We have heard on many occasions the much talked about relationship between virtual assets and money laundering. This misuse – although less frequent than is thought – has been associated in several treaties and investigations with terrorism and drug trafficking. Where should tax administrations and anti-laundering bodies focus?

We have frequently read articles or heard specialists talk about the link between virtual assets and illicit activities (money laundering, drug trafficking, terrorism). However, this relationship, in detected cases, has much more to do with their use as a means of payment or for financing of such illicit activities, than with their specific use for money laundering. And it is much less common than it is believed[i]

The specific characteristics of these assets, such as being anonymous- the transactions are (until today) traceable, but initially not attributable to a particular person or entity -, the absence of a centralized issuer, and the easy transaction, facilitate their use by people or organizations engaged in criminal activities.

Let us then review the main publications on the subject, the various analyses carried out by the Financial Action Task Force (FATF) resulting as an inescapable reference.

• June/2014: “Virtual Currencies, Key Definitions and Potential AML/CFT Risks”, describes as potential risks the decentralization and anonymity of transactions.[ii]
• June/2015: “GUIDANCE for a RISK-BASED APPROACH to VIRTUAL CURRENCIES” is the first comprehensive anti-laundering prevention guide. Reference quote (United Kingdom, United States, Italy, Hong Kong, among others) [iii]
• February 2019: issues an interpretative note updating the Recommendation 15, suggesting, among other actions, the registration of virtual asset providers, licensing, imposition of anti- laundering rules, setting alert amounts for operations[iv]
• June 2019: incorporates into a formal guide the updates made in October 2018 on recommendation 15[v]
• September 2020: red flags or alerts report, containing specific recommendation parameters in the analysis of transactions, transactions, issuers and receivers, wealth funds and geographic risks[vi]

TRENDS IN CONTROLS.

As an initial analysis, it is observed that the trend in the recommendations is aimed at the registration of Providers of Virtual Assets (e.g., Exchanges), registration, and information operations, specific alert parameters (number of operations, solvency, activity declared, withdrawals or repeated contributions in small amounts, FIAT cash withdrawals, etc.

Everything indicates that the first goal is control over the exchange platforms, their customers, and the interaction of both with traditional banking; that is, the exchange of crypto assets with fiat money.

But what is, according to this new reality, and with these recommendations underway, the “Achilles’ heel” of the scheme to be controlled? Without a doubt, the operations that are carried out outside the platforms, i.e., person to person, using wallets that go outside the Exchanges (paper wallet, physical bitcoin, mobile wallets, desktop, hardware, etc.).[vii]

IMPLICATIONS FOR TAX ADMINISTRATIONS.

And if a juicy profit made based on basis of buying and selling virtual assets, which pays taxes according to local laws, is, in fact, an asset laundering maneuver itself?

In many jurisdictions, profits from the purchase and sale of digital assets are taxed at lower rates than those applicable to income in general. While this is an aggravating factor, we consider that this situation does not constitute money laundering. That they pay the general rate…

In a context of exponential rise in Bitcoin trading (for example), what evidence will a taxpayer need to provide to prove that they acquired BTC at USD 30,000. – and sold them the same year at, say, USD 60,000. -? And what can be worse…. what will the Tax Administrations and anti-laundering agencies do, to, on the contrary, refute the existence of such operations?

Returning to the beginning of this article, almost all anti-money laundering measures are aimed at financing or channeling funds through virtual assets, without conversion into FIAT money, recordable assets, or traditional investments.

But, if these assets are used, per se and without interacting with other assets, how to channel the introduction of illicit funds into the formal circuit? It seems that today, nothing makes it difficult for a person to declare that he or she has doubled his capital- even paying taxes – without having to prove it reliably. How to prove the true date of each operation?

This inconvenience has been glimpsed by the FATF, body that within the alerts suggests reporting withdrawals of virtual assets from Exchanges to cold wallets, but this seems to be insufficient.

PERSON-TO-PERSON TRANSACTIONS. VALUATION INTERPRETATIONS.

Some jurisdictions have advised users on how to document person-to-person operations. For example, in the case of Spain, can be seen within the Binding Query V0999-18, that “In regard to the market value corresponding to the virtual coins which are permuted, is that it would be up to the agreed price for sale between independent entities at the time of the swap. In any case, the fixing of this value is a matter of fact, therefore outside the competence of this management center and that can be accredited through means of proof admitted in law, whose assessment will be carried out by the management and inspection bodies of the Tax Administration”. In the case of the United States, it has been pronounced in frequent consultation 27: “the IRS will accept as proof of fair market value the value determined by a cryptocurrency or blockchain explorer that analyzes the world indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time.”

Everything seems to indicate that the production of the documentation is in charge of the user. Also, that both the Tax Administration and the anti-laundering bodies, very possibly, find themselves in trouble to refute it. In addition, in no case is it planned to identify the counterparty.

EFFECTIVE PREVENTION MEASURES: TRACEABILITY AND SELF-DECLARATION.

The measures being taken, and especially the latest FATF suggestions already detailed above, are moving in the right direction. However, it would be highly desirable for the monitoring bodies to analyse, as soon as possible, two aspects:

• ADOPT TECHNOLOGY FOR TRACEABILITY CONTROL, through the implementation of computer developments designed for this purpose. In this respect, there is already a precedent: the US government concluded – through the Department of Homeland Security-a definitive contract with the firm COINBASE-based in San Francisco, California – to make use of the software developed for the tracking of transactions on the Web. This is the formal contract 70us0920c70090044. While talks initially developed with the IRS and the DEA, eventually the contract was signed with DHS, initially for 4 years, with initial expiration in May 2024. However, the Treasury Department also participates in the contract, on which the IRS, as a sub-agency, depends. [viii]

• DESIGN AND IMPLEMENT AN ONLINE SELF-DECLARATION INFORMATION REGIME, which is completed by all those who operate virtual currencies outside an Exchange. A simple transaction, completed in real-time (through the web or a smart phone App), through which the person-person trader must inform the tax authorities of simple and basic data (type of operation, species, amount, Amount in fiat money and counterparty) will undoubtedly generate a database of enormous value in order to contrast these operations with tax positions. It would also act as a strong constraint on marginal operations.

It is enough just to think that today, in all jurisdictions and by way of example, a small business or trade must issue a voucher, register it and declare a simple retail sale. There are, around the world, an endless number of information regimes: banking transactions, real estate transactions, stock market transactions, etc.  In short, economic facts between individuals that must be externalized and informed to the control bodies. So … what is the logical reason that person-to-person operations of virtual assets should not be externalized until completing an annual tax position?

The various controls that have been arranged, in many respects, are going in the right direction. But the sum of traceability control, plus an Operations Declaration Scheme, could surely grant the control elements that the system is now requiring.

CLOSING CONCEPTS.

Many measures are being taken, trying to keep up with the growing boom-and the growing capitalization – of virtual assets. Maybe it is time to evaluate which ones are working and which are not. And it is certainly time to think about innovative and specific measures for a financial economic sector that has generated a revolution.

[i] ” An Analysis of Bitcoin’s Use in Illicit Finance”, Michael Morell, 06/04/2021
[ii] June 2014: Virtual currencies-Key Definitions and Potential AML/CFT Risks (fatf-gafi.org)
[iii] June 2015: http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf
[iv] February 2019: http://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets-interpretive-note.html
[v] June 2019: International Standards Update http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf
[vi] September 2020: Report of “red flags” as indicators of money laundering http://www.fatf-gafi.org/media/fatf/documents/recommendations/Virtual-Assets-Red-Flag-Indicators.pdf
[vii] For more information it is suggested to consult the publication” taxation of cryptocurrencies and the digital economy ” EDICON, ISBN 978-987-741-132-4 (Vadell-Aued-Bordignon-Moren-Gonzalez Cao) Link: http://edicon.org.ar/wp-content/uploads/2020/11/FISCALIDAD-DE-LAS-CRIPTOMONEDAS-Y-DE-LA-ECONOM%C3%8DA-DIGITAL.-web.pdf
[viii] Source: https://www.usaspending.gov/

2,474 total views, 3 views today