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Crypto Laundering On The Rise: Can Law Enforcement Keep Up? PART 1
Crypto money laundering, or “crypto laundering,” disguises and moves illegally-obtained digitized currencies to make them look legitimate.
Introduction
Headlines regarding cryptocurrency-related criminal investigations continue to rise.
Indeed, by now most people have heard about the recent multi-billion crypto hack and subsequent laundering by a young married couple out of New York.
Cryptocurrency continues to pose significant challenges for federal law enforcement agencies, especially given the lack of uniform cryptocurrency regulations. But federal law enforcement seems determined to keep pace with the crypto-related criminal activity, including money laundering or “crypto laundering.”
Discussion
Money laundering, in particular, is prevalent. Cybercrimes often include elaborate money laundering schemes or are themselves designed to launder money.
To launder money, people disguise the origin of illegally obtained money by transferring it to legitimate businesses.
People often wonder how is money laundering possible in cryptocurrency transactions?
Money laundering refers to the process of introducing the proceeds of criminal activity into the legitimate financial system. Crypto money laundering, or crypto laundering, disguises and moves illegally-obtained digitized currencies to make them look legitimate.
Cryptocurrencies like Ethereum or bitcoin are online currencies subject to no traditional financial authorities. Crypto transactions are stored on the decentralized public ledger and verified using substantial computing power.
“Decentralized” means that no single entity or person controls the Bitcoin network, making law enforcement investigations more challenging.
Bitcoin is one of the most well-known blockchain cryptocurrencies. Bitcoin and other emerging cryptocurrencies have become very valuable to people as they become more comfortable trading crypto for cash, goods, and services.
Cryptocurrencies work using Blockchain. As a decentralized technology, Blockchain spreads across many computers to manage and record transactions online. Many companies issue their own electronic or cryptocurrencies called Tokens. These tokens are traded, like cash, for the good or service that the company offers. Think of these cryptocurrencies as casino chips or amusement park tokens. These tokens, however, exist only in electronic form and cannot be placed in your purse or wallet and exchanged at your local bank.
Because of the anonymity some tokens offer, these online currencies attract people seeking to launder money. It is no longer necessary for someone to carry loads of cash physically to money launder when they can use online crypto exchanges.
Uncovering and tracing criminal proceeds in cryptocurrencies continues to be a significant problem for federal law enforcement. That said, federal law enforcement is devoting more resources to regulating and stopping cryptocurrency crimes.
Why Crypto Laundering?
As noted above, crypto money laundering, or crypto laundering, disguises and moves illegally-obtained digitized currencies to make them look legitimate.
The reasons for the increasing use of cryptocurrency in crimes generally and money laundering schemes in particular are:
- they are hard to trace;
- there is no consistent federal regulation;
- transaction costs are low;
- there are no financial intermediaries; and, among other things,
- people appreciate the ease of use.
Traditional Financial Systems vs. Crypto Exchanges
Cryptocurrencies do not require central authorities or controllers, whereas traditional financial systems require a central banking authority. The underlying technology for cryptocurrencies is blockchain technology—the secure decentralized ledger with no single controlling entity or person.
Before crypto, people used traditional bank accounts to launder money, which required people to complete bank identification and verification procedures. With traditional banking, the laundering activity occurs under the umbrella of a regulating central banking authority.
On the other hand, there are few necessary identification and verification measures with cryptocurrency and crypto exchanges. A crypto transaction only requires the wallet address of the sender and recipient for a transfer to occur. And there is no centralized authority.
Thus, cryptocurrency transfers can occur unmonitored and unbothered by any third-party intermediary or banking authority. In addition, crypto transactions do not have much of any paper trail, as people can complete transactions with just the record on the blockchain.
Even with all the subterfuge enjoyed when conducting activities on crypto exchanges, crypto launderers are always trying to stay one step ahead of law enforcement. For this reason, they are willing to use unlicensed crypto exchanges, many of which operate out of foreign jurisdictions with few or none of the anti-money laundering (“AML”) and know-your-customer (“KYC”) protocols required by federal law.
“Chain hopping” (moving quickly to and from multiple cryptocurrencies) or “Bitcoin mixing” (mixing up illegal funds with the legitimate coins of other users) are tools crypto launderers use to obscure the movement of illegal funds and complicate law enforcement investigations.
Recent DOJ Crypto Laundering Investigations
DOJ’s activities in investigating and prosecuting cryptocurrency-related money laundering and investment scams that result in money laundering will continue into the foreseeable future.
U.S. regulators’ fines in the cryptocurrency industry are more than $2.5 billion since Bitcoin emerged in 2009. And cryptocurrency platforms have agreed to pay over $150 million in fines to settle federal government claims against them.
The main agencies involved in the prosecution of these cases include
- Department of Justice (DOJ)
- Federal Bureau of Investigation (FBI)
- Securities and Exchange Commission (SEC)
- Commodity Futures Trading Commission (CFTC)
- Internal Revenue Service (IRS)
- Financial Crimes Enforcement Network (FinCEN)
- Financial Stability Oversight Council (FSOC)
- Offices of Inspectors General across the government, and
- States Attorneys General (AGs).
In addition, Attorney General Merrick Garland announced a new task force effort several months ago. The DOJ created a National Cryptocurrency Enforcement Team (the “”NCET””), adding structure and coordination so that the federal government can better investigate the illegal uses of cryptocurrency, including crypto laundering.
According to the DOJ, the NCET will “tackle complex investigations and prosecutions of criminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors.” The creation of the NCET is a clear signal that the federal government is committed to enforcement in the cryptocurrency space.
Examples of recent and ongoing money laundering or crypto laundering cases include:
The DOF filed criminal charges in New York against a group of people who started a cryptocurrency “investment” fund. As part of their scheme, they recruited hundreds of investors. The investors believed that the defendants would use their investments to invest in Bitcoin and other cryptocurrencies, with high rates of return.
The defendants stole about $9 million of investor contributions, misappropriating the money for personal use instead of investing and trading for the investors. This one cryptocurrency scheme led to over $30 million in losses.
Then there is the case of Dr. Bitcoin, who operated a cash-to-crypto conversion business, converting almost $1.5 million over one year. Dr. Bitcoin ran a business that converted US dollars to Bitcoin crypto wallets for a fee.
Dr. Bitcoin disregarded the requirement to verify the source of his clients’ cash. He also instructed clients on how to circumvent financial institution reporting requirements. Not only did Dr. Bitcoin fail to conduct thorough verification procedures under federal law, but he also failed to file mandatory currency transaction reports for high-value transactions, a separate criminal offense.
In May 2021, news broke that Binance Holdings (the world’s largest cryptocurrency exchange) was under DOJ and IRS investigation for money laundering and tax evasion.
And in August 2021, the cryptocurrency trading platform BitMEX agreed to pay $100 million as part of a settlement with the CFTC and FinCEN for multiple violations of the Bank Secrecy Act and other anti-money laundering laws.
This $100 million fine is one of the largest crypto settlements with federal regulators. The allegations against BitMex and its three co-founders include:
- Operating a crypto exchange from the U.S. without regulator clearance.
- Unlawfully accepting orders and money from U.S. investors to trade cryptocurrencies without regulator clearance.
- Failing to maintain necessary anti-money laundering protocols.
- Conducting at least $209 million in transactions with “known “darknet markets or unregistered money services businesses.”
In addition to prosecuting for money laundering or crypto laundering, federal law enforcement is also going after crypto industry operators who do not put in place anti-money laundering protocols in the first place.
Reported Dollar Value of Laundered Cryptocurrencies
Industry estimates are that $33 billion worth of cryptocurrencies have been laundered since approximately 2017.
Last year alone, people laundered at least $8.6 billion in cryptocurrencies, according to Chainanalysis.
That number of $8.6 billion does not include the laundering of money for criminal activity occurring outside of a native cryptocurrency environment, such as drug trafficking. Such activity is much more challenging to measure. No doubt, however, that money derived from traditional criminal activity gets converted into cryptocurrency to be laundered.
As for where do the laundered funds ultimately end up? Chainanalysis estimates that 17% or so remains on crypto blockchains. Most of it, however, makes its way back to traditional bank accounts. As we cover in this blog series on crypto laundering, that may be good news for law enforcement.
Why?
Converting laundered funds from crypto into fiat currency is often the break needed to give law enforcement a greater chance to crack a criminal case.
Several recent cases of crypto laundering were cracked when offenders sought to convert crypto into US legal tender, as we will discuss in more detail in upcoming blogs.
Conclusion
As crypto is increasingly accepted worldwide, potential crypto launderers keep trying to remain ahead of authorities by developing new crypto laundering schemes.
Federal cryptocurrency regulation is spread across multiple federal law enforcement agencies. Still, the federal government has vowed to coordinate its efforts and increase investigative and prosecuting resources to catch people engaging in crypto laundering and other crypto-related crimes.
The breadth and strength of the federal government’s commitment should put all people and businesses who use blockchain technology to move around funds on guard for the risk of a federal inquiry.
