November 19, 2018

Outlier Solutions Inc Founder on Anti-Money Laundering in Cryptocurrency

Midas Letter
Midas Letter
Outlier Solutions Inc Founder on Anti-Money Laundering in Cryptocurrency

Outlier Solutions Inc Founder and CEO Amber Scott is an expert in anti-money laundering practices. Scott joins James West in the Midas Letter studio to discuss the application of anti-money laundering legislation and anti-fraud techniques to the digital currency space. Scott talks about forthcoming regulations for cryptocurrency and indicates that this new global financial enforcement of the digital currency space will be similar to traditional anti-fraud practices with which consumers are already familiar. While Scott admits that most of the anti-fraud alerts generated for money laundering are false positives, these security measures are important to prevent crimes such as drug and arms dealing as well as human trafficking. Outlier Solutions works with cryptocurrencies, investment firms, and more traditional banks and credit unions to ensure regulatory compliance and advises currency operators to have in-house compliance officers to better prevent fraud.


James West:   And now I’m going to talk to Amber Scott, who’s the founder and CEO of Outlier Solutions, an anti-money-laundering consulting services and strategies. Amber, welcome to the show.

Amber Scott:  Thank you for having me.

James West:   Anti money laundering – how much of a problem is that in the world of cryptocurrencies in Canada?

Amber Scott:  I don’t know that it’s necessarily a problem; I would say that money laundering is probably the problem, and then anti0-money-laundering is part of the solution.

James West:   Money launderers would say getting caught is the problem.

Amber Scott:  [laughter]

James West:   Okay, so how do you go about – what is the anti0moneylaundering landscape looking like right now?

Amber Scott:  So right now, we have proposed legislation. It was released in draft in June of this year, and we’ll probably see a final version of that published in the Canada Gazette next year. That will see businesses that are dealers in virtual currency regulated as money services businesses, and some of them are already, if they’re already doing some additional activities But buying and selling cryptocurrencies and other virtual currencies is going to become a regulated activity.

James West:   Sure. So anti-money-laundering compliance and certification is pretty much part of opening of any account with any financial institution now, and even with some institutions that aren’t necessarily financial. So what are the sort of nuances of anti-money-laundering provisions as it pertains to virtual currencies, relative to anti-money-laundering positions as it pertains to a normal banks, and/or a brokerage account for trading stocks?

Amber Scott:  They’re actually very similar. So one of the important nuances is that they haven’t rewritten new laws; so it’s not like ‘know your customer’ is going to be entirely new for virtual currencies. It’s going to look a lot like opening a bank account or opening up any other kind of financial services account. They’ll be regulated in the same way as traditional money services businesses, so you’ll be expected to identify yourself, to provide information about your address, often about your source of wealth depending on the type of transaction that you’re doing, and those are things that most of us as customers are used to being able to do.

James West:   Sure. So the use of cryptocurrencies to conduct transactions on markets and in goods and services that are essentially – not essentially, that are absolutely illegal – how is it that they are able to get away with those transactions if anti-money-laundering is such a entrenched concept within he global financial system?

Amber Scott:  So getting away with it, I think, is interesting. Financial crimes investigations take a long time, so it takes a long time for law enforcement to collect the evidence, to make an arrest, and then to go through the trial and prosecution. That said, while someone is doing these investigations, I personally think that specially when you look at a ledger like Bitcoin, so you have an immutable, public ledger which is the Bitcoin blockchain, I think that’s a terrible way to do legal things. It’s a really not the best way to do that, and of course there are other, more privacy-intensive cryptocurrencies, but I certainly don’t think that cryptocurrency is the main way that people are laundering money.

James West:   Yeah. So then, is it the case like we’ve actually seen successful prosecutions of like Dread Pirate Roberts and some other players in the space –

Amber Scott:  So my favourite in that case is actually Carl Mark Force.

James West:   Okay.

Amber Scott:  So you have an officer who was part of the – and I can’t remember which law enforcement agency he was with in the US, but he actually took part in seizing part of the Bitcoin, and then decide that he could steal some of that Bitcoin.

James West:   Ooh, I remember hearing about that. Yeah.

Amber Scott:  And he was actually prosecuted for that. And I think that’s really fascinating in that even when you have someone who’s saying they understand how law enforcement works – he had at least somewhat of an understanding of how Bitcoin worked – and still wasn’t able to obfuscate that trail, and that was instrumental in terms of that prosecution as well.

James West:   You bet. Is it conceivable, then, that these people just fail to grasp that immutable record of transaction actually means that the money trail will always be there for everyone to find eventually? They just don’t get it and they think that, what? People are going to overlook it?

Amber Scott:  I think early on, people just weren’t really thinking about it as much. People didn’t understand how it worked. People still don’t, in many cases, understand how it works, so it isn’t completely anonymous; it is pseudonymous.

James West:   Right.

Amber Scott:  And so if I can connect your address to you, and connect your transactions to you, then I can get the record of all of those transactions.

James West:   IP address, hello! I know! Well, that’s the funny thing. So the existence of things like the Silk Road and the Tor and all of these things where these nefarious transactions occur, I mean, isn’t it really just a case of the global financial enforcement is letting these things proceed so that they can actually track everybody down and arrest them?

Amber Scott:  I – maybe? I never tend to believe that there’s someone pulling all of the strings. I think in terms of global financial enforcement, that takes a lot of coordination between different law enforcement agencies in different countries. I certainly would like to see more enforcement in various ways, especially when it comes to crimes like human trafficking, so where you have like actual victims that are harmed and profiteering from that – I absolutely would love to see more prosecution. I think that we need more political will for that, that goes beyond a four-year cycle.

James West:   Sure.

Amber Scott:  I’ve definitely seen more coordination in recent years between different law enforcement agencies in different countries, because of course, these crime syndicates operate internationally. And so it’s not enough for –

James West:   You’re talking about governments, here?

Amber Scott:  [laughter]

James West:   Just kidding. [laughter]

Amber Scott:  Sometimes. I think government corruption is another really fascinating source of financial crime, and that’s something that factors into our anti-money-laundering legislation. So if somebody is a politically exposed person, then you have to look at the source of that person’s wealth, you have to pay attention to certain transactions that they do, you have to consider them higher risk than you would the rest of your customers.

James West:   Sure. So how likely is it that anti-money-laundering provisions are going to flag me as a risk of being involved in money laundering if I’m not, but I mean, so what happens to create a flag where somebody’s going to say Well, this guy’s got some things that don’t make sense; we need to take a closer look at this, and in the meantime, don’t give him an account?

Amber Scott:  Hopefully most of the time, it’s not ‘don’t give him an account’. It’s just we’ll monitor it more closely, we’ll take a loo, we’ll ask additional questions, we’ll ask for additional information. Most of the alerts that are generated from an anti money laundering perspective are going to be false positives, which means that an alert was generated, but the activity isn’t really related to money laundering. And that’s because most of us aren’t doing crimes; most of us are just, you know, we’re getting paid, we’re buying things, we’re going about our daily business.

I’ve bought a ton of things with Bitcoin, most of them are things like computer equipment.

James West:   Really? Wow.

Amber Scott:  And so you will see those transactions, but most of those things will be false positives. I certainly know even within my own accounts, and I think it’s funny as an anti money laundering geek, because I’ll get the questions. And so at certain points in time, when I’m calling to do transactions – so I’ve done a pre-payment, for instance, on my mortgage, where I’ve paid off more money than I had to pay off – you know, I know that this is a flag. So when I call them, I’m very proactive about saying ‘and here’s where that money came from, and let me know if you need any other information’. But for most of us, it’s just those questions where you sort of wonder, why the heck are they asking me that? Why do they want additional information about that? What are they going to want next, my blood type?

Well, no, because your blood type has nothing to do with your financial transactions. But they want to know where the money is coming from, and what it is that you’re trying to do.

James West:   Okay. So in Canada, or in your experience in Canada, what are the crimes that are typically anti-money-laundering based crimes that happen in Canada currently?

Amber Scott:  Any crime that generates proceeds. So really, you have to have a crime where somebody gets paid or profits from that crime in some way. And so you’re looking at things like drugs, human trafficking, the dealing of illegal arms. I think a lot of the things where it raises suspicion within the financial system tends to be drug-related, so that’s going to be particularly interesting now that marijuana is legal.

James West:   That’s great. Interesting. So then, now how do, what kind of clients do you have in Outlier Solutions?

Amber Scott:  So we work with cryptocurrency companies, we work with Exchanges and brokerages, we work with traditional financial services companies – so, money services businesses, banks, credit unions, essentially anyone that needs to be compliant from an anti-money-laundering perspective.

James West:   So if I wanted to start a cryptocurrency called Midas Coin, I would contact you to find out about how to implement anti-money-laundering protocols in my system, and probably consult with you on what is and isn’t legal within this idea that I have?

Amber Scott:  Exactly, and developing your policies and procedures, hiring a compliance officer, because you would want someone who was overseeing –

James West:   So would you be a compliance officer outsourced for hire?

Amber Scott:  No. I actually don’t recommend that.

James West:   Okay.

Amber Scott:  As much as possible, I think it’s very important for reporting entities to have in-house compliance officers. And I say that as someone who’s been an in-house compliance officer: it’s really hard to know everything that’s happening within an organization, especially within a startup. Things change fast, things move fast, and I think it’s very difficult for someone who isn’t there, having that interface every day, to really know what’s happening within an organization. So I think the best compliance people are always in-house compliance people.

James West:   Interesting. Okay, well, so you founded this company in 2013, and is there – so you’re saying there’s not really a problem in the Canadian space so much as there is just a absence of familiarity with the process to become compliant for newer financial institutions involved in virtual currencies?

Amber Scott:  So I think it’s always a moving target. We’re always looking, you know, criminals are always changing the way that they launder money, they’re always trying to stay one step ahead; we’re always trying to catch up to them. So it’s always a work in progress. There’s always something to do in the compliance field, but I have seen, in cryptocurrency, that people have very much wanted to be compliant.

So we had our first crypto clients in 2013, so the same year that we started doing business, and these weren’t institutions that were regulated; they were coming in and saying We’re doing this business, we want to understand the risk, we want to have compliance programs, we want to do that voluntarily, and help us set that up to the extent possible as if we were a regulated entity, because we don’t want to be the weak point in this system.

James West:   Sure. So how did you come to be an expert in anti money laundering? Like, what’s the educational sort of requirement?

Amber Scott:  So everything in my career is happy accident, I can take no credit for it.

James West:   Okay, same here. [laughter]

Amber Scott:  So when I finished undergrad, I saw a job posting at Manulife Financial, and it was in compliance. And with all of the wonderful bravado of a 20-year-old, I said I have all of the soft skills for this, and I can learn the rest, and bless their hearts, someone believed me. And I started there in August of 2001, and then in September of 2001, September 11th happened.

James West:   Right.

Amber Scott:  And anti-money-laundering and counterterrorism became a major topic of conversation in the compliance field. So for me, as a relatively new compliance officer, it was new, it was exciting, it was interesting, and I pursued that interest.

James West:   And never looked back. Awesome. Well, really interesting, Amber, I’m sure we’re going to have you back again as we have more questions surrounding anti-money-laundering and compliance. Thanks very much for joining us today.

Amber Scott:  Thank you for having me.


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