The FCA has written to UK banks suggesting good practice for handling the financial crime risks posed by crypto-assets.
In a Dear CEO letter dated 11 June 2018, the FCA has reminded banks that they should take “reasonable and proportionate measures” to reduce the risk that they are used to facilitate financial crime, such as money laundering or terrorist financing, by clients who deal with crypto-assets. This risk may arise when banks provide services to crypto-asset businesses (such as exchanges) and clients whose source of wealth is derived from crypto-asset trading or token offerings/ICOs.
Taking a risk-based approach
The FCA suggests steps that banks may want to take as part of their risk-based approach for tackling financial crime. These include:
- training staff on crypto-assets to help them identify high-risk clients and activities;
- engaging with clients to understand the nature of their businesses and the risks they pose; and
- carrying out due diligence on key individuals in the client business and, where relevant, assessing the client’s own due diligence arrangements.
The letter is a reminder to banks that the FCA continues to focus on how the banking sector may be used to facilitate financial crime. Some crypto-asset business may pose higher risks but banks who deal with relevant clients should, by taking appropriate steps, be able to understand and manage those risks and ultimately continue to serve those clients.
Checking source of wealth
In the letter the FCA also tells firms that they should assess the risks posed by clients whose wealth or funds derive from the sale of crypto-assets, or other crypto-asset-related activities, using the same criteria that would be applied to other sources of wealth or funds. According to the FCA, if those crypto-asset transactions have a weaker evidence trail, this does not justify applying a different evidential test on source of wealth.
Pseudonymity is built into the structure of many crypto-assets, such as Bitcoin. As part of their ongoing monitoring procedures, banks may require more from relevant customers to verify and document the source of wealth or funds for transactions relating to crypto-assets.