Crypto Crisis: How Cryptocurrency Became a Money Laundering Hub

  • Bion Behdin, Chief Revenue Officer at First AML
  • 20.04.2023 05:00 pm
  • #crypto

In 2022, financial institutions in the UK were fined nearly $5bn (£4.04bn) due to money laundering failings. This jump is argued to be linked to the huge increase in fines levied at crypto, which increased by 90% as regulators cracked down on financial misconduct. Money laundering within the crypto space is quickly becoming a growing concern for law enforcement agencies.

Crypto can now be stored in mixed wallets with transactions hidden via browsers. So not only can the illegally gained funds be mixed and hidden with legitimate sources, it can also be layered via online entities. It’s a simple step to move from there to integration and then onto illegal activities.

These activities are highly complex and lighting fast, making it difficult for humans to detect using traditional methods. While it’s positive to see that steps are being made to squash money laundering in this space, the crypto industry has a lot of catching up to do when it comes to compliance. 

The SARs (Suspicious Activity Reports) annual report cited that since September 2021 65,505 cryptocurrency SARs have been reviewed to date. At the start of the review, the daily count of SARs was at more than 80 a day – this now stands at over 350 a day. Clearly, illicit crypto activity is very much on an upward trajectory. 

So why is it such a problem? And what can be done to tackle this issue head on? 

The crypto problem: from cross-border transactions to the metaverse 

Two of the key assets of cryptocurrency for money launderers is anonymity combined with the ability to move money across borders without any institutional involvement – and so there’s no need to pass currencies through any regulated bodies. It’s one of the reasons why the money laundering process has evolved from a highly manual one to a digital one. 

Traditional methods of placing dirty money into a cash-based business – mixing the dirty cash with the clean, layering and depositing this cash into ‘cuckoo’ or offshore accounts, extracting this money and then converting it into assets and clean cash – have transitioned into new forms of laundering, such as with multiplayer games and crowdfunding. 

Games such as World of Warcraft allow criminals to create avatars that can be used to convert money into a game’s virtual currency; likewise, fake campaigns and anonymous accounts can use crowdfunding to launder illegitimate money. And now with the metaverse, there’s the opportunity to use this template but via the traditional ‘real world’ process. Virtual businesses and goods are met with the same tactics of ‘placing’, ‘layering’ and then ‘extracting’ clean money. 

But unlike in the real world, the virtual world doesn’t have an interpol for anti-money laundering (AML) compliance.  

The task of keeping up with money laundering innovations 

This digital transition marks out a particular gap in current AML capabilities. Policies and policing are tailored towards ‘real world’ activity but there is no system in place for the domains of the virtual world and metaverse. 

The ability for launderers to hide behind anonymous accounts – in similar vein to the multitude of bots that patrol Twitter – makes it increasingly difficult to identify them. It enables the proliferation of ill-natured transactions across the globe and eradicates the ability for regulatory bodies to carry out proper customer due diligence. As the speed of transactions surge, can governance keep up? 

The advancements of technology simply allow criminals to discover new and unforeseen methods of laundering their money. So it’s essential that authorities are able to advance their processes in their own right. Criminal innovation needs to be met and superseded by governance innovation. It’s a burgeoning task, but one that can be met. 

The need for ‘inter-collaboration’

When confronting seemingly unstoppable tactics, you need to get to the root of the cause – the source. This begins with clamping down on exchanges where individuals convert traditional currency into cryptocurrency – these are the ‘on and off ramps’ of crypto. Regulating bodies could impose strict rules on this process to ensure that these exchanges comply with AML regulations. 

Case in point of this working was the recent news that Coinbase reached a $100m settlement with regulators for contravening AML regulations due to a lack of adequate background checks. 

And when it comes to the metaverse, for example, the source here is the account setup. So regulators could develop a separate compliance process that creates a tiered access system, potentially helping to spot money launderers at the entry point or early in the buying and selling process. 

In the matter of wider policing and monitoring, collaboration is key. This should encompass much closer intra-team collaboration alongside a significant increase in inter-agency and inter-country data and information sharing and cooperation. The more knowledge shared, the more effective the protection. Creating more transparency over transactions is also highly desirable. This could be achieved through concepts like shared wallets between crypto users, helping to enhance the Know your Customer (KYC) and Customer Due Diligence (CDD) processes. 

Toppling the crypto crisis 

As fines and SARs surge, the indicators are more than clear. AML practice needs to adapt and evolve to meet the innovative, anonymous and deceptive methods of money laundering in the digital world. Just as traditional money laundering methods are now being replicated and advanced in the virtual world, traditional AML methods need to follow suit. Not only that, but race ahead. 

Anonymity is a money launderer’s best friend – and the digital world gives this to them. So supervisory bodies need to find ways of tackling the problem at the source and introduce more stringent rules to regulate online. At the heart of whether this is successful will be collaboration between agencies and cross-borders. 

It’s time the virtual world got its own AML interpol.