Crypto Money-Laundering Complete Q&A

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Money laundering via cryptocurrency has been going on for a while now. We’ve all heard of Bitcoin, Ethereum and Dogecoin. Crypto is used by financial criminals globally but how are they getting away with it? It’s time we lifted the lid on this crime and decoded what often sounds complicated but doesn’t have to be.

This is everything you need to know. 

What is cryptocurrency?

Simply put, Cryptocurrency is a digital or virtual currency that is protected by encryption, making counterfeiting and double-spending practically impossible. Many cryptocurrencies are built on blockchain technology, which is a distributed ledger enforced by a distributed network of computers. Cryptocurrencies are distinguished by the fact that they are not issued by any central authority, making them potentially resistant to government intervention or manipulation.

The biggest criticism Cryptocurrencies face is their use for illegal activities.

Technological advancements have given criminals faster and safer options to wash their ill-gotten money. There is no doubt that cryptocurrencies are a very useful technological innovation that helps individuals and institutions access financial products and services in a faster and cost-effective manner. However, their rise as alternative value transfer and investment tools raises money laundering concerns as well.


Banned in some countries

Cryptocurrencies are rapidly gaining popularity, but not everyone is on board, as many governments have outlawed dealing and trading in these digital tokens. While there are apparently over 5,000 known cryptocurrencies in the world today, analysts and experts are still anticipating a rapid rise in the value of Bitcoin, the world’s oldest and most valuable cryptocurrency, with only a few months left in 2021. However, while some nations, like India, are rapidly expanding their crypto markets, others, such as Russia, Morocco, Egypt and Bangladesh, are tightening down. Recently, China’s central bank has announced that all transactions of cryptocurrencies are illegal in the country.


Money laundering via crypto

While they may not be a competitor to the currency in terms of laundering volume at present, the ever-increasing use of cryptocurrency and their unregulated or less-regulated nature in many jurisdictions mean that the financial world has a lot to worry about. The same is echoed in the 2019 meeting of the G20 Finance Ministers and Central Bank Governors in Japan. “While crypto-assets do not pose a threat to global financial stability at this point, we remain vigilant to risks, including those related to consumer and investor protection, anti-money laundering and countering the financing of terrorism,” says a note from the meeting.

Crypto advisors often claim that laundering money with cryptocurrencies is highly complex and risky, making it an ineffective strategy compared to conventional techniques. They also argue that transactions in digital currencies are more transparent and accountable compared to fiat currencies. Another argument is: money laundering using cryptocurrencies is comparatively very small in terms of volume and mainstream media is focusing more on criminal activities related to digital currencies rather than technology and innovation. Albeit on a small scale, there is no doubt that cryptocurrencies are being used to facilitate money laundering.

Cryptocurrencies are slowly changing their stature as a mainstream medium of value exchange in the digital era. Many large companies now accept the digital currency for payments of products and services, and many banks consider the adoption of blockchain technology. This being said, cryptocurrency really has the potential to replace their paper and plastic variants. Therefore, it is important to analyze the loopholes enabling these currencies to be used for money laundering and to develop adequate counter technologies to combat the crime.


Some Noteworthy Numbers and Cases

According to the United Nations, between US$800 billion and US$2 trillion are being laundered every year across the globe, representing 2-5% of the global gross domestic product. Out of this, more than 90% goes undetected. The exact volume of crypto laundering is yet to be established. However, we found some indicative statistics on the Internet.

A report says that crypto thefts, hacks, and frauds totaled US$1.36 billion in the first five months of 2020, compared to 2019’s US$4.5 billion.

According to another report, criminals laundered US$2.8 billion in 2019 using crypto exchanges, compared to US$1 billion in 2018.

As of 2019, total bitcoin spending on the dark web was US$829 million, representing 0.5% of all bitcoin transactions.

A separate study, analyzing more than 800 market maker exchanges, found that 56% of all crypto exchanges worldwide have weak KYC identification protocols — with exchanges in Europe, the US and the UK among the worst offenders.

The study noted that 60% of European Virtual Asset Service Providers have deficient KYC practices.

In October 2020, Europol announced that an unprecedented international law enforcement operation involving 16 countries had resulted in the arrest of 20 individuals who attempted to launder tens of millions of euros since 2016 on behalf of the world’s foremost cybercriminals. Operated by the notorious QQAAZZ network, the scheme involved the conversion of stolen funds into cryptocurrency using tumbling services that help hide the source of funds. In yet another incident, a man from New Zealand was arrested on money laundering, worth thousands of dollars, involving cryptocurrency.




How Do Criminals Use Cryptocurrencies for Money Laundering?

To conceal the illegitimate origin of payments, criminals use a variety of strategies involving cryptocurrency. All of these approaches rely on one or more of cryptocurrency’s flaws, such as their intrinsic pseudonymity, ease of cross-border transactions, and decentralized peer-to-peer payments. Money laundering with cryptos follows the same three-stage process as cash-based money laundering.


  1. Placement

In this stage, illicit funds are brought into the financial system through intermediaries such as financial institutions, exchanges, shops and casinos. One type of cryptocurrency can be bought with cash or other cryptocurrencies. It can be done through online cryptocurrency exchanges. Criminals often use exchanges with less levels of compliance with AML regulations for this purpose.


  1. Layering

In this phase, criminals obscure the illegal source of funds through structured transactions. This makes the trail of illegal funds difficult to decode. Using crypto exchanges, criminals can convert one cryptocurrency into another or can take part in an Initial Coin Offering where payment for one type of digital currency is done with another type. Criminals can also move their crypto holdings to another country.


  1. Integration

Here, illegal money is put back into the economy with a clean status. One of the most common techniques of criminals is the use of over the counter (OTC) brokers who act as intermediaries between buyers and sellers of cryptocurrencies. Many OTC brokers specialize in providing money-laundering services and they get very high commission rates for this.


Crypto Mixing

Mixing services, also known as tumblers, help cryptocurrency users to conduct transactions by mixing their cryptos with other users. A typical mixing service takes cryptos from a client, sends them through a series of various addresses and then recombines them, resulting in ‘clean’ cryptos.


Peer-to-peer Crypto networks

Criminals use these decentralized networks to transmit funds to a different location, frequently in another country where there are crypto exchanges with lax anti-money laundering legislation. These exchanges assist individuals in converting cryptocurrency into fiat currency in order to purchase high-end items.


Crypto ATMs

These ATMs allow people to purchase bitcoin via credit or debit cards and in some cases by depositing cash. Some ATMs offer the facility to trade cryptocurrencies for cash as well. In many countries, the KYC measures for the use of these machines are poorly enforced.


Online Gambling

Many gambling sites accept payments in cryptocurrencies. Criminals can purchase chips with cryptos and cash them out after a few transactions.


AML Regulations Related to Cryptocurrency

To combat the use of cryptocurrency in money laundering, regulators around the world have issued laws and advice for businesses trading in digital currencies.

While some regulators have included crypto exchanges and wallet businesses in their existing anti-money laundering legislation, others have established new ones.

  • In June 2019, global AML watchdog the Financial Action Task Force (FATF) published its guidance for virtual assets and virtual asset service providers (VASP). “The FATF strengthened its standards to clarify the application of anti-money laundering and counter-terrorist financing requirements on virtual assets and virtual asset service providers. According to the FATF, countries must now examine and minimize the risks associated with virtual asset financial operations and providers, as well as license or register providers and subject them to supervision or monitoring by competent national authorities.
  • The Monetary Authority of Singapore (MAS)’s Payment Services Act mandated that crypto businesses operating in the country should obtain a license to comply with AML regulations. In July 2020, the MAS proposed another set of regulations to control the cryptocurrency industry in the country. The European Union (EU) has recently adopted the Fifth Anti-Money Laundering Directive (AMLD5) which require crypto exchanges and custodial service providers to register with their local regulator and be compliant with know-your-customer (KYC) and anti-money laundering AML procedures. In the US, the Financial Crimes Enforcement Network (FinCEN) regulates Money Services Businesses (MSBs) under the Bank Secrecy Act.
  • In 2013, FinCEN issued guidance that stated a virtual currency exchange and an administrator of a centralized repository of virtual currency with the authority to issue and redeem the currency to be considered as MSBs.
  • Canada became the first country to approve regulation of cryptocurrency in the case of anti-money laundering in 2014, passed by the Parliament of Canada under Bill C-31. The bill aims to amend Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act to include Canadian cryptocurrency exchange. It has laid out the framework for regulating entities dealing in digital currencies, treating the currencies as money service businesses (MSBs).


How Can Crypto MSBs Ensure AML Compliance?

While regulators can issue guidance and norms, the onus is on MSBs to implement them. They need to have a well-designed AML compliance programme. This should be a well-balanced combination of compliance personal and technology. Having an in-house compliance team may be feasible only for large MSBs. However, the same is usually very expensive and impractical for smaller firms. They would have to rely more on highly intelligent process automation tools and platforms to sift out illegitimate transactions from large data sets.

There should be proper tools to verify the identity of people who transact in cryptocurrencies. They should be able to match and relate blockchain transactions with real identities, creating an end-to-end trail to help with AML investigations. Transaction monitoring tools that dig out suspicious patterns for further investigations are also essential for the AML compliance programmes of crypto MSBs.


The relevance of Tookitaki Typology Repository in the Crypto World

Tookitaki developed a first-of-its-kind Typology Repository Management (TRM) framework to effectively solve the shortcomings of the present AML transaction monitoring environment. Tookitaki is a provider of proven and in-deployment AML solutions for major and small financial institutions. Through collective intelligence and continual learning, TRM is a novel means of identifying money laundering. Financial institutions will be able to capture shifting customer behavior and stop bad actors with high accuracy and speed using this advanced machine learning approach, enhancing returns and risk coverage. It detects suspicious cases and prioritizes notifications with high accuracy without requiring any personal information.

Tookitaki used the technique to successfully combat money laundering related to cryptocurrencies. We built a TRM-based solution for bitcoin AML compliance as part of the G20TechSprint challenge, a hackathon-style competition jointly organized by the Bank for International Settlements (BIS) and the Saudi G20 Presidency. In the category of monitoring and surveillance, the same team came out on top. Our technology could detect money laundering cases employing cryptocurrency via crypto-exchanges or their connection with banks because TRM can be scaled to cover any type of typologies spanning products, places, tactics, and predicate crime for the purpose of locating cryptocurrency-related funds.


February 20, 2022, published by Tookitaki.

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