Read Time: 16 minutes

Synopsis

The United Nations defines money laundering as the processing of criminal proceeds to disguise illegal origin.[1]

The concept of money laundering became familiar for the first time in the 1920s during the prohibition era in the United States of America when gangster Al Capone laundered his profits made through the illicit sale of banned liquor. Capone used his laundry operations to mix his illicit money and showed it as a legitimate source of income.[2] However, the term ‘Money Laundering’ gained significant recognition during the 1970s when the ‘Watergate Scandal’ was exposed in the USA which aptly described the process of money laundering and how it was weaponized by politicians.[3]

Most organisations including the United Nations, state that there are 3 stages of money laundering. First, the illegitimate money is ‘placed’ in the legitimate financial system. The money is then ‘layered’ and routed to multiple transactions to conceal the source. Lastly, the money is then ‘integrated’ with legitimate operations.[4]

Even though several countries have implemented AML (Anti-Money Laundering) regulations and KYC (Know Your Customer) norms to counter money laundering, the rise of cryptocurrency since 2009 has made the enforcement of this difficult. On the other hand,  decentralized systems have made it easier to launder illicit money.

Blockchain is a decentralized system that records all transactions through its peer-to-peer network without requiring a central bank/authority to verify the transaction. Cryptocurrency is a digital payment system built on blockchain technology that uses cryptographic algorithms that protect privacy, enhance transparency, and provide anonymity to the transaction.[5]

wThe anonymity provided by blockchain and cryptocurrency has become an attractive option for criminals to launder money. Launderers use crypto exchanges to register themselves without identifying themselves and only providing their crypto addresses to exchanges.

A report[6] published in July this year revealed that since 2019, over $100 Billion has been transferred from known illicit crypto wallets. The report found that the highest amount transferred was $30 Billion in the year 2023.

Launderers use anonymity and access to services that make illicit transactions almost untraceable, which further results in criminals resorting to crypto exchanges for money laundering.

Tumblers/Mixing is one of the techniques used by criminals wherein the fund from multiple sources is sent to one crypto wallet which results in the blending of money received from different users. Later, they are split into different portions and again sent to different addresses making it more difficult for agencies to trace the source.[7] For instance, in March 2023, the Washington jury convicted a Russian-Swedish man who was operating a darknet cryptocurrency mixer.[8] 

Over-the-counter (OTC) trading is another manner in which criminals transact in crypto. These transactions are facilitated by OTC brokers who connect sellers and buyers for a commission. The US Department of Justice in 2020 filed a case to forfeit 280 crypto accounts after $250 million worth of cryptocurrency was stolen from an exchange by a North Korean group and was laundered through Chinese OTC Brokers.[9]

The availability of Bitcoin ATMs has made it easy for launderers to deposit illicit cash which in return credits the bitcoins in their crypto wallet.[10] Fiat Exchanges which work in a similar fashion allowing conversion of crypto to cash have also been one of the choices of the launderers. These bitcoins can be later used by criminals on darknet markets for illegal activities.

Criminals have also resorted to gambling platforms to launder money where illicit money is used to place bets via anonymous accounts and is later cashed out as legal income. The Financial Action Task Force (FATF) in its September 2020 “Virtual Assets Red Flag of Money Laundering and Terrorist Financing”[11] report has dealt with the issue of money laundering through gambling platforms.

To counter this and combat money laundering, jurisdictions across the globe have started implementing AML and KYC norms including the United States, Europe, United Kingdom and Australia.

These KYC norms include identity verification, sanction screening, monitoring and reporting of suspicious transactions. Recently, the Financial Crime Enforcement Network (FinCEN), a body under the US Department of Treasury, suggested strengthening AML norms to counter terrorism.

The rule introduced by FinCEN required money services businesses to report transactions of more than $10,000 for self-hosted crypto wallets over which users have complete control over their private keys.

However, the rule was withdrawn after the Biden administration took charge and a pushback from the crypto industry raised privacy concerns.[12]

Pertinently, despite several jurisdictions implementing KYC and AML norms, several crypto exchanges remain non-compliant. A recent report[13] revealed that out of the 216 exchanges surveyed, 69% of them remain non-compliant and do not have KYC policies or procedures in place. It also revealed that only 26% of the exchanges had AML procedures in place that included monitoring of ongoing transactions and compliance staff.

In 2021, BitMEX paid $100 million to settle a case initiated against them for non-compliance with KYC and AML norms.[14] In December 2023[15]Binance was directed by a US court to pay a fine of $2.7 Billion after a case was filed by the Commodities and Future Trade Commission for money laundering.

Although regulators across countries have ordered the implementation of KYC and AML norms, several crypto exchanges remain non-compliant which has drastically affected and facilitated criminals to launder their money in modern times.

Preventive measures like customer due diligence, politically exposed person screening, transaction monitoring, sanction screening and adverse media which are taken in cases of money laundering other than through cryptocurrency should now be implemented in cases of cryptocurrency as well. 

Regulators should initiate and strengthen their enforcement action against non-compliant crypto exchanges to deal with issues of money laundering via cryptocurrency.