Many crypto crimes have a common theme of money laundering. Criminals use the blockchain’s anonymity to launder proceeds from both off-chain and on-chain crimes, obscuring the provenance of illicit payments and converting them to cash for bank deposits.
Criminals utilize cryptocurrency to launder profits from a variety of crimes, ranging from traditional crimes and schemes to cybercrime, digital fraud, and cryptocurrency thefts from online exchanges.
The Financial Action Task Force (FATF) has issued recommendations to most mainstream exchanges and other Virtual Assets Service Providers (VASPs), with the goal of reducing the dangers of utilizing virtual assets for money laundering and terrorist financing. FATF uses a risk-based approach to anti-money laundering (AML), which includes Know Your Customer (KYC) rules that require exchanges and other VASPs to authenticate their customers’ identities. Due to these rules, criminals have developed ingenious tactics to elude financial investigators and launder their unlawful funds.
How does cryptocurrency money laundering work?
To hide their origins, criminals use a variety of methods and services that deliver money to many addresses or corporations. The assets are subsequently delivered to a target location or an exchange to be liquidated from a seemingly legal source. This procedure makes tracing laundered monies back to illegal activity extremely difficult.
The five most common ways used by thieves to launder money on the blockchain are listed below.
A broad range of services that run within one or more exchanges is referred to as nested services. These services use exchange-hosted addresses to get into the exchanges’ liquidity and take advantage of trading opportunities. Some exchanges don’t have strict compliance requirements for nested services, allowing criminals can use them to launder money.
These nested services transactions appear on the blockchain ledger as having been carried out by their host counterparties (i.e., the exchanges), rather than by the hosted nested services or individual addresses.
An Over-the-Counter (OTC) broker is the most widespread and well-known sort of nested service. OTC brokers allow dealers to exchange huge amounts of cryptocurrencies quickly, safely, and discreetly. Without the need of an exchange, OTC brokers enable direct cryptocurrency exchanges between two parties. These transactions can take place between cryptocurrencies (for example, Ethereum and Bitcoin) or between cryptocurrencies and fiat currency (e.g., cryptocurrencies, like Bitcoin and fiat currencies, like euros).
In exchange for a commission, OTC brokers discover counterparties for a transaction but do not participate in the talks. After the agreements have been agreed upon, the parties transfer asset custody to the broker.
Cryptocurrency money launderers frequently use gambling platforms. Funds are deposited into the platform using a variety of identifying and anonymous accounts. They’re either paid out or put into bets, frequently with the help of affiliates. The money in the gambling account can be given legal status once it has been paid out. The Financial Action Task Force’s (FATF) “Virtual Assets Red Flag of Money Laundering and Terrorist Financing” study, released in September 2020, includes gambling services. FATF recognized two instances in which gambling services can be deemed a red flag in this report:
- Funds deposited or withdrawn from a virtual asset address or wallet that have direct and indirect links to known suspect sources, such as problematic gambling sites.
- VA transactions that originate or end up in online gaming services.
Mixers are services that combine digital assets from many addresses before sending them to new destination addresses or wallets at random intervals, hence boosting anonymity. They’re frequently utilized to hide money’s trail before it’s transferred to legitimate businesses or significant exchanges.
The use of mixers to launder cryptocurrency funds has made the news, and the figures are staggering. Helix, a custodial mixing service, was accused in August 2021 of being involved in a $300 million money laundering scheme involving assets obtained from drug trafficking and other illegal activities. The charges against Helix center on the company’s intention to assist users in concealing ownership of Bitcoin obtained through darknet operations, primarily through the Grams and AlphaBay darknet sites. Helix has been described as a “darknet-based cryptocurrency tumbler.”
Non-compliant exchanges are those that don’t follow regulations, aren’t subject to them, or have lax compliance programs. To transfer crypto-assets, these exchanges require little or no user identity verification, making them particularly appealing to criminals.
According to a recent study, non-compliant exchange transaction volume in 2020 was approximately $20 billion, with $4.2 billion serving criminal operations, representing a 16 percent rise in illicit transaction volume over 2019. According to this study, non-compliant exchanges are so appealing to criminals that they execute 10 times more unlawful transactions than exchanges with established KYC and AML regulations.
Services headquartered in high-risk jurisdictions
Services located in high-risk jurisdictions are those that have been identified as having strategic flaws in their anti-money laundering (AML) or counter-terrorist financing (CFT) regimes.
In two public papers known as the “black list” and “grey list,” the Financial Action Task Force (FATF) recognizes nations with insufficient anti-money laundering and counter-terrorist financing (AML/CFT) procedures. The European Commission also identifies countries with strategic weaknesses in their anti-money laundering and counter-terrorist financing regimes that constitute a serious threat to the European Union’s financial system.
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