Money Laundering via Cryptocurrencies: All You Need to Know

Technological advancements have given criminals faster and safer options to wash their ill-gotten money. There is no doubt that cryptocurrencies are very useful technology innovation that helps individuals and institutions access financial products and services in a faster and cost-effective manner. However, their rise as alternative value transfer and investment tools raises money laundering concerns as well. While they may not be a competitor to fiat 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. The same is echoed in the 2019 meeting of the G20 Finance Ministers and Central Bank Governors in Japan. “While crypto-assets do not pose a threat to global financial stability at this point, we remain vigilant to risks, including those related to consumer and investor protection, anti-money laundering and countering the financing of terrorism,” says a note from the meeting.

Crypto advisers often claim that laundering money with cryptocurrencies is highly complex and risky, making it an ineffective strategy compared to conventional techniques. They also argue that transactions in digital currencies are more transparent and accountable compared to fiat currencies. Another argument is: money laundering using cryptocurrencies are comparatively very small in terms of volume and mainstream media is focusing more on criminal activities related to digital currencies rather than the technology and innovation. Albeit on a small scale, there is no doubt that cryptocurrencies are being used to facilitate money laundering. With these currencies slowly change their stature as a mainstream medium of value exchange in the digital era, many large companies accepting digital currency payments for products and services, and many large banks and a number of central banks considering the adoption of the blockchain technology, they really have the potential to replace their paper and plastic variants. Therefore, it is important to analyse the loopholes enabling these currencies to be used for money laundering and develop adequate counter technologies to combat the crime.

Money Laundering via Cryptocurrencies: Some Noteworthy Numbers and Cases

According to United Nations estimates, between US$800 billion and US$2 trillion are being laundered every year across the globe, representing 2-5% of the global gross domestic product. Out of this, more than 90% goes undetected. The exact volume of crypto laundering is yet to be ascertained. However, we found some indicative statistics on the Internet. A report says that crypto thefts, hacks, and frauds totaled US$1.36 billion in the first five months of 2020, compared to 2019’s US$4.5 billion. According to another report, criminals laundered US$2.8 billion through crypto exchanges in 2019, compared to US$1 billion in 2018. As of 2019, total bitcoin spending on the dark web was US$829 million, representing 0.5% of all bitcoin transactions.  A separate study, analysing more than 800 market maker exchanges, found that 56% of all crypto exchanges worldwide have weak KYC identification protocols — with exchanges in Europe, the US and the UK among the worst offenders. The study noted that 60% of European Virtual Asset Service Providers have deficient KYC practices.

In October 2020, the Europol announced that an unprecedented international law enforcement operation involving 16 countries had resulted in the arrest of 20 individuals who attempted to launder tens of millions of euros since 2016 on behalf of the world’s foremost cybercriminals. Operated by the notorious QQAAZZ network, the scheme involved the conversion of stolen funds into cryptocurrency using tumbling services that help hide the source of funds. In yet another incident, a man from New Zealand was arrested on money laundering, worth thousands of dollars, involving cryptocurrency.

How Does Criminals Use Cryptocurrencies for Money Laundering?

Criminals use a number of methods involving cryptocurrencies to hide the illicit origin of funds. All these methods make use of some or the other vulnerabilities of cryptocurrencies such as their inherent pseudonymity, easy cross-border transactions and decentralized P2P payments. As in the case of cash-based money laundering, there are three main stages in money laundering using cryptos.

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 the purpose.

2. Layering

In this phase, criminals obscure the illegal source of funds through structure transactions. This makes the trail of illegal funds difficult to decode. Using crypto exchanges, criminals can convert one cryptocurrency into another or can take part in an Initial Coin Offering where payment for one type of 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 to 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 specialize in providing money-laundering services and they get very high commission rates for the same.

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 recombine them, resulting in ‘clean’ cryptos.

Peer-to-peer Crypto networks

These decentralized networks are used by criminals to send funds to another destination, often in another country where there are crypto exchanges with not stringent AML regulations. These exchanges help them convert crypto into fiat money to purchase luxury goods.

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.

AML Regulations Related to Cryptocurrency

In order to counter increasing AML/CFT threats related to cryptocurrencies, regulators across the globe have come up with rules and recommendations for firms dealing in these currencies. While some regulators have included crypto exchanges and wallet companies under the purview of existing AML regulations, some have issued new regulations for them. In June 2019, global AML watchdog the Financial Action Task Force (FATF) published its guidance for virtual assets and virtual asset service providers (VASP). “The FATF strengthened its standards to clarify the application of anti-money laundering and counter-terrorist financing requirements on virtual assets and virtual asset service providers. Countries are now required to assess and mitigate their risks associated with virtual asset financial activities and providers; license or register providers and subject them to supervision or monitoring by competent national authorities,” says FATF.

The Monitory Authority of Singapore (MAS)’s Payment Services Act mandated that crypto businesses operating in the country should obtain a license to comply with AML regulations. In July 2020, the MAS proposed another set of regulations to control the cryptocurrency industry in the country. The European Union (EU) has recently adopted the Fifth Anti-Money Laundering Directive (AMLD5) which require crypto exchanges and custodial service providers to register with their local regulator and be compliant with thoroughgoing know-your-customer (KYC) and anti-money laundering AML procedures. In the US, the Financial Crimes Enforcement Network (FinCEN) regulates Money Services Businesses (MSBs) under the Bank Secrecy Act. In 2013, FinCEN issued guidance that stated a virtual currency exchange and an administrator of a centralized repository of virtual currency with authority to issue and redeem the currency to be considered as MSBs. Canada became the first country to approve regulation of cryptocurrency in the case of anti-money laundering in 2014, passed by the Parliament of Canada under Bill C-31. The bill declares to amend Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act to include Canadian cryptocurrency exchange. It has laid out the framework for regulating entities “dealing in digital currencies, treating the currencies as money services businesses (MSBs).

How Can Crypto MSBs Ensure AML Compliance?

While regulators can issue guidance and norms, the onus is on MSBs to implement them. They need to have a well-designed AML compliance programme. This should be a well-balanced combination of compliance personal and technology. Having an in-house compliance team may be feasible only for large MSBs. However, the same is usually very expensive and impractical for smaller firms. They would have to rely more on highly intelligent process automation tools and platforms to sift out illegitimate transactions from large data sets. There should be proper tools to verify the identity of people who transact in cryptocurrencies. They should be able to match and relate blockchain transactions with real identities, creating an end-to-end trail to help with AML investigations. Transaction monitoring tools to dig out suspicious patterns for further investigations are also essential for the AML compliance programmes of crypto MSBs.

The relevance of Tookitaki Typology Repository in Crypto World

A provider of proven and in-deployment AML solutions for large and small financial institutions, Tookitaki developed a first-of-a-kind Typology Repository Management (TRM) framework which effectively addresses the pitfalls of the current AML transaction monitoring ecosystem. TRM is a new way of detecting money laundering through collective intelligence and continuous learning. This advanced machine learning approach will enable financial institutions to capture changing customer behaviour and stop the bad actors with high accuracy and speed, improving returns and risk coverage. It detects suspicious cases, besides prioritizing alerts with high accuracy, without the need to apply any personally identifiable information (PII), rules and thresholds.

Tookitaki TRM is a growing centralized 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. A money-laundering pattern is defined as a technique to aggregate varied customer activities that represent a suspicious behaviour. It gives the ability to ingest specific money laundering patterns and automatically create thousands of relevant risk indicators when overlaid on a bank’s dataset. These risk indicators are then auto picked by pre-defined machine learning models to detect suspicious cases.

Tookitaki successfully applied the concept for tackling money laundering related to cryptocurrencies. As of part of the G20TechSprint challenge, hackathon-style competition jointly organized by the Bank for International Settlements (BIS) and the Saudi G20 Presidency, we developed a TRM-based solution for cryptocurrency AML compliance. The same has won the competition in the monitoring and surveillance category. As TRM can be scaled to include any type of typologies across products, locations, techniques and predicate offence, our solution could detect money laundering cases using cryptocurrency via crypto-exchanges or their combination with banks. For finding crypto-currency related money laundering cases, we primarily utilized our in-house crypto typologies, automated model management and semi-supervised learning approach.

To summarise the benefits, Tookitaki 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 70% reduction in manual work.

To know more about our AML solution and its unique features, please write to us and we will be happy to give you a detailed demo.

 

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“Innovation distinguishes between a leader and a follower.” -Steve Jobs What comes on the top of your screen when you google the meaning of the word innovation is – the introduction of somet...

Compliance Functions in Need of a Technological Overhaul. Can Machine Learning be the Game-Changer?

McKinsey in its latest compliance benchmarking survey found that compliance function at financial institutions has reached “an inflection point” and current compliance standards are in an “incho...

Tookitaki Raises US$7.5 mn Series A from Global VCs to Transform Regulatory Compliance

Tookitaki, a regulatory technology company that aims to enable financial institutions to develop sustainable compliance programs, has raised US$7.5 million in Series A round. The round was co-led by L...

From Wachovia to Danske Bank: Biggest Money Laundering Cases in Recent Times

Money laundering – the criminal activity of processing criminal proceeds to disguise their origin – is one of the gravest problems faced by the global economy, and its size is growing rapidly. It ...

A Modern Approach to Address the Reconciliation Challenges of Financial Services

Reconciliation of transactions is deemed critical for the smooth running of every financial institution. The speed and accuracy of data reconciliation can distinguish a successful institution from its...

Busting a Myth: Compliance Officer’s Job is All About Risk

Regulatory compliance has become a dreadful task for banks after regulators across the globe set stricter norms in the aftermath of the 2008 financial crisis in an effort to prevent financial crimes s...

SocGen Goes Next-Gen with Tookitaki Reconciliation Suite

Société Générale leveraged Tookitaki’s Reconciliation Suite to automate the bank’s existing break reconciliation system. Key Challenges Addressed The bank’s finance department was unable to ...

Attending ACAMS Conference in Singapore? Tookitaki Awaits You with Its Disruptive AML Solution

“In today’s era of volatility, there is no other way but to re-invent. The only sustainable advantage you can have over others is agility, that’s it.”- Jeff Bezos Singapore is hosting ACAMS’...

MAS’ Stress on Transaction Monitoring for Effective AML/CFT Compliance and Machine Learning is the Answer

Singapore is known for its top-notch AML/CFT regime created through up-to-date legislation, stringent policy and uncompromising supervision to safeguard against the abuse of the city state’s financi...

Mifid II and the Pressing Need for a New Reconciliation Approach

The financial services industry in the EU has been confused with the introduction of a revamped version of the Markets in Financial Instruments Directive (Mifid II). The ambitious regulatory reforms t...

Is Automated Reconciliation Next to Impossible in Today’s Complex Financial World?

The 2008 global financial crisis and fairly new regulatory requirements like Basel III asked financial institutions (FIs) to cut operating costs and adopt a lean operations structure, pushing FIs to r...

Modern Tech to Reshape US AML Compliance with Regulators’ Recent Handshake

George Bernard Shaw once said: “Those who cannot change their minds cannot change anything.” The past week has seen a significant change of mind from financial regulators in the US in their ardent...

Skills Development: We Have Talents and We Strive to Multiply Them

“Mastery lies on an infinite continuum, and as a result, we will never reach the end. We can, however, see to it that we are as far along that continuum as our circumstance allows.” ― Chris Mat...

It’s Our Fourth Founding Day; Taking a Pause to Cherish Our Simple but Awesome Journey

Today, as we step into our 4th year of foundation, I feel proud and honored to be leading Tookitaki that has been successful in creating added value to all its stakeholders. I was never a CEO and Took...

Tookitaki Expands into the US with New Office in Charlotte

SINGAPORE, Sept. 24, 2018: Tookitaki Holding Pte Ltd, a leading regulatory technology company, is pleased to announce the official opening of its North American office in Charlotte, NC, in the Unite...

We Tame Machines but We Unleash Human Spirits

We are well aware of the fact that our progress as an organization is in the hands of our employees. The more energy, time and attention we invest in them, the more yield we receive. So, we always mak...

5 Methods That Modern Money Launderers Use To Beat Detection

Society prepares the crime, the criminal commits it. DID YOU KNOW? Every year, an estimated amount in the range of US$800 billion-US$2 trillion (2-5% of global GDP) is being laundered globally Regulat...

Risk Management Conference: Positive Vibes from All Corners

The Risk Management Association’s (RMA) premier annual event, the Risk Management Conference, came to an end on 6 November, and Tookitaki had the privilege to attend the event which we believe was ...

Singapore Fintech Festival: Tookitaki to showcase advanced machine learning solutions in financial services

Singapore is assured of the Fintech world’s unwavering attention next week, as the city state, is hosting this year’s Fintech Festival during 12-16 November. Touted as the world’s largest platfo...

The RMA Clarion Call to Address Risks and the Tookitaki Way

Risk officers, doing your best today is good while preparing hard for tomorrow is extraordinary. Risk management at banks has become difficult due to operational and regulatory changes. The Risk Manag...