Crypto Laundering: What Are the Red Flags to Look Out For?

Money Laundering via Crypto

While there 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.

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

How Do Criminals Use Crypto to Launder Money?

To conceal the illegitimate origin of payments, criminals use a variety of strategies involving cryptocurrency. All these approaches rely on one or more of cryptocurrency’s flaws, such as their intrinsic pseudonymity, ease of cross-border transactions, and decentralised peer-to-peer payments.

Crypto service providers should be on the lookout for suspicious transactions and suspect consumer behaviour to detect and prevent money laundering. The Financial Action Task Force (FATF) published a report on crypto laundering approaches in 2020, which included several red flags.

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.

2. 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 take part in an Initial Coin Offering where payment for one digital currency is done with another type. Criminals can also move their crypto holdings to another country.

3. 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 specialise in providing money-laundering services and they get remarkably high commission rates for this.

What are some methods used to launder crypto?

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 decentralised 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 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.

What are the Red Flags of Crypto Laundering?

Cryptocurrency service providers should be on the lookout for suspicious transactions and suspect consumer behaviour to detect and prevent money laundering. The Financial Action Task Force (FATF) published a report on crypto laundering approaches in 2020, which included the following red flag indicators:

• Technological features that increase anonymity - such as the use of peer-to-peer exchanges websites, mixing or tumbling services or anonymity-enhanced cryptocurrencies
• Geographical risks - criminals can exploit countries with weak, or absent, national measures for virtual assets
• Transaction patterns - that are irregular, unusual, or uncommon which can suggest criminal activity
• Transaction size – if the amount and frequency have no logical business explanation
• Sender or recipient profiles - unusual behaviour can suggest criminal activity
• Source of funds or wealth - which can relate to criminal activity

Read more on the FATF report. 

Using Tech to Detect Red Flags

With new regulations on the horizon, crypto exchanges and other financial institutions must reconsider their approach to cryptocurrency services compliance and the effectiveness of existing anti-money laundering (AML) solutions.

Tookitaki has enabled AML experts worldwide to create and share the largest library of money laundering and financial crime behaviour patterns, often called typologies. Tookitaki’s typology repository is a first-of-its-kind initiative allowing banks and financial institutions to join forces in the fight against financial crime.

Crypto laundering is based on a complex trail of financial transactions. Multiple complex rules are required to effectively monitor one pattern. Tookitaki has created a tool which allows firms to design rules based on real-life red flags. Instead of managing hundreds of rigid rules, AML officers can leverage fewer typologies which are easier to maintain and explain to regulators, whilst providing better risk coverage than static rules. Tookitaki’s Transaction Monitoring solution unlocks the power of typologies to detect hidden suspicious patterns and generates fewer alerts of higher quality.

Our Anti-Money Laundering Suite

Our award-winning Anti-Money Laundering Suite (AMLS) is an end-to-end AML operating system, unlike any other RegTech player in the industry

The suite comprises our Transaction Monitoring, Customer Risk Scoring, Smart Screening and Case Management solutions under one roof for all your AML needs.

Smart Screening

Provides accurate screening of names and transactions across 18+ languages and a continuous monitoring framework for comprehensive risk management.

Customer Risk Scoring

Dynamic customer risk scoring engine which adapts to changing customer behaviour to build a 360-degree risk profile thereby providing a risk-based approach to client management.

Transaction Monitoring

Provides comprehensive risk detection and efficient alerts management via automated threshold management and seamless alerts disposition workflows.

Case Management

Provides a centralised investigation workflow for all AML alerts according to the parameters set by the relevant regulatory requirements.

To discover our AML solution and its unique features, speak to one of our experts.