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Evolution in Money Laundering Methods Through Cryptocurrencies
Ujjwal Singh, Rahul Dhigan and Siddharth Balani : October 05, 2022
What is cryptocurrency?Cryptocurrency is a decentralized virtual or digital currency which is based on blockchain technology. A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. No participant can change or tamper with a transaction after it’s been recorded to the shared ledger. Using this technology, participants can confirm transactions without a need for a central clearing authority. Here are some of the key features of Cryptocurrency:
- Inconsistently regulated
- Limited anonymity
- Fast movement
- Global reach
Money laundering via cryptocurrency
Money launderers are constantly looking for new ways to convert their illegally received funds and cryptocurrency has become their new favorite because of its unique features discussed above. Here are some of the ways money launderers clean their money by using cryptocurrency:
- Cryptocurrency Exchanges - One way to launder money is through unregulated cryptocurrency exchanges. These exchanges do not follow AML practices and fail to comply with basic KYC/CDD checks before onboarding customers. This lets launderers trade crypto repeatedly in multiple markets without providing their identity information.
- Online Gambling - Various online gambling and gaming websites accept cryptocurrencies to buy credit, virtual chips, or value adding in-game artifacts, where they would play some rounds and cash out after few transactions. In this way, money launderers cash out winnings in the form of real money which allows them to have legitimate money in the end.
- Smurfing Scheme - Smurfing through cryptocurrency involves the use of money mules. A mule is a person performing transactions on behalf of others, typically receiving some small part of the transferred amount. This scheme has four simple steps:
- Opening verified accounts at unregulated exchanges using money mules with fake documents
- Transferring the illicit crypto funds from a digital wallet to one or more unregulated exchanges
- Mules open bank accounts with false identity documents
- Transferring the crypto funds from the unregulated exchange into the new bank accounts
- Cryptocurrency ATMs - These ATMs allow the purchase of digital currency with cash. In the US, cryptocurrency ATMs are required to comply with AML regulations, however, many ATM operators are not adhering to these regulations. This gives launderers a path conversion of illegally obtained money without being subject to a KYC process.
- Tumblers - This method is also referred to as mixing. Here the launderer mixes the illicit crypto funds with other funds and routes them through multiple unregulated decentralized mixers on the dark web. This allows users to create a complex crypto trail which obscures the ownership and makes investigations more difficult. Due to the multiple layers of transactions, the funds become clean enough to be deposited in a digital wallet and are then traded on a recognized exchange.
With the rising adoption of cryptocurrency, how can the financial industry combat money laundering?
FinCEN and other major regulatory bodies require all crypto exchanges to have an effective AML compliance program. The decentralized and pseudonymous nature of cryptocurrency makes it more challenging to implement. Here are ways that exchanges and other Virtual Asset Service Providers (VASPs) can comply with required AML regulations and reduce the risk of money laundering and other illicit activities:
- KYC Verification - Collect and verify customer identities before onboarding and determine the risk level that each customer presents.
- AML Screening - Conduct screening of customers against watchlists issued by regulatory authorities such as FATF, UN, FINTRAC, OFAC and others.
- Ongoing monitoring of customer transactions - Implement an ongoing transaction monitoring tool to detect and report suspicious transactions in timely manner. The monitoring rules should be reviewed and modified on timely basis.
Increasing cryptocurrency adoption and strict regulatory requirements makes it essential for VASPs to invest in the right AML solutions. Developing effective counter-technologies and customized programs can help organizations comply with regulations and combat financial crime associated with cryptocurrencies. Check out our range of solutions to support you.