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How To Detect Crypto-Related Laundering?

Technological advancements are creating great potential and opportunities in the Crypto industry. However, it is also becoming a gateway for criminals to wash their ill-gotten money. It is crucial to note that Money laundering is more than a Financial crime, as it has a motivation behind legitimizing funds that are obtained for various serious crimes such as terrorism financing, drug trafficking, political crimes, and so forth. Money laundering through fiat currency may not really have a competitor when it comes to volume. But the growing popularity and use of Cryptocurrency is further becoming susceptible to illicit activities due to its unregulated nature in jurisdictions.

Cryptocurrencies, without question, are a valuable Financial and Technological breakthrough that enables individuals and institutions to access financial products and services in a cost-efficient manner along with speed. Cryptocurrency is seen with the potential to replace fiat and create a stature into the mainstream medium of exchange in the digital era. Many large Corporations, Banks, and Financial institutions are adopting Blockchain and Cryptocurrency. Nevertheless, its very P2P decentralized system, anonymity, and hassle-free cross-border transactions are a matter of concern in the Financial sector.

In 2019, the G20 Finance Ministers and Central Bank Governors meeting in Japan, shared their very sentiment, “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.”

On the other hand, Crypto advisors suggest that money laundering with Cryptocurrencies is an ineffective strategy as they are more complex and risky than traditional approaches. In terms of fiat currency, digital currency transactions are transparent, and the crime is comparatively minor. Despite this, the media is more focused on the Blockchain and Crypto’s negatives than the positives.

It's worth noting that the Cryptocurrency market is relatively new and in its infancy stage, making the shortcomings vulnerable to money laundering and other illicit activities. As a result, it's even more essential to analyze the digital currencies’ flaws and take the necessary measures to address them.

In this blog, we are going to discuss the Crypto money laundering loopholes and various countermeasures to eliminate the crime.

As per the UN estimation, around $800 billion to $2 trillion money is laundered annually across the world, out of which 90% stays undetected. The estimation of money laundering through Cryptocurrency is still ascertaining; however, some statistics on the Internet state that at the beginning of 2020, the Crypto hacks, scams, and thefts reached $1.36 billion. In 2019, criminals laundered money at an estimated $2.8 billion via Cryptocurrency exchange, from $1 billion in 2018.

In October 2020, Europol announced that an unprecedented international law enforcement operation comprising 16 countries had succeeded in arresting 20 individuals who endeavored to launder tens of millions of euros since 2016 on behalf of the world’s foremost cybercriminals. The operation, which was run by the notorious QQAAZZ network, entailed converting stolen cash into Bitcoin using tumbling services to conceal the source of funds.

Also Read, How Cryptocurrency Can Revolutionize The Banking Industry

Stages of Money Laundering Through Cryptocurrency

1. Placement

In Placement, the dirty money is converted into Cryptocurrency through intermediaries such as financial institutions, exchanges, casinos, and stores. They are used to disguise illicit funds as legitimate in the financial system. Cash or other Cryptocurrencies are used to purchase one type of Cryptocurrency. For this purpose, criminals frequently use Crypto exchanges that do not comply with AML requirements.

2. Layering

In Layering, criminals obscure the illegal origin of funds through structured transactions, making the fund’s trail crafty to decode. They obfuscate the origin of the currency with the use of Crypto exchanges and convert one Cryptocurrency to another, or they participate in ICOs, in which one form of digital currency is exchanged for another. Criminals can also transfer their Crypto assets to a different country.

3. Integration

The final phase is Integration, wherein illegal funds are reintroduced or legitimize to the economy with a clean record. One of the most common prevalent strategies is the use of OTC – over-the-counter brokers, who function as intermediaries between Crypto sellers and buyers. Many OTC brokers specialize in money-laundering services and are compensated handsomely for their role in the process.

Sources of Money Laundering Through Cryptocurrency

1. Peer-to-peer Crypto networks are used to transmit funds to a location, usually in a jurisdiction where the Crypto exchange has lenient AML regulations. These exchanges assist in converting Cryptocurrency into fiat currency to purchase high-end items.

2. Crypto ATMs enable users to buy Crypto through credit or debit cards and cash deposits in some cases. In many jurisdictions, the KYC requirements for Crypto ATMs are not strictly enforced.

3. Online Gambling accepts Cryptocurrency payments. Criminals can launder money by using Cryptocurrency to buy chips and then cash them out after a few transactions.

4. Cryptocurrency Exchanges are subject to fraudulent activities and are vulnerable to money laundering involving Crypto. The cause of these is the lack of AML regulations practices and the risks by the technology itself, such as anonymity, malicious software, lack of security, and regulation.

5. Mixers, also known as tumblers, is the technique used to effectively break the dirty money. The process involves sending funds in a split manner with a series of multiple addresses and then recombining them, resulting in a clean total.

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