A confidential report into the operations of a Malta-based cryptocurrency firm offers insight into how the ‘wild west’ period of lax regulations was exploited by the high-risk industry.
As part of the government since-abandoned ‘Blockchain island’ dream, cryptocurrency firms were initially allowed to operate in a regulatory vacuum until obtaining a virtual financial asset licence, in what became known as the free-for-all “wild west” period.
Cryptocurrency operator Bequant were this month fined over €460,000 by the FIAU – Malta’s anti-money laundering body – for a “serious and at times systemic” failures to safeguard against financial crime.
A 40-page FIAU report labelled as being “strictly confidential” was included in publicly available court filings by Bequant, which is contesting the fine.
According to the report, Bequant argued that it has “no legal obligation” to carry out basic anti-money laundering checks during the regulatory vacuum in 2018 and 2019. The report details the “worrying” lack of regard by Bequant to properly assess the financial crime risks it was exposed to.
Bequant’s transaction monitoring policies were found to not even indicate what should be done by an employee in case of suspicions of money-laundering or funding of terrorism by one of its clients, the FIAU said.
Russian with €55 million in cryptocurrency holdings classified 'low risk'
In one instance, Bequant was discovered to have classified a Russian national residing in Malta and the UK with €55 million in cryptocurrency holdings as being “low risk”. The FIAU said the fact that the Russian CEO, who was not named in the report, was a high-net-worth individual with €55 million in crypto investments should have meant he was classified as a high-risk client by Bequant.
In multiple instances detailed in the report, Bequant justified its lack of scrutiny into what its clients were up to by saying it had no legal obligation to do so, thanks to the regulatory vacuum created by the government in 2018 and 2019.
While acknowledging the “lack of clarity” that existed at the time, the FIAU said Bequant continued to fail its anti-money laundering obligations, even after it was made clear in February 2020 that it would have to abide by strict financial crime regulations. The firm was given a three-month grace period to bring itself in line with the law.
The FIAU made it clear that Bequant was obliged to carry out anti-money laundering checks for clients it had taken on during the regulatory vacuum. It says that Bequant’s argument that it was not obliged to carry out due diligence checks on old customers taken on prior to 2020 “does not hold water”.
According to the report, Bequant took “one whole year” to carry out a risk assessment of certain clients it had taken on prior to 2020.
FIAU inspection
During its inspection of Bequant, carried out in 2021, the FIAU found that the firm was failing to keep an updated list of high-risk and sanctioned countries. The FIAU found “deficiencies” in the way Bequant assessed and attached risk weightings to various jurisdictions that its clients may hail from. This was said to be “even more concerning” in view of Bequant’s exposure to various jurisdictions like Panama, the British Virgin Islands, Morocco and Russia.
Apart from failures to carry out financial crime checks when taking on clients, the FIAU also discovered that Bequant’s transaction monitoring policy did not detail the steps to be taken to counter financial crime threats. Considering the volume of transactions handled by Bequant, the FIAU said it was “worrying” that the company did not have automated systems to monitor transactions.
Bequant is contesting the FIAU’s fine in court, joining the litany of firms arguing that the anti-money laundering body’s role as judge, jury and executioner is unfair.
The firm’s lawyers did not respond to a request for comment about the FIAU’s findings.
Bequant Exchange voluntarily surrendered its Malta licence in September 2022, just one year after obtaining it.