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In recent years, cryptocurrency has become one of the most important components of the global financial system, as it can be considered as a significant form of personal wealth. Many businesses that have emerged over the past decade are involved with cryptocurrency trading and development.
Though the use cases of cryptocurrency for illegal purposes are much less compared to legitimate transactions, crypto crime cannot be ignored. As per recent academic analysis, in 2019 only $829 million in Bitcoin(BTC)trade was spent on the dark web, which translates to a meager 0.5% of BTC’s entire pool of transactions. However, with the improvement of technology, cybercriminals are using this medium of exchange for money laundering and other illegal purposes.
Stages of Money Laundering Using Cryptocurrency
Cybercriminals use a variety of methods to conceal the origin of illegally obtained money. The three most common phases of crypto money laundering are:
Placement
One can buy cryptocurrencies with cash (fiat currency) or by using other types of cryptocurrencies (altcoins). Online crypto trading platforms have different safety and security policies regarding financial transactions. Almost all the legitimate crypto exchanges abide by certain rules and there are regulations that identity verification and sourcing of funds. Typically, they are also anti money laundering (AML) compliant.
However, some digital asset exchanges do not comply with AML regulation. These trading platforms, which are not AML compliant, do not have any Know Your Customer (KYC) policies and they do not offer any strict protocols to the users. Because of these lawfully-loose exchanges, crypto money laundering cases occur more often.
Hiding
One can keep a track record of crypto-based transactions through blockchain technology. In the case of money laundering, cybercriminals make use of anonymizing services to conceal the source of the funds and to break the links (or more accurately, blocks) between the Bitcoin transactions. Anonymizing service providers aid in the protection of personal data. However, these can be used wrongfully to hide the fund’s original source.
Hiding of data can be done on regular crypto exchanges as well as by taking part in an Initial Coin Offering, where one type of coin is used to pay for another type of coin. This is done to make the origin of the digital currency complicated.
Integration
Integration is the final stage of crypto money laundering. This step is done so that the illegal transaction of the digital currency can not be traced further. In this phase the illegal money is being legalize and to show that the money legally belongs to the criminal.
One of the easiest ways to legitimize an illicit income is by showing it as an earning of a profitable trade or any other legitimate currency appreciation. The tremendous volatility of the crypto market makes this process much simpler. The most common process of doing this integration phase is by exploiting an online trading platform that accepts Bitcoin payments and using that company as a medium to legitimize the illegally obtained money into legal Bitcoin.
Practices Undertaken for Cryptocurrency Money Laundering
Some of the most used practices that are undertaken in a case of cryptocurrency money laundering are:
Tumblers
Mixing services, or tumblers, are being used to break the illegal money into small parts and then to send it through various addresses before recombining them again. In the case of money laundering, the cryptocurrency funds are first present in a legal crypto wallet; then, they are shifted to another wallet on the dark web. Here, the digital assets are sent through various addresses and are then recombined in a second dark web wallet.
By this point, the virtual currency becomes clean enough that it can be transferred to the clearnet again. After it is transferred back to the clearnet, it can easily be traded on any legal crypto trading platform or can be sold for fiat currency.
Unregulated Cryptocurrency Exchanges
Another path taken by criminals to execute Bitcoin money laundering is unregulated cryptocurrency exchanges. The unregulated cryptocurrency exchanges are obviously not AML compliant, and do not contain any proper or strict security policies. These exchanges do not perform thorough identity checks of the users before allowing them to trade digital assets.
Repeated trading of cryptocurrencies across different markets will result in cleaning of the digital assets, and thus making them seem legal. Then, criminals will withdraw this ‘legalized’ currency from the external wallets.
Peer-to-Peer Networks
Many criminals use decentralized peer-to-peer networks to minimize the risks involved in money laundering. Peer-to-peer networks are mostly international networks. Thus, criminals make use of unsuspecting third parties to send funds on their behalf. After repeated transfers, these illegal virtual currencies are traded in various exchanges with little or no AML regulations.
Cryptocurrency ATMs
According to Coin ATM Radar, there are over 6,000 Bitcoin ATMs present in the entire world as of November 20, 2019. Crypto ATMs are continuously connected to the internet and anyone with a credit or debit card can purchase Bitcoin (or other supported cryptocurrencies) from these crypto ATMs.
These cryptocurrency ATMs also provide provisions for trading Bitcoin with cash by using a wallet address. They also accept cash deposits and will provide you with a QR code, which has to be scanned at any traditional exchange. This QR code is used to extract Bitcoin or other cryptocurrencies.
However, the rules and policies set up by financial institutions regarding these cryptocurrency ATMs are not up to the mark, at least not yet. Criminals use the benefits of these loopholes in the rules to minimize the risks. This is why the US IRS wishes to investigate deeper the industry of crypto ATMs.
Prepaid Cards
Prepaid debit cards are also used by criminals to lower the risk of money laundering. These are used to provide money for various types of illegal activities, repeated trades of Bitcoin with other types of currency, etc. These cards are also given to the third parties along with the associated PINs.
Gambling and Gaming Sites
Most of the online gaming and gambling sites accept payments through Bitcoin or other types of virtual currencies. These sites are used by criminals for money laundering and other illegal practices. They use cryptocurrency to purchase credit or virtual chips, which can, again, be converted into cash by a series of small transactions.
Anti-Money Laundering Solutions for MSBs
In order to control money laundering, small and medium-sized businesses (MSBs) must follow certain legal frameworks. The first and foremost requirement for controlling money laundering is implementing AML compliance. This will reduce the risks of money laundering.
AML compliance and strict security policies like identity verification for each transaction is an important step for preventing money laundering and risk exposures. Another important way to stop money laundering is blockchain technology. The MSBs should try to keep a clear record in the blockchain so that it becomes difficult for criminals to hide the original sources of digital currencies.
Steps Taken by MSBs to Remain Compliant with AML Standards
Hiring an In-House Compliance Team
MSBs can hire an in-house compliance team to ensure AML compliance. However, it may not be possible for the smaller MSBs to hire an in-house compliance team. They require expensive tools and platforms to identify money laundering among large data sets and transaction histories.
Taking the Help of Bitcoin AML Services and Tools
There are various tools and services that can assist you to know and verify the identity of the customers making cryptocurrency transactions. Automated monitoring of transactions will help you to identify patterns which are suspicious.
Deploying Upgraded Blockchain Technology Functionalities
Blockchain technology reduces the chances of money laundering to a great extent. MSBs should use advanced and upgraded blockchain technology functions and features. They can match transactions on the blockchain with the identities of the users making the transactions. This improves the AML standards and helps you to keep track of all crypto transactions.
Establishing a Trustworthy Identification System
The G7’s Financial Action Task Force (FATF) has pretty much made it compulsory for MSBs to collect and share the information of the people making cryptocurrency transactions. MSBs should have the technology to identify the sender and the recipient of the funds. They must share the information when required and should ensure that the customers are not involved in any illegal affairs.
Conclusion – US and Global Approaches to Crypto
The rules and regulations regarding cryptocurrency vary from one country to another, and AML requirements are different in different countries. There are many countries that have strict AML requirements such as the Netherlands, the UK, etc. and many countries that do not have any AML enforcement at all.
However, the FATF has recently issued a strict rule called the Travel Rule. The main aim of this rule is to collect information and data about each customer before every cryptocurrency transaction.
Crypto exchanges are ordered to share this information with one another in the case of transferring of funds between firms. This initiative has been taken by the FATF to lower the number of money laundering crimes.
