There is a high risk of cryptocurrency money laundering because it is no secret that criminals are constantly searching for new ways to tidy up shady cash. As a way of value transfer, it conspicuously rose to be exploited for wrongdoings. Nonetheless, those were the time of care-free trading when there were absolutely zero rules and regulations, and no duties were forced on virtual asset service providers or also called as VASPs.
Advancing to the year 2022 where there are already established overseers such as Financial Action Task Force (FATF) which is an independent inter-governmental body that aims to protect global financial systems against money launderers, European Union’s (EU’s) Anti-Money Laundering Directive 5 (AMLD5) currently the 6th but the 5th put cryptocurrency under control for anti-money laundering (AML) counter-terrorist financing (CTF) purposes. Additionally, the EU’s MiCA initiative mandates registration for AML supervision with the FCA in the UK. As you can see, the industry is seeing significant upheaval from various sources. As you can see, the industry is seeing substantial upheaval from various sources.
The use of cryptocurrency is spreading, and more people are using it for various purposes, including illicit ones. According to recent estimates, fraudsters are increasingly using cryptocurrencies for money laundering. According to Chainanalysis, this usage has grown by 30% annually.
Cryptocurrency has come a long way toward demonstrating that it is here to stay in some capacity, but some problems still require attention. Let’s start a conversation on the risk of crypto money laundering!
What are the risks of money laundering using cryptocurrencies?
To ensure that everyone is on the same page and understands the concept of legalising proceeds of crime, I will provide some background information. The three money laundering processes are typically placement, layering, and integration. Each stage specifies a potential action and how frequently money is cleaned. Each stage is illustrated below, along with a brief description:
- Step 1 – The money is deposited into the system.
- Step 2 – Transactions are carried out to conceal the source.
- Step 3 – The money is reintroduced into the economy.
Above all, whereas other value transfer methods are more suited to certain aspects of the process than others, crypto performs equally well across the board. Now, we’ll go through each step in more detail and describe how either one might be carried out.
Step 1 – Placing crypto to launder money
In a conventional meaning, placing refers to placing illegal funds into the financial system.
This phase is a little different if we’re talking about cryptocurrencies because they are neither money nor do they fit into the traditional financial system. Criminals often buy one cryptocurrency to begin money laundering by converting unlawfully obtained fiat currency.
Alternately, random payments can be made directly in crypto, including those obtained from hacking exchanges, defrauding people, and any other type of cybercrime you can think of.
The fact that the initial store of value was gained by unlawful means is crucial in this context. Once crypto assets have been bought, it allows criminals to do additional transactions and exchanges on track to clean their shady money further.
It’s important to note that the person who enabled placement will still have access to the dirty money if this stage uses fiat cash. Therefore, different plans for cleaning it will need to be made. We won’t explain the concurrent process involving fiat coins in this article because we will just be discussing the crypto aspect of things. Just remember that these procedures can happen concurrently.
Step 2 – Layering Crypto
Suppose placement enables criminals to enter cryptocurrency derived from illegal conduct into the crypto sphere. In that case, layering enables them to hide their connection to the proceeds of the original crime and erase their traces. Traditionally, it was accomplished by making many transfers between various wallet addresses. However, since the majority of blockchains are public, this strategy could be more effective because transactions can be easily tracked with the aid of software, so more creative methods are increasingly being chosen. These “ill-witted” criminals often hire services that include private entities such as online casinos, P2P exchanges, centralized exchanges with lax protocols, and many others. The said services make it more difficult to follow the trail that proves that the crypto assets came from unlawful acts.
Step 3 – Integration back into the economic system
Cryptocurrencies can be reintroduced into the system when their origin is obscured. This can be accomplished in a number of ways, beginning with exchanging crypto for fiat currency and concluding with making a black-market purchase. The final step’s main idea is that the criminal can profit from their criminal behaviour. These criminals benefit regardless of how the money is reinvested in the economy, which gives them additional incentive to commit new crimes.
What are the operational details of cryptocurrency money laundering?
Let’s examine a hypothetical example that can potentially be extremely real to show how crypto money laundering actually functions. Consider the scenario if Mark Johnson deceived people by offering a 200% return on investment in exchange for their cryptocurrency, which he would then reinvest in upcoming cryptocurrencies about which he had inside knowledge. Having visibility on social media gave his character more legitimacy. He approached his targets using this channel and posted about his opulent lifestyle. However, it was eventually discovered that there was no such individual and that his persona was clearly a phoney front to entice prospective “investors”. In essence, our criminal collected cryptocurrencies from unscrupulous individuals who were being duped by a con artist named not even Mark but Ian.
Ian’s deception was fruitful; he collected a total of five Bitcoin from different people he conned, but still, he is in a bit of a pickle; Ian cannot use them because he might be found out and be caught by authorities. Being a mischievous-minded person, Ian is aware of how to hide his tracks and decides to start money laundering with cryptocurrencies.
He accomplishes this by transferring laundered crypto assets from his unlisted wallet to a number of wallets he opened using an exchange with a loose know-your-customer policy that only requires an email address to open a wallet for transfers under 20,000 EUR.
When it is finished, he moves the money to five private wallets integrated with mixers to continue his illegal scheme. Naturally, he decides to use the mixer’s capabilities and further obscures Bitcoin’s source (which we all know was laundered from his victims).
Additionally, he performs a payout in five separate batches, equally distributing his laundered assets to the un-hosted wallets. At this point, he decides that he wants to withdraw some of the money. He sends one bitcoin to an exchange with a fiat connection, where he has already completed the know-your-customer and registration processes by providing documents of a friend to whom he paid 1,000 EUR to provide his document and pose for the camera while the checks were being done. Thus, Ian now transfers money to his cryptocurrency-friendly service provider, with which he has an account made in the name of another nominee and uses a card to make any purchases without being concerned that he will be discovered.
What happens if you are caught using cryptocurrencies to launder money?
Ian has cheated others into investing money in his illegal scheme, which is a criminal offence in and of itself. If he is discovered, he will suffer severe consequences. We shall use some examples from the actual world to show it.
For instance, in 2022, Spanish authorities, with assistance from EUROPOL and EUROJUST, acted against a criminal gang that was laundering illicit funds associated with the Magnitsky case, a 219 million EUR corruption case in Russia. Millions of euros are thought to have been transferred via European bank accounts by this money laundering operation before being sent to Spain to buy real estate. The person at the centre of this operation to launder money has been taken into custody in the Canary Islands. Seventy-five properties in total, worth a total of 25 million euros, have so far been confiscated across Spain. Along with the seized properties, those apprehended are now facing heavy persecution.
Close to our crypto topic, another conman in the name of Roman Sterlingov was arrested; he is accused of being the creator of the cryptocurrency mixing service Bitcoin Fog. If proven guilty, he could spend at least ten years in prison.
Similar circumstances can be applied to Larry Harmon, who admitted guilt to a conspiracy to launder money and now faces a maximum sentence of 20 years in prison for running Helix, a Darknet-based bitcoin money laundering firm.
These are all examples of what offenders can anticipate when they are apprehended.
How might COREDO assist you in reducing the danger of bitcoin money laundering?
Money laundering using cryptocurrencies is a serious problem that requires effective solutions to reduce its risks. Such procedures must include duly educated staff people and software programs that improve client screening and activity monitoring. Please contact us if you have any questions about the subject or would like our help putting a money laundering prevention policy in place at your company.