelligence on indicators through advisories like this one enhances both industry and government abilities to detect illicit flows.

Since cybercrime does not respect international boundaries, pooling resources for research and alerts strengthens overall protection. The advisory is meant to benefit financial intelligence units globally in recognizing and halting criminal exploitation of cryptocurrencies.

This is the second notice issued by the J5 pertaining to digital currency concerns, following one last year on risks surrounding non-fungible tokens or NFTs. They continue refining guidance as virtual asset risks evolve in order to maintain financial integrity and support regulatory adherence.

Representatives from the IRS, Canada Revenue Agency, Dutch Fiscal Information and Investigation Service, HM Revenue and Customs, and Australian Taxation Office stressed their determination to collaborate against transnational tax evasion and money laundering increasingly facilitated by technologies like cryptocurrencies and blockchain.

By disseminating knowledge of risk factors to financial institutions, the J5 aims to improve the prevention, detection, and reporting of illegal activity to authorities to ensure public safety and a fair international tax system.