Crypto money laundering and how to combat the same
Crypto money laundering:
Money laundering is on the rise globally. Money launderers and financial criminals are increasingly exploiting technological advancements to conduct financial crimes. They are misusing loopholes in regulations and technology to find out new ways of placing and layering illicit money. And the latest victim of their laundering attacks is the world of virtual assets and cryptocurrency.
Why is crypto money laundering attractive to criminals?
Inadequate or no regulation
The absence or lack of controls and regulations on cryptocurrencies is the primary reason for a rise in crypto money laundering. Many laws and rules exist for other financial channels, currencies, and instruments, wherein fines and penalties are imposed for non-compliance with these laws.
However, these are not currently prevalent in regulating the world of cryptocurrencies. Since it is a new form of currency, not yet acceptable in all countries, it is not adequately regulated by most countries. There are no centralized authorities involved in crypto transactions. Money launderers are attracted to crypto assets, as loose regulations result in a higher scope of not being caught by authorities.
Anonymous in nature
Individuals do not have to share their names while dealing with cryptocurrencies. Public addresses are used in these transactions, which do not relate to the user’s name. It provides users with a degree of anonymity, which is what makes cryptocurrencies desirable to money launderers.
There is no paper trail of a transaction. Only a digital record exists on the distributed ledger technology. Therefore, it is easier for criminals to move large amounts of illicit funds through blockchain technology without disclosing their identity.
Fast and convenient
The processing of cryptocurrencies occurs through online exchanges. These online transactions can happen across borders without many protocols. Thus, launderers are not required to deal with cash, which is more suspicious to investigators. Also, these transactions can happen rapidly between senders and recipients in any part of the world without giving much time to AML regulators to notice the transactions.
Fewer chances of being suspected
Transactions of cryptocurrencies are recorded in public domains on the blockchain. Only the individual who carried out the transaction can access their wallet. It is highly encrypted. Therefore, there are fewer chances of linking it to a specific individual or wallet. It reduces the chances of being suspected of money laundering, as the specific transaction by a criminal may get mixed up with genuine transactions over the blockchain.
No legal tender
Since cryptocurrencies have no legal tender, they cannot be authorized. Also, anyone can subscribe to it. Since no owner details are maintained, it is easier to launder.
How does crypto money laundering occur?
Gambling and gaming websites
Money launderers use illicit cryptocurrencies to buy chips or game currency on gambling websites. Once they are finished with gambling or gaming, they encash the remaining amount. Thus, the illicit cryptocurrency entered the gaming or gambling website is cleaned and converted to cash.
Anonymizing services
Launderers can hide illicit funds’ sources by anonymizing services on crypto exchanges. Anonymizing services breaks the connection between cryptocurrency transactions. Launderers can also participate in Initial Coin Offering (ICO) – using one type of coin to buy another. Thus, they can disguise the origins of the unlawful money by creating multiple layers.
Tumblers and mixing services
Tumblers are mixtures of different digital assets – dirty and clean – from diverse addresses. Once these are blended well, they are redistributed to new addresses or wallets. Once mixed, it is difficult to differentiate the legal and illegal currencies.
Also, by blending the cryptocurrencies, their anonymity increases, making it more challenging for investigators to find the owners. Thus, criminals can save themselves from being suspected and transfer the blended funds to legal businesses or crypto exchanges.
Use of cryptocurrencies in terrorism financing or paying for drugs
Many terrorist organizations raise cryptocurrencies through Telegram and Facebook groups. Many intermediaries are involved in transferring such funds to terrorist organizations. Further, money generated from drug trafficking on the internet is disguised as cryptocurrencies.
Illegal payments are made in cryptocurrency. Fiat currency is converted to cryptocurrency through a blockchain trading platform. These are later transferred to drug traffickers’ accounts.
The payments received in cryptocurrencies are transferred to virtual wallets in different crypto exchanges. Thus, it becomes difficult to trace the origin of funds.
Dark exchanges
Many unregulated cryptocurrency exchanges operate across the world. They do not conduct any identity checks or KYC of customers or transactions. So, criminals use such exchanges to launder cryptocurrencies. Specifically, launderers use illegal money in fiat currency to open an online account with currency exchanges.
Money launderers repeatedly transfer illegal currency to multiple accounts or move from one currency to another, thereby developing various layers to cleanse the funds. They sent the cleaned currency to an external cryptocurrency wallet in the last transfer. Alternatively, they convert it into cash using crypto ATMs.
Over-the-counter (OTC) brokers
Over-the-counter brokers facilitate transactions between buyers and sellers of cryptocurrencies. They are the intermediaries who get commissions to facilitate transactions. They are involved in converting illegal cryptocurrency to cash or vice versa by charging high commission rates.
Integration stage
In the integration stage, criminals aim to legitimize illicit cryptocurrency. They have successfully laundered the illegal money but need to show a legal source. In such cases, crypto money launderers create a fake online company that allows crypt currencies as payment methods.
Thus, they transform illegal crypto into legal money by faking the trade transaction. Alternatively, launderers can show the money as the sale of a profitable business or an asset appreciation.
What are the red flags of crypto money laundering?
You must be aware of the following red flags to save yourself from the threat of crypto money laundering:
- When funds are received from a platform that does not have any AML regulations or has been categorized as a jurisdiction with high money laundering risks.
- Several high-value transactions suddenly occur in an inactive account or in a new one.
- When there are multiple transfers of cryptocurrencies from multiple crypto wallets to one account.
- When there are several transactions of purchase of cryptocurrencies by several individuals with the same IP address, followed by several transfers to accounts in another country.
- When the crypto sending and receiving transactions are just below the mark of reporting thresholds.
- When several credit cards and bank accounts are linked to a single crypto wallet to use it to move funds around.
- Connected crypto wallets where the customer profiles do not match.
- Continuous occurrence of many high-value transactions in a short time.
- When several high-value transactions occur in a regular pattern and stop entirely after a specific period.
- When there are cryptocurrency transactions that do not match the profile of a customer.
- When there are frequent transactions of fiat conversion to crypto with no logical reasoning.
- When many unrelated wallets transfer cryptocurrencies to one common wallet, which immediately converts it to fiat currency.
- When transactions occur with digital wallets whose owners are earlier connected to cases of fraud, ransomware, or feature in the sanctions list.
How to combat crypto money laundering?
Yes, there is anonymity in cryptocurrency transactions, which launderers take benefit of. But all the cryptocurrency transactions are documented on a distributed public ledger. These digital records stay permanently. One mistake in the entire money laundering process can help investigators trace the illegitimacy.
One way of protecting cryptocurrencies from money laundering threats is implementing KYC rules. With KYC norms, exchanges could identify the customers and have data about owners of virtual wallets and cryptocurrencies. Registration and licensing of operators in the cryptocurrency market is also a solution that can address the money laundering issue.
How can AML UAE help?
Companies can hire AML consultants to help implement policies and controls to fight AML threats. AML UAE is one such consulting services provider in the UAE. We have been assisting firms in complying with the AML laws and identifying suspicious transactions.
Our AML/CFT services include creating AML policies and controls, setting up an AML compliance department, and training your employees to identify suspicious transactions. We also help our clients select cost-effective AML software, conduct KYC, KYT, and due diligence, and comply with reporting requirements.
Keep yourself ahead of money launderers with the right AML support from AML UAE.
Speak to our experts here.
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About the Author
Pathik Shah
FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)
Pathik is a Chartered Accountant with more than 25 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing.
He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework.