Cryptocurrencies are often used legitimately, and their benefits are well-known. An accessible, cheap, fast, and international payment system has powerful potential that is already starting to be realized.
However, such things of value can often end up being misused. And one of the ways criminals utilize blockchain technologies is for crypto money laundering.
Crypto is inherently ‘pseudonymous’, transnational, and, in some cases, highly liquid – these are its strengths. But this makes money laundering through cryptocurrency appealing to criminal groups that need to “wash” illicit funds.
When Crypto Goes Bad
According to Federico Paesano, Senior Financial Investigation Specialist of the Basel Institute on Governance, the subject of crypto money laundering was once a highly niche topic. “There was basically only one cryptocurrency (Bitcoin), only one case to discuss (Silk Road) and only 20 of us in a small room at the University of Basel,” he explained, recalling 2014.
“Regardless, we decided to co-found a Working Group on Cryptocurrencies and Money Laundering. We could sense something big was happening and law enforcement needed to be ready to face the challenge.”
Now, there are hundreds of new cryptocurrencies and other innovative forms of virtual assets, such as NFTs. This means an increase in cryptocurrency money laundering risk, and more opportunities for criminals to hide and illegally liquidate their illicit dealings.
The number of crypto money laundering cases that require investigators to enter the sphere are soaring, as well.
- U.K. police seized more than £2 million ($2.7 million) in cryptocurrency from a 17-year-old during an investigation into what they called a “sophisticated cyber fraud.”
- A suspect allegedly involved in earning money through suspicious transactions from social media has sought release on bail. The Federal Investigation Agency (FIA) arrested him for financial terrorism and money laundering and recovered both cryptocurrency and an assortment foreign currency worth millions of rupees from his custody.
- Cryptocurrency exchanges like Binance and Huobi are failing to perform stringent background checks on users, increasing bitcoin money laundering cases and problems, new research claims.
Telltale Signs of Crypto Money Laundering
There is a certain lack of federal guidance around crypto money laundering. However, many law enforcement agencies still rely on existing laws to uncover cryptocurrency money laundering risks, with the help of traditional investigative tools. Here are some telltale signs of crypto money laundering, according to the National Law Review:
- Transfer of crypto funds to wallets in unregulated or less regulated jurisdictions;
- Multiple high-value transactions occurring within a short period of time;
- Bitcoin or other transactions totaling amounts that are just under the amount that would trigger reporting requirements;
- Immediately withdrawing cryptocurrency deposits;
- New accounts funded with an amount that is immediately withdrawn;
- Transactions with multiple cryptocurrencies on many accounts;
- Deposits from unregulated jurisdictions or jurisdictions with poor AML and KYC regulations; and
- One wallet that is linked to multiple credit card accounts under different individuals’ names or one wallet linked to multiple bank accounts.
These warnings should be considered when doing business with cryptocurrency firms, as well as when dealing with law enforcement investigations. Anti-money laundering (AML) reviews should also be performed through reputable crypto service providers.
Responding to the Threat
Because of the threat of crypto money laundering transactions, the US Securities and Exchange Commission (SEC) recruited AnChain.AI to help monitor and regulate the turbulent decentralized finance (DeFi) industry.
In order to better understand how to best regulate the space moving forward, the SEC must keep track of money being spent within the country’s borders and, at the same time, get a handle on the blockchain industry.
“The SEC is very keen on understanding what is happening in the world of smart contract-based digital assets,” said Victor Fang, AnChain CEO and co-founder, “so we are providing them with technology to analyze and trace smart contracts.”
The SEC has already performed a major action against the DeFi space, when it shut down EtherDelta, a ‘DeFi’ exchange deemed to be operating illegally, back in 2018. There is reason to believe that this is only the beginning, with many enforcement actions to come.
AnChain.AI’s solution focuses on tracking illicit activity across crypto exchanges, DeFi protocols, and traditional financial institutions. Our solution takes a more holistic and preventive approach to the issue of money laundering through cryptocurrency, in contrast with 90% of the vendors in the space focusing mostly on post-incident investigation.
When post-incident investigation is called for, our artificial intelligence engine can automatically trace down cryptocurrencies. And on the preventive side, we envision this as the future of cryptocurrency AML compliance. We have innovated a real-time API product that uses machine learning to infer the risk profiles behind hundreds of millions of blockchain addresses and complies with FINCEN OFAC sanctions and other jurisdictions’ AML requirements.
Prevent Crypto Money Laundering from Poisoning Your Well
Money laundering through cryptocurrency is one of the main drivers behind the current government response.. Criminals are leveraging crypto to hide their dealings, but there are telltale signs to indicate that. The question is, how do we fix it?
Still, prevention is better than cure. Why wait to see the signs when you can protect your company before it even happens? True, companies affected by crypto money laundering will need help with post-investigation, but they won’t need that if they prevent money laundering through their crypto assets in the first place.
Learn more about how to protect your crypto transactions and assets from money laundering. Check out our solution here.
