Financial institutions play a vital role in detecting and reporting suspicious activity that may be related to financial crimes. One of the critical responsibilities of financial institutions is to monitor transactions and report any suspicious activity that may be indicative of money laundering, terrorist financing, or other illegal activity. In this blog post, we will discuss the latest alert from the Financial Crimes Enforcement Network (FinCEN) regarding “pig butchering” scams and their implications for financial institutions.
What is “Pig Butchering”?
FinCEN describes “pig butchering” scams as “resembling the practice of fattening a hog before slaughter.” The victim is conned or “fatten up” by scammers into believing they are in a trusted partnership to buy legitimate virtual currency investments before they defraud the victims of their assets — the “butchering.” FinCEN reports that these scams are “largely perpetrated by criminal enterprises based in Southeast Asia who use victims of labor trafficking to conduct outreach to millions of unsuspecting individuals around the world.“
There are several red flags that financial institutions should look out for to detect suspicious activity related to pig butchering.[1]
Behavioral Red Flags
- A customer with no history or background of using, exchanging, or otherwise interacting with virtual currency attempts to exchange a high amount of fiat currency from an existing or newly opened bank account for virtual currency, or attempts to initiate high-value transfers to Virtual Asset Service Providers (VASPs).
- A customer mentions that they were instructed by an individual who recently contacted them to exchange fiat currency for virtual currency at a virtual currency kiosk and deposit the virtual currency at an address supplied by the individual.
Financial Red Flags
- A customer uncharacteristically liquidates savings accounts prior to maturation, such as a certificate of deposit, and then subsequently attempts to wire the liquidated fiat currency to a VASP or exchange it for virtual currency.
- A customer receives what appears to be a deposit of virtual currency from a virtual currency address at or slightly above the amount that the customer previously transferred out of their virtual currency account. This deposit is then followed by outgoing transfers from the customer in substantially larger amounts.
Technical Red Flags
- System monitoring and logs show that a customer’s account is accessed repeatedly by unique IP addresses, device IDs, or geographies inconsistent with prior access patterns. Additionally, logins to a customer’s online account at a VASP come from a variety of different device IDs and names inconsistent with the customer’s typical logins.
- A customer receives a large amount of virtual currency such as Ether (ETH) at an exchange, subsequently converts the amount to a virtual currency with lower transaction fees such as Tronix (TRX), and then abruptly sends it out of the exchange.
How to Minimize Risk to Your Institution and Clients
Financial institutions must ensure that they have proper policies, procedures, and systems in place to identify, investigate, and report suspicious activity related to pig butchering or any other illicit activity. As part of their anti-money laundering (AML) compliance program, financial institutions should conduct ongoing risk assessments to identify the specific money laundering and terrorist financing risks associated with their business.
Financial institutions should also provide regular training to staff on how to detect and report suspicious activity related to money laundering and terrorist financing and ensure that they are aware of the latest trends and typologies related to financial crimes.
Conclusion
The FinCEN alert highlights the importance of financial institutions in detecting and reporting suspicious activity related to money laundering and other financial crimes. Pig butchering scams demonstrate how criminals are becoming increasingly more sophisticated in their methods. The burden lies with financial institutions to ensure that they have the necessary policies, procedures, and systems in place to identify and report suspicious activity in a timely and accurate manner. By doing so, they can help prevent financial crimes and support the efforts of law enforcement and regulators in combating money laundering and terrorist financing. If you need assistance updating policies and procedures or training, reach out to our experienced Bates team of industry AML and compliance professionals. We can help.
[1] October 2022 FBI PSA, supra note 10
How Bates Helps:
It is essential for firms to have a well-developed BSA/AML/OFAC compliance program in place that manages compliance risks and promotes best practices for your industry. FinCEN expects each institution to tailor its AML program specifically to its location, customers, and services. At Bates, our certified consulting experts and former AML regulators help you identify and understand the requirements for your businesses and develop an AML compliance program based on your individual risk profile.
