Scammers and hackers in a bid to hide the proceeds of their escapades have turned to money laundering using cryptocurrencies. How crypto is being used for laundering illegal money, and the types of crimes involved are explained in this article.
Cryptocurrencies are increasingly becoming the favored currency of cybercriminals, from using them to buy illegal items with Bitcoin as a payment mechanism to ransomware attacks where Bitcoin payments are sought. They can make it simpler for fraudsters to conceal the source of criminal earnings.
Using cryptocurrencies, practically all types of illegal profits are cleaned up. These operations range from the conversion of substantial sums of cash into virtual assets to the laundering of proceeds that have already taken place in the digital space, such as the payment of ransoms or the funding of criminal infrastructures.
Cryptocurrency money laundering services provide advice on how criminals can cash out their holdings, for example, by converting Bitcoin into gift cards or prepaid debit cards.
Before we consider the use of crypto in money laundering, it will be safe to first explain what the term Money laundering is.
What is Money laundering?
Making significant sums of money obtained through illicit activities appear to have originated from a lawful source is called money laundering. The technique “launders” the money, which is thought to be dirty as a result of the illicit action, to make it appear clean.
Smurfing commonly referred to as “structuring,” is a typical type of money laundering. To avoid being caught, the thief divides huge sums of money into numerous little deposits and frequently disperses them among numerous accounts.
Cash smugglers, who sneak large sums of cash over borders and deposit them in foreign banks where money-laundering enforcement is less rigorous, are another method of money laundering. Other methods include currency exchanges, wire transfers, and currency exchanges.
Placement, layering, and integration are the traditional three steps in the money laundering process.
Placement: To introduce “bad money” into the established financial system.
Layering: This is the process of hiding the source of the funds via a succession of transactions and accounting gimmicks.
Integration: The now-laundered funds are taken out of the genuine account and put to use in any way the criminal pleases.
The anonymity of crypto transactions
The fact that crypto transactions although recorded on the blockchain have to a large extent an anonymous feature is usually a high factor in its consideration in money laundering.
The concept is that there are only two people participating in the activity since bitcoin permits direct peer-to-peer transactions done via the internet. Banks, governments, or middlemen are not required.
Even while this seems to set up the ideal foundation for secrecy and anonymity. In essence, crypto allows you to launder the proceeds of crime by combining anonymity, usability, and the capacity to go around international boundaries and restrictions.
Use of Crypto in money laundering
The primary illegal activity connected to the unauthorized usage of cryptocurrency is money laundering. The usage of cryptocurrencies in money laundering operations has increased as a result of their rising acceptance and popularity.
They are also frequently used to pay for illegally obtained products and services that are sold both online and offline. A 2022 report from blockchain analytics firm Chainalysis claims that in 2021, fraudsters laundered $8.6 billion in cryptocurrencies, a 30% increase from the year before.
Numerous criminal networks used cryptocurrency as a form of payment during the COVID-19 pandemic, and thus the usage of cryptocurrencies in money laundering schemes has been on the rise. A lot of indications demonstrate how much cryptocurrency use is favored by fraudsters.
Advanced cryptocurrency fraudsters or money launderers may use both Bitcoin exchanges and Bitcoin mixing services. Customers are often given a newly created bitcoin address by bitcoin mixers so they can deposit bitcoin.
Fraudsters can use Bitcoin mixing services to hide the source of their illicit gains, distance themselves from criminal activity, and withdraw their funds secretly and safely through a Bitcoin exchange.
Methods used for money laundering using crypto
- Non-compliant exchanges
- gambling websites
- Crypto mixers
- Nested services
These are exchanges that have lax compliance programs and do not adhere to regulations or both. These exchanges have low or no requirements for user identity verification, which makes them particularly appealing to criminal organizations for money laundering.
A recent study found that the volume of non-compliant exchange transactions in 2020 was close to $20 billion which was an increase from 16% in 2019.
money launderers who use crypto usually do so using gambling platforms. Money is deposited into the platform using a mix of identifiable and anonymous accounts. They are frequently placed in bets or cashed off in conjunction with affiliates. The funds in the gambling account can be given legal status once they have been distributed.
Crypto Mixers are services that combine digital assets from numerous addresses before distributing them arbitrarily to new destination addresses or wallets, hence enhancing anonymity. They are frequently employed to hide the trail of money before it is moved to trustworthy companies or important exchanges.
Services that run within one or more exchanges fall under the broad category of nested services. In order to access the exchanges’ liquidity and take advantage of trading opportunities, these services use addresses that are hosted by the exchanges for money laundering.
Over-the-Counter (OTC) brokers are the most prevalent and notorious category of nested service. Trading big sums of cryptocurrency is made simple, safe, and anonymous by OTC brokers. Without the need for an exchange, OTC brokers enable direct cryptocurrency trading between two parties.
An example occurred earlier in the year when the DOJ filed a complaint describing two hacks of cryptocurrency exchanges by North Korean actors, who stole around 28.7 million dollars worth of cryptocurrency and later laundered the money through Chinese over-the-counter (OTC) cryptocurrency traders.
Crimes that launder money using crypto
- Drug trafficking
- Ransomware payments
- Payment for illicit goods and services
The use of cryptocurrencies to launder the revenues of drug trafficking is growing. This has been the subject of multiple investigations by EU law enforcement agencies in recent years. These extensive money-laundering operations typically include specialized criminal organizations that offer specialized crypto money-laundering services.
The emergence of Bitcoin and other cryptocurrencies has had a significant impact on the development of ransomware as a lucrative criminal enterprise. The use of malware to encrypt computer systems and/or data, followed by a demand for payment in exchange for the decryption key, is known as ransomware.
Businesses and individuals pay the ransom and refrain from reporting out of fear of disclosing sensitive information, reputational harm, and possible sanctions, which makes this extortion method very lucrative. The average ransom demand is increasing as attacks grow more specialized and focused. Payments for ransomware are almost always paid with cryptocurrency, most frequently Bitcoins.
More than half of identified criminal transactions involve fraud, making it the most common unlawful use of cryptocurrency. Fraudsters either build up their own money laundering systems or hire professional (crypto) money laundering services.
Fraudsters set up websites dedicated to cryptocurrency investments or promote profitable investments, enticing customers to register on trading websites. Pyramid schemes are a common strategy for luring investors in with guarantees of big profits.
Cryptocurrencies are used by cybercriminals, thus they must be invested, laundered, or cashed out. Cybercrime proceeds are frequently already in cryptocurrencies, therefore conversion is typically not necessary. Obfuscation methods and services are frequently used by cybercriminals to thwart transaction traceability.
Payment for illicit goods and services
Additionally, cryptocurrency is utilized to pay suppliers and accept payments for the online purchase of illegal goods. Compared to fiat money, the usage of cryptocurrencies as a payment method for illegal operations is expanding.
The majority of the buying of illegal goods and services happens online, primarily on dark web markets. Despite the rise of alternative currencies, dark web exchanges still mostly accept Bitcoin. However, a handful of exchanges also accept alternative currencies, including Monero and Ethereum.
Additionally, the purchase of intangible goods and services, such as documentation of child sex abuse material (CSAM), is done using cryptocurrencies.
Anti-Money Laundering in crypto
Cryptocurrency anti-money laundering (AML) refers to the laws, regulations, and guidelines that stop criminals from converting illegally acquired cryptocurrency into cash.
The following areas of concern with cryptocurrencies are highlighted in a report by the FATF titled Virtual Currencies Key Definitions and Potential AML/CTF Risks:
High levels of anonymity: Compared to conventional non-cash payment methods, cryptocurrency transactions may offer higher levels of anonymity. Online virtual currency trading is possible, there are typically no face-to-face customer interactions, and anonymous funding is possible (cash funding or third-party funding through virtual exchangers that do not adequately identify the funding source). In cases where the sender and recipient cannot be sufficiently identified, they may also permit anonymous transfers.
Cross-border transactions: When you have a global reach to any country, AML/CTF risks are magnified, making surveillance and enforcement more challenging.
Lack of centralized supervision: Law enforcement is unable to look into or seize assets related to a single central place or entity (administrator) due to a lack of central monitoring (although authorities can target individual exchangers for client information that the exchanger may collect).
As a result, transactions using virtual currency offer a level of anonymity that is not available when using conventional credit and debit cards or earlier online payment methods.
Cryptocurrencies play a major role in money laundering, the digital assets have become a means of payment for all sorts of illegal activities. However, governments have shown concerns by enacting laws that will guard against this.