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Cryptocurrency Scams: Where There’s Confusion, There Are Money Launderers

Cryptocurrency Scams: Where There’s Confusion, There Are Money Launderers
Mar 31, 2020 Red Flag Alert Updated On: February 17, 2023

I was listening to this podcast recently about the cryptocurrency scam OneCoin, and it got me thinking about how the rise of cryptocurrency has opened up a whole new world for money launderers.

OneCoin is a 21st-century Ponzi scheme, but many of the ringleaders have been handed money laundering charges with huge sentences. While the head of the operation, Dr Ruja Ignatova, is still on the run, her brother pleaded guilty and is now facing up to 90 years in prison.

With the Anti-Money Laundering Directive 5 (AMLD5) now in force and cracking down on cryptocurrencies, I wanted to take a closer look at the state of AML and crypto.

How Crypto Is Used for Money Laundering

Even though the basis of cryptocurrency is around secure and verifiable money transfers, the pseudonymous nature of transactions and the reality that many exchanges have weak anti-money laundering (AML) compliance means that criminals have been able to exploit cryptocurrency to launder money.

The complexity of many cryptocurrency transactions can help criminals trying to obscure the source of their funds. One way money is laundered through cryptocurrencies is through a service known as a ‘tumbler’. This is a mixing service that can effectively split up the dirty cryptocurrency, send it through various addresses (using the dark web) and then bring it back together. Once it’s back together, it’s clean enough to go back to legitimate mainstream exchanges and be traded back into cash.

Other approaches are more straightforward, such as loading up prepaid debit cards with cryptocurrency and trading these for other currencies or using gaming and gambling sites that accept cryptocurrencies to buy virtual chips before quickly cashing out into ‘clean’ cash.

A Growing Problem

The size of the problem is huge: recent analysis found that last year alone, criminals laundered £2.1 billion using crypto exchanges, often through reputable mainstream channels. Criminals appear to have found a workaround to get onto these exchanges by using crooked third-party ‘over the counter’ brokers.

Last year, one man was arrested on charges of trying to launder more than $19 million (£14.7m) worth of bitcoin that he had allegedly earned through drug deals on Silk Road, the defunct but infamous dark web black market. This case also demonstrated that criminals are willing to bide their time when laundering cash: Silk Road was shut down in 2013, and the alleged deals were made in 2011 and 2012, but the proceeds were not transferred into cash using a crypto exchange until 2018.

Getting a Handle on Crypto Crooks

It’s because of this increased AML risk from cryptocurrencies that AMLD5 came into force as of 10 January 2020. This directive includes changes to AML legislation that imposes new, stricter regulations on crypto exchanges and custodians (wallet providers) operating in the EU and brings the rules in line with those already in place in the US.

Under the new rules, exchanges and custodians will become ‘obliged entities’ in the same way that banks and other financial institutions operate, meaning they need to implement AML compliance activities, including customer due diligence and transaction monitoring.

In the UK, this means that businesses carrying out certain crypto activities need to register with the FCA. And, as with traditional AML enforcement, fines for non-compliance can be huge.

Why This Matters to You

Even if you are not directly involved in providing cryptocurrency services, the interaction of crypto with traditional financial institutions and services increases your risk. As with all money laundering activity, the three key steps are placing the money in the system, layering it through a series of transactions and finally integrating it back into legitimate systems.

The pseudonymity of the exchanges and the lack of national borders makes due diligence very difficult in terms of KYC checks and knowing which jurisdiction is in charge. The need for crypto businesses to register with the relevant authorities under AMLD5 should help to address this, but your compliance burden remains.

Red Flag Alert Can Help

Luckily, Red Flag Alert’s AML service can help. It offers a full range of risk level checking with unbeatable match rates, Know Your Client (KYC) and AML solutions, enhanced due diligence and much more. It’s an instant, secure and cost-effective way to make sure you’re taking a risk-based approach to AML and meeting your obligations.

To improve AML compliance and safeguard your business from the risk of money laundering and financial crimes, Try Red Flag Alert today.


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