Cryptocurrencies have been around for a while now. We’ve all heard of Bitcoin, Ethereum and Litecoin. As technology develops quickly, financial criminals keep up the pace to find new ways to exploit it via money laundering. Cryptocurrencies are still on a long way to matching traditional financial channels in terms of the volume of value laundered. However, they are increasingly becoming one of the most favoured means for criminals to collect, store and clean criminal proceeds. Offenders are making use of the lack of control and regulation over these digital currencies in many regions. Over the past month, we have seen a number of instances where criminals used different techniques of using cryptocurrencies to launder money. The perpetrators have been caught, however, what has come to light could be the tip of the iceberg.
There are many countries where cryptocurrencies are either unregulated or underregulated, effectively helping financial criminals conduct their activities unrestrained. Giving a rough estimate of the criminal money involved, major crypto thefts, hacks, and frauds during the first four months of 2021 totalled $432 million, according to blockchain analytics firm Ciphertrace.
While criminals are quick to adapt to technological advancement with financial transactions such as cryptocurrencies, financial institutions and regulators need to be more proactive to counter the misuse. Regulators across the world should invest time in creating effective rules pertaining to the crypto space and promote the use of technology to detect crime. Meanwhile, financial institutions should look at technological opportunities to prevent money laundering with these new-age transaction methods.
A global problem
Cryptocurrencies, including Bitcoin, can make it easier for criminals to obscure the source of criminal proceeds and move the illegal funds across borders without detection. Recent reports suggest that the use of cryptocurrencies for money laundering is rapidly gaining acceptance worldwide. Let’s take a look at some of the cases reported recently.
The UK makes its largest-ever seizure of crypto assets in money laundering investigation
In June, specialist detectives from the London Metropolitan Police Economic Crime Command, investigating money laundering offences, seized crypto assets worth £114 million – the largest cryptocurrency seizure in the country. “Cash remains king, but as technology and online platforms develop, some are moving to more sophisticated methods of laundering their profits, said Deputy Assistant Commissioner Graham McNulty.
The US sentences cryptocurrency fraudster for money laundering and securities fraud
On July 4, the US Department of Justice announced that a Swedish man, Roger Nils-Jonas Karlsson, was sentenced to 15 years in prison for securities fraud, wire fraud and money laundering charges that defrauded thousands of victims of more than US$16 million through an investment scam. Karlsson promised astronomical returns and lured victims to purchase shares in an investment scheme using cryptocurrencies such as Bitcoin and other online payment platforms. Karlsson transferred the funds received to his personal bank accounts and then used proceeds to purchase expensive homes, a racehorse and a resort in Thailand.
China arrests over 1,100 suspects in a crackdown on cryptocurrency money laundering
China’s Ministry of Public Security said in June that its law enforcement arrested more than 1,100 people suspected of using cryptocurrencies to launder illegal proceeds from telephone and Internet scams. The police caught more than 170 money laundering groups who charged their criminal clients a commission of 1.5% to 5% to convert illegal proceeds into virtual currencies via crypto exchanges.
Hong Kong busts cryptocurrency money laundering scheme worth HK$1.2 billion
Hong Kong customs said on July 15 that they arrested four men for a suspected money-laundering syndicate involving HK$1.2 billion with the stablecoin tether. The men opened various local bank accounts and made transactions through a cryptocurrency exchange. The suspicious funds were processed via bank remittances and virtual currency from February 2020 through May 2021. About HK$880 million of the total sum involved cryptocurrency trading in around 40 e-wallets.
Why crypto is being used for money laundering
The use of cryptocurrencies to make transactions has many advantages and disadvantages. In general, criminals are making use of these shortcomings for their fraudulent activities and profiteering. China’s Payment & Clearing Association earlier said that cryptocurrencies “have increasingly become an important channel for cross-border money laundering” as they are global in nature, anonymous, convenient and fast to process. Here are some key factors that make cryptocurrencies attractive to money laundering.
- Lack of regulation: Traditional financial channels are heavily regulated and legally protected across the globe. Meanwhile, cryptocurrencies are unregulated or loosely regulated in many countries and governments generally discourage their use of any kind. This lack of universal protection and regulation makes them attractive to criminals as effective means for cleaning illegal proceeds.
- Anonymity or pseudonymity: Many money laundering acts are made possible by the relative anonymity of cryptocurrency transactions. There are many wallet providers and crypto exchanges that offer services with little-to-no anti-money laundering (AML) or Know Your Customer (KYC) regulations in place.
- Payment option for a crime: Cryptocurrencies have already become a popular means of payment for criminal activities such as ransomware attacks and illegal online gambling.
Red flags related to cryptocurrency money laundering
Here are some red flags that cryptocurrency service providers can use during AML monitoring and screening.
- Incoming funds from a platform with no or relaxed AML/KYC regulations
- A single crypto wallet linked to multiple bank accounts and credit cards (an indication that a group of people is using the same wallet to move funds around)
- Incoming transfers of very high frequency from multiple crypto wallets into one account
- Linked crypto wallets that hardly match customer profiles
- Transactions amounting just below the reporting thresholds
- Continuous high-value transactions within a short period of time
- Quick transfer of deposits to unregulated jurisdictions
How technology can help combat crypto money laundering
While criminals are increasingly looking to technology to carry out their scams, financial institutions can keep themselves a step ahead with futuristic innovations on their side.
We are a provider of proven and in-deployment AML solutions for large and small financial institutions. We developed a first-of-a-kind Typology Repository Management (TRM) framework which effectively addresses the pitfalls of the current AML transaction monitoring ecosystem. Our TRM is a growing centralised repository of money laundering typologies sourced from financial institutions, AML experts and regulators. Typologies refer to patterns that are used to finance or launder money for illicit activities like drug trafficking, forced labour, forgery, terrorism etc.
We provide the ability to consume specific money laundering patterns and automatically create thousands of relevant risk indicators when overlaid on an institution’s own dataset. These risk indicators are then auto-picked by predefined machine learning models to detect suspicious cases.
As TRM can be scaled to include any typologies across products, locations, techniques and predicate offence, our solution can detect money laundering cases using cryptocurrency via crypto-exchanges or their combination with banks. Our TRM provides improved risk coverage for firms dealing in cryptocurrencies by detecting complex money laundering cases. It enhances process efficiency with accurate triaging of alerts and helps make faster business decisions with around a 70% reduction in manual work.
To learn more about our AML solution and its unique features, speak to one of our experts today.
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