Fraud and Regulator’s Fault

Fraud and Regulator’s Fault

Ella Rosenberg

Written by

Ella Rosenberg
April 23, 2023

Last week we witnessed the approval of MiCA, the Markets in Crypto Assets Regulation of the EU, by the European Parliament, which means that finally some of the uncertainty when it comes to crypto assets, will be resolved on a pan-European level.

With that said, as the majority of crypto frauds that took place during the past few years, have stemmed from the un-regulated CFD trading platforms, that have evolved from the binary options schemes, a significant watchful eye, and also criticism has been placed upon regulators worldwide, that have not sufficiently tackled these issues. Central banks and financial intelligence units (FIUs), that are in charge of the licensing of the trading platforms and of the crypto exchanges, have been scrutinized both by the European Securities and Markets Agency (ESMA), but also by consumers that were targeted by CFD boiler rooms and other crypto-forex frauds. This leads to the question of accountability and of traceability by the regulators.

The compliance teams that form the licensing and inspection of the licenses are caught in a severe tackle of Catch-22. On the one hand, the compliance teams need to examine an infinite amount of data submitted to the regulator, without an option to screen or detect the unusual or suspicious transactions due to their high volume of material submitted. This issue was raised by the Estonian FIU back in August 2020 when the amount of fraudulent crypto exchanges surpassed the amount of legitimate financial institutions, and as, such the Estonian FIU decided to cancel the majority of licenses and increased the regulatory threshold to an alarming degree. Yet, this is not the response many have wished for. The consumers of the platforms and also the international regulators (not on a Member State level) are under the impression, that sufficient safeguards were not taken. Hence, the issue of digitalization of the AML process has become a much-needed resource of the FIUs.
In cases where the FIU were stuck with the detection of anomalies in the AML quarterly reports by the financial institutions, it was presumed that the FIUs will at least try and find a solution, and not a post-mortem one, that will enable any sort of detection of fraudulent activity from FIAT currency to crypto currency and vice versa. This is the same case also for liquidity providers and for market makers, who have been also highlighted for money laundering and terrorist financing cases.

A similar argument was also raised by the Egmont Group in their last meeting and also in the FATF Recommendations, and has been highlighted by the recent updates to the EBA Recommendations. Thus, the recent scandals, the recommendations of the international organizations and the market conditions all lead to the unescapable conclusion- that there is an inherent need for AML AI technologies to solve the overload on the regulators and their respective compliance teams and to minimize the amount of criticized duress on the regulators.
Just as much as the binary options schemes have evolved into CFD frauds, which in turn evolved into crypto liquidity frauds, the criticism pouring over the regulators heads may be solved by implementing the correct AML AI technology that should detect the problematic transactions, prior to the approval of the quarterly or yearly license, and not in retrospect.

Technologies such as the SNI Dark Web Scanner, are now available in the market, yet regulators are hesitant to involve private companies’ technology, white-labeled or not. This approach should change, mainly because it is not humanly possible to assess the amount of regulatory material received. Regulators may be of the impression that they are accountable to their respective states only, yet in today’s market regulators are also accountable to their respective end-clients, the financial institution’s clients who are left to the mercy of the financial institution.