What impact does cryptocurrency have on money laundering?

What impact does cryptocurrency have on money laundering?​


The spread of cryptocurrencies and other types of crypto assets has been aided by the rise of blockchain technology.

Cryptocurrencies, which are secured by cryptographic algorithms and circulated without the need for a central bank authority, have disrupted traditional financial systems and are widely traded on exchange platforms worldwide.

However, the disruptive presence of cryptocurrency has increased the potential for criminals to abuse the technology and engage in crypto laundering, circumventing traditional anti-money laundering controls.

Criminals laundered approximately $2.8 billion in Bitcoin through cryptocurrency exchanges in 2019, an increase of approximately $1.8 billion over 2018. Because most criminals do not conduct business directly through their criminally linked addresses, these estimates are likely to be a small fraction of actual illicit volumes.
The crypto laundering trend has prompted global regulators to take action, bringing cryptocurrencies under the purview of existing anti-money laundering regulations or enacting new AML/CFT laws that apply to cryptocurrency service providers.

But how do these financial criminals get away with it? It's past time to lift the lid on this crime and decipher what often appears to be complicated but doesn't have to be.

Crypto Laundering: What it is and how it works?​

Crypto laundering is broadly defined as the concealment and movement of illegally obtained digitized currencies in order to make them appear legal.
Cryptocurrencies are quickly becoming the preferred payment method for cyber criminals for a number of reasons, including the following:

  • Difficulty in tracing;
  • Lack of consistent federal regulation;
  • Low transaction costs;
  • Lack of financial intermediaries;
  • Simpleness of use;
  • Transaction speed.

Money laundering with fiat currencies necessitates customers opening accounts with banks by providing personal identifying information; money launderers then use the banks' infrastructure to conduct transactions, transferring illegal funds into and out of the financial system in an attempt to conceal their origin.

In contrast, cryptocurrency exchange users do not have to identify themselves thoroughly or use regulated banking infrastructure to move their funds when it comes to crypto laundering. Cryptocurrency transactions require only the unique addresses of users' crypto wallets and take place directly between senders and recipients anywhere in the world, without the need for scrutiny by a centralized authority or intermediary administration.

Similarly, there is no written record of cryptocurrency transactions, only a cryptographically secure record on the blockchain. While cryptocurrency exchange platforms require some level of customer identification and record-keeping, regulatory standards for these platforms are inconsistent and frequently inadequate, and criminals continue to benefit from the anonymity and speed associated with online money transfers.

As a result, uncovering and tracing laundered cryptocurrencies remains a major challenge for law enforcement agencies.

How can law enforcement identify Suspicious Transaction Patterns?​

To detect and prevent money laundering, cryptocurrency service providers must be alert to suspicious transactions and customer behavior. The Financial Action Task Force (FATF) published a report on crypto laundering methodologies in 2020, outlining the following red flag indicators:

  • Customer identification:
Customer identification issues frequently indicate attempts to exploit cryptocurrency's anonymity benefits. Multiple exchange accounts controlled from the same IP address are examples of red flag behavior, as are discrepancies in identifying documents during account creation and frequent changes in identifying information.

  • Sources of funding:
Cryptocurrency exchange service providers should investigate the sources of cryptocurrency funds for signs of money laundering. Funds originating from sources associated with illegal activities, darknet sites, sites with insufficient AML controls, and sites located in countries known to pose a high AML risk may be regarded as red flags.

  • Tractation conduct:
Multiple small-amount transactions, transactions that do not fit a customer's risk or wealth profile, regular transactions that result in frequent losses, or frequent transactions of fiat to crypto currencies with no obvious business explanation are all signs of money laundering.

  • Money muling:
To avoid AML controls, money launderers may seek third parties (money mules) to conduct cryptocurrency transactions on their behalf. Customers who make deposits that contradict their wealth profile or are unfamiliar with the financial products they use may be used as money mules.

Preventing Money Laundering with Blockchain​

Blockchain technology underpins cryptocurrency transactions. The fact that blockchain is an 'immutable ledger' - a record that cannot be changed - is one of the key drivers of security in crypto asset transactions. Each 'block' contains records of entire transaction chains, which can be compared to the records of other blocks to identify anomalies. This means that all information contained in the blockchain is trustworthy and correct.

This 'immutable ledger' records the crypto wallet identifications behind each transaction. If an illegal transaction is linked to a wallet, the wallet can be used to identify the owner, implying that any illegal activity can be stopped through legal action.

Other blockchain technologies enable automated AML fraud detection, with requirements that block or flag suspicious transactions before they are implemented.

AML Crypto Compliance​

While crypto laundering is a relatively new methodology, global regulators have been taking steps to introduce dedicated crypto AML (Anti-Money Laundering) measures.

With new regulations on the horizon, cryptocurrency exchanges and other financial institutions must reconsider their compliance approach to cryptocurrency services as well as the efficacy of their AML solutions. Firms should seek to implement a risk-based cryptocurrency AML compliance solution that includes the following measures and controls, in accordance with FATF guidance:

  • Due diligence by the customer:
Crypto service providers must accurately establish and verify their customers' identities. In the context of a cryptocurrency service, digital identification methods such as scans of official documentation or biometric IDs such as fingerprints, face, or voice recognition may be required.

  • PEP testing:
Politically exposed persons (PEP) are more vulnerable to AML than other customers. Cryptocurrency companies should screen their customers on a regular basis to determine their PEP status and to inform their AML risk profiles.

  • Screening for sanctions:
Individuals on international sanctions lists may use crypto laundering to avoid sanctions. As a result, cryptocurrency service providers must check their customers' names against the relevant international sanctions lists.

  • Transaction tracking:
Firms must be able to detect suspicious activity and red flags in their customers' cryptocurrency transactions. Given the significant digital activity associated with cryptocurrency transactions, businesses should seek to implement automated monitoring technology to collect the required data.

Why does it matter?

State-level sanctions evasion threatens to exacerbate geopolitical instability if crypto laundering is not stopped. The inability to limit privacy coins through advanced exchange regulation will provide financial safe havens for hostile state and non-state actors.

That’s why partners from the public and private sectors must work together to establish global standards for combating the growing, borderless threat of digital money laundering.

Seo title: What impact does cryptocurrency have on money laundering?

Meta Description: The disruptive presence of cryptocurrency has increased the potential for criminals to abuse the technology and engage in crypto laundering, circumventing traditional anti-money laundering controls. But how do these financial thugs get away with it? It's past time to lift the lid on this crime and decipher what often appears to be complicated but doesn't have to be.
Cryptocurrency has a massive effect on money laundering. Because money is just data, and because cryptocurrency can be stored in a virtual wallet and sent anywhere in the world without an intermediary like a bank or government, it's easier than ever to launder money.

Crypto is also anonymous: people who send crypto don't need to know anything about each other except their public key and private key, which they can change at any time. This means that it's possible for someone to send crypto from one place, then change their public key so that all transactions from that address go to another address controlled by them instead.

Then there are "mixers" which take your real coins and mix them up with fake ones before sending back out again. You're left with fake coins with no way of tracing them back to you—you could even send this money into another country if you wanted to!
Cryptocurrencies are a dream come true for those who want to launder money. They're digital, they're anonymous, and they can be transferred almost instantaneously. They don't have any physical form, which means that they can be hidden away in a safe or even in your head—as long as you have access to a computer or mobile device with internet access, you can send and receive cryptocurrency payments. And the fact that cryptocurrencies are anonymous makes them appealing to criminals who want to hide their activities from law enforcement.
If you're looking to hide your money from the government, you can use cryptocurrency or you can use cash—both of which have been used to do so for decades. The difference between the two is that cryptocurrency can be traced back to your wallet and linked to your identity through blockchain technology.