Tracing assets or, to put it another way, following the money trail is an important part of financial investigations to establish the criminal origin of the proceeds or to determine crime instrumentalities. In asset investigations focusing on virtual currency, this can be deemed the preparatory stage, which helps determine freezing or seizure objects before such objects are seized.
As with any criminal or financial intelligence activity, asset tracing relies on specific indicators – “red flags” – that may help and guide the investigator in determining the criminal nature of the proceeds/property in question. In fact, the red flags referenced to and discussed in this Manual are relevant in terms of actual investigations and the identification of transactions in virtual currencies.
These red flags are:
- A large number of bank accounts held by the same virtual currency administrator or virtual currency exchange company (sometimes in different countries) apparently being used as flow-through accounts (may be indicative of layering activity), without a business rationale for such a structure;
- Virtual currency administrator or virtual currency exchange company located in one country but holding accounts in other countries where it does not have a significant customer base (unexplained business rationale which could be suspicious);
- Back and forth movement of funds between bank accounts held by different virtual currency administrators or virtual currency exchange companies located in different countries (may be indicative of layering activity as it does not fit the business model);
- The volume and frequency of cash transactions (sometimes structured below reporting threshold) conducted by the owner of a virtual currency administrator or virtual currency exchange company do not make economic sense;
- Virtual currency systems that lack appropriate registration and/or transparency or are known to be popular with notable criminal groups.
As can be seen from these indicators, these are directed at the points of contact of the virtual currencies with the established financial institutions – that is, central administrators, currency exchanges, virtual currency payment processors, hosting services, merchant service companies, etc. One should bear in mind that virtual currency transactions operate beyond established financial institutions. The anonymity of such transactions, reliance on cryptography, and absence of official record-keeping will make tracing cryptocurrencies an arduous, if not impossible, task. Even where such currencies, such as Bitcoin, keep an open, transparent ledger of all transactions available as open-source information (known as the Blockchain), linking a specific transaction to individual users (wallets) may require information from other sources.
In this light, there are several other options in which assets can be traced in the virtual currencies context: