Written by Fabrizio Lorini, asset management director at Taleo Consulting and co-chair of the Association of Certified Anti-Money Laundering Specialists (ACAMS) in Luxembourg.
Advances in technology are offering criminal organizations multiple faster, safer, and more anonymous options for laundering their illicit transaction proceeds.
Cryptocurrencies are a brilliant and highly useful technological innovation that allows crypto holders to access a vast panel of financial products and services faster and in a much cheaper way than the classic «method».
However, the explosion of cryptocurrencies as an alternative value tool as well as an investment tool is raising many concerns regarding money laundering by criminal organizations.
Although cryptocurrencies may not yet be considered a serious competitor to fiat currency (laundering volumes are still largely dominated by classic currencies), the increasing use of cryptocurrency and their unregulated or better, less regulated environment in many jurisdictions means that the financial landscape will likely be facing serious concerns.
Cryptographic experts have confirmed that, in most cases, money laundering with cryptocurrencies is highly complex and involves big risks, making this practice an ineffective strategy compared to the recycling techniques that are currently used. Industry experts also argue that transactions in digital currencies are more transparent than fiat currencies.
A somewhat controversial note that is often made by experts in the cryptocurrency sector is that, although the volumes of money laundering using cryptocurrencies are exponentially low, the tendency of the «traditional» media is to demonize these products and to focus mainly on illicit activities attributable to digital currencies rather than emphasizing the cutting-edge technology and innovation they require.
Nevertheless, even with minimal volumes, there is no doubt that cryptocurrencies are still a clear vector that may facilitate money laundering.
In our current digital age, the advent of these new currencies is gradually changing their positioning and making them become one of the main means of exchanging values. It can be noted that today, many large companies are starting to accept cryptocurrency payments for their products.
Considering the increasingly strong adoption of blockchain technology, many large banks and a number of central banks are also facing strong pressure to replace the old means of payment used up to now (banknotes and credit cards).
Therefore, it is considered extremely important to analyze the possible loopholes that allow the use of cryptocurrencies to launder money and consequently develop the appropriate law enforcement technologies to fight criminals.
Money laundering through cryptocurrencies: some noteworthy numbers and cases
According to United Nations estimates, between $ 800 billion and $ 2 trillion are laundered around the world each year, representing between 2% and 5% of global gross domestic product. Of these, over 90% are not detected. The exact volume of cryptocurrency laundering has yet to be ascertained.
However, some indicative statistics can be found on the Internet. One report claims that cryptocurrency thefts, hacks, and fraud totaled $ 1.36 billion in the first five months of 2020, up from $ 4.5 billion in 2019.
According to another report, criminals laundered $ 8 billion through cryptocurrency exchanges in 2019, compared to $ 1 billion in 2018. As of 2019, total bitcoin spending on the dark web was $ 829 million, or 0.5% of all bitcoin transactions.
A separate study, analyzing more than 800 market maker exchanges, found that 56% of all cryptocurrency exchanges worldwide have weak KYC identification protocols, with exchanges in Europe, the US and the UK among the worst offenders.
The study found 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 people who had attempted to launder tens of millions of euros on behalf of major cybercriminals since 2016.
Operated by the infamous QQAAZZ network, the scheme involved converting stolen funds into cryptocurrency using tumbling services that help hide the source of the funds.
In what ways do criminals rely on cryptocurrencies to launder money?
Criminals can use a variety of different methods involving cryptocurrencies to mislead and/or mask the illicit provenance of funds.
These methods make use of various cryptocurrency vulnerabilities such as their intrinsic pseudonymity, ease of performing cross-border transactions as well as P2P payment systems which are, in almost all cases, decentralized.
As in the case of «classic» money laundering, even for cryptocurrencies, there are three main steps in the money laundering process.
- Positioning
- Stratification
- Integration
In the context of integration, the transformation of dirty money into clean money, criminals who use cryptocurrencies can take advantage of many other opportunities:
- Crypto Mixing
- Peer-to-peer cryptographic networks
- Cryptographic ATMs
- Gambling online
AML regulations related to cryptocurrency
With the aim of countering the growing AML / CFT threats related to cryptocurrencies, regulators around the world have developed rules and recommendations for companies dealing with these currencies.
While some regulators have included cryptocurrency exchanges and portfolio companies under the scope of existing anti-money laundering regulations, some have issued new regulations for them.
In June 2019, the global anti-money laundering watchdog, the Financial Action Task Force (FATF), released its guide to virtual resources and virtual resource service providers (VASPs).
«The FATF has strengthened its standards to clarify the application of anti-money laundering and terrorist financing requirements on virtual assets and virtual asset service providers.
Countries are now required to assess and mitigate the risks associated with financial assets and providers of virtual assets; to authorize or register suppliers and have them supervised or monitored by national competent authorities,» says FATF.
The European Parliament has adopted, for a year now, the Fifth Anti-Money Laundering Directive (AMLD5) which obliges cryptocurrency exchanges as well as custody services of such currencies, to be registered with their local regulator and to apply compliance standards dictated by the KYC (Know-Your-Customer) and AML (Anti-Money-Laundering) laws.
As for the United States, it is the Financial Crimes Enforcement Network (FinCEN) that regulates the activities of the monetary service (MSB) under the Bank Secrecy Act.
Canada became the first country to approve cryptocurrency regulation in the case of anti-money laundering in 2014.
Fabrizio Lorini.