My client has crypto assets I cannot place, how do I deal with that?

How do you assess a client’s crypto assets you cannot place?

A client brings in assets, and part of them is crypto whose origin you cannot trace. Your policy asks for evidence; the client says it was simply bought. Between the two sits your judgement, and you need to be able to explain it later.

The core is always the same trail: what money was the crypto bought with, where has it been held, and does its current size fit the amount paid in and the price movements? A balance at an exchange or in a wallet says something about ownership, not about origin. That difference is easily overlooked in practice.

Under the Money Laundering Regulations 2017, firms must carry out customer due diligence under regulation 28 and, in higher-risk cases, enhanced due diligence under regulation 33, for example where a transaction is unusually large or complex for the client. The higher the risk, the further your check needs to go.

What is the difference between unexplained and unexplainable crypto?

Unexplained means the documents are not there yet. Unexplainable means that, after investigation, the origin cannot be evidenced. The first is an interim position, the second a conclusion. Only the first is your starting point.

Mixing the two up risks two mistakes. You turn a client away or file a report when a simple export would have solved it. Or you accept an explanation that nobody has checked against what is on the blockchain. Both can be avoided, but only if someone actually follows the trail.

Which three risk classes help with the assessment?

A split into three classes gives you something to hold on to. Which class you assign belongs in your own risk assessment.

• Low: a modest amount, bought through a well known exchange, with bank statements for the deposits.
• Medium: a larger amount, moved between exchanges or to a wallet of the client’s own.
• High: old holdings without documents, platforms abroad, mixers, or a size that does not fit the client profile.

The terms behind the check are explained under KYC and AML.

Not sure which class a client falls into? Run it past Paucitas; there is often a first picture quickly. Get in touch or call +31 20 244 5774.

When should you ask a client with crypto for more?

As soon as the explanation and the documents do not match. Think of a balance larger than the amount paid in plus price rises can explain, a period without documents, or a wallet whose addresses the client cannot name. These are signals to look further, not conclusions. It may be perfectly fine. Something may also be missing.

Asking works best with specific requests, such as the first deposits and the full export per exchange. A client who obtained their crypto honestly can often provide those documents, even if it takes a little time. For the client there is a page you can pass on: showing crypto profit was earned honestly.

An example from practice

A wealth manager took on a new client with a sizeable crypto balance at an exchange. The client said he had bought early, but only had a recent annual statement. The manager provisionally placed the assets in the highest class.

The reconstruction showed that the balance had arrived years earlier through the client’s own wallet, and before that from another exchange funded from his own bank account. One small part remained open. The manager could treat most of it as explained and put the open question to the client in a targeted way.

Paucitas takes privacy very seriously and never shares personal details of clients. This is a composite example: names, amounts and details have been changed. The situation is one we see in practice.

What Paucitas does for you

Paucitas works everything out: the transactions, the route of the money from purchase to current balance, the platforms and wallets, the documents and the timeline. Paucitas also reads through the relevant documents, emails and other communication, so you get a complete picture of where all the money came from and where it went, step by step. Paucitas does all tracing itself, without tracing tools. You receive a report that anyone can follow and understand step by step, with a separate note of what cannot be established. So you see exactly which part is explained and which is not.

• What you can expect: early on, Paucitas tells you which transitions hold up and where documents are missing.
• Costs: every investigation is tailored. You receive a custom quote in advance that we go through together, with no surprises.
• Turnaround: from the same day to about two weeks.

Paucitas does not give tax or legal advice and does not decide on the client relationship. That stays with you. Paucitas provides the facts you can decide on, and where a report is needed, the Paucitas report gives it a clear foundation. How we work with advisers is on for accountants and advisers. Our approach is under services, and for businesses there is crypto on the balance sheet.

Sources: legislation.gov.uk, Money Laundering Regulations 2017, regulation 28; legislation.gov.uk, Money Laundering Regulations 2017, regulation 33.