Money laundering is described as a process where cash that is acquired through criminal activity is ‘washed clean’ to make it appear genuine or legitimate. The funds acquired via illegal activities like drug trafficking and terrorist financing are normally laundered to eliminate any trace of criminal activity.
This practice has been going on for decades, taking place in the traditional industry and the nascent crypto sector. Money laundering normally happens in three steps. First, the criminals place the stolen funds into a financial system and they are strategically broken down into smaller amounts to ensure that they can be hidden quite easily.
A ‘layering’ system is mostly deployed to create some distance between the criminals and their stolen funds. Then, they finish the process by ‘integrating’ the money which enables the thieves to retrieve their loot through seemingly legitimate income streams or clean money sources.
Fiat currencies are normally laundered by distributing money into multiple accounts in smaller amounts, which is also known as “smurfing.” To transfer funds internationally, currency exchanges, wire transfers, or smugglers might be used.
Criminals may also decide to invest in other assets to hide the funds. They can buy gold, real estate, or invest in various businesses. Cryptos can also be used, but it is also possible to untangle and uncover the fund flows using analytics tools.
Why Cryptos Are Used For Money Laundering
One main reason why criminals are turning to cryptos is that they presume that all blockchain transactions are anonymous. Many malicious actors also seem to find the cross-border nature of cryptos quite appealing because in a perfect world it means that they will not need to worry about getting the funds ‘out of the country.’
However, as the virtual asset sector keeps maturing, we are beginning to see a positive move towards regulating the space, and mitigating illegal practices. The total amount of bitcoin sent and received by the darknet entities has decreased since 2017, maybe due to tighter regulations and the rigorous introduction of various Know Your Customer (KYC) checks.
The total value transferred, however, has increased in the terms of dollars, and that has happened due to a surge in the prices of bitcoin.
What Strategies Are Criminals Using To Launder Crypto?
Criminals always seek services that intentionally or unintentionally hide their identity. Mixer services and the darknet are normally considered by the criminals and bad actors that want to launder their crypto funds. Criminals also appear to use the exchanges with lax authentication requirements, as the exchanges normally deliver increased anonymity levels.
But that laundering strategy is now getting harder, with most of the exchanges becoming more compliant and striving to meet the set KYC standards. Last year, about 16% of exchanges that the Crystal Blockchain analytics platform sampled did not yet have any countries of registration.
That number is expected to reduce considerably as cryptocurrency regulations develop at a worldwide and regional level.
How To Combat Money Laundering That Involves Cryptos
The best approach to take for now is to monitor potentially suspicious blockchain transactions. Crypto transactions are transparent and this nature puts the sector in an advantageous position when it comes to investigating illegal activities, for instance, money laundering.
Crypto fund flows are majorly traceable while the traditional fiat currencies can never be traced once they are lost. Any suspicious blockchain transactions can get monitored by following indirect and direct connections that are made through these transactions; and also by tracking back possibly illegal sources of crypto funds.
While some of the available blockchains are private, which means that the transactions are theoretically difficult to trace, blockchains like Ethereum and Bitcoin are highly traceable since they are transparent.
The Crystal analytics platform automatically monitors and offers risk scores for transactions executed across all major blockchains. They review Ethereum, Bitcoin, Tether, Bitcoin Cash, Ripple, and Litecoin. Crystal is also known to monitor over 1,500 ERC-20 tokens and at least 60 DeFi protocols.
How Anti-Money Laundering Compliance Software Enhances Crypto Businesses
Given the total number of transactions made on blockchains daily at high speeds, automation is crucial. Manual monitoring is now impractical due to these mind-blowing volumes. Analytics services strive to automate the monitoring process with 24/7 updates to ensure that crypto businesses and traditional institutions that deal in crypto can be alerted quickly when something goes wrong.
The recent guidelines published by the Financial Action Task Force (FATF) indicate that there is a combination of red flag indicators to be watched for whenever it comes to the issues of money laundering.
This set of indicators to fight illicit activities is in constant development, with information about the entity in question being one of the primary priorities, together with the monitorization of transactions and transaction patterns being used, and all the connections made.
The integration of factors is critical to possible risk, and the FATF has highlighted that these factors should never be considered in isolation, but as a part of a general contextualized picture.
With this general picture in mind, Virtual Asset Service Providers (VASPs) must consider anti-money laundering factors that are defined by the government, and with their compliance team decide what combination of factors must be considered for the distinct compliance needs. The customizable nature of software like Crystal analytics enables VASP compliance teams to create their localized AML requirements.