Headline: Crypto and Money Laundering

Date: 3/8/2022

Body:  DeFi protocols… a confusing name but pretty apt.  DeFi stands for “decentralized finance” and it is the goal of cryptocurrency.    The people who set these economic ecosystems up believed that the central banks of individual countries had way too much power.  In their estimation, there had to be a way to “DeFi” these systems. (See, these guys and gals are pretty darn clever, even with their marketing.)  So, they designed various kinds of cryptocurrency which don’t depend upon a government-controlled Central Bank, and these currencies make it so much easier to move money from one country to another.  Mission accomplished, right?   We can go to bed?

No.   As surely as night follows day, if one designs a system that can anonymously send large amounts of currency internationally in a few keystrokes, money launderers the world over popped champagne, and quickly got to work.

What is the relationship between cryptocurrency and money laundering

It might sound like the trailer for a movie, but I swear, it’s not.  The “Treasure Men” exist!!  And, they are HERE!!

Well, not here, precisely, but, around.   First, they are not mythical creatures.  They are specialists who can turn your cryptocurrency (however you acquired it) into a physical form of payment.   For an extra fee, they’ll leave the gym bag of cash or the purse full of Amazon gift cards somewhere near you, then give you explicit directions of where to pick it up.  These specialists don’t really hide either: If you have access to the Dark Web, they can readily be found at some of the most visited marketplaces, like Hydra.

But I thought that the cryptocurrency blockchain had no identifiable information, the individual was safe.

The crypto world is well, unique.   All of the transactions are open to EVERYBODY to see, but the names are not connected.  So,one has the ability to keep quiet about the identity of counterparties, but the fact of the transaction is known.  Some white-hat hackers have gotten together and opened businesses to help trace these transactions, and these business entities are large.   Two examples are Chainalysis (based in New York) and Elliptic (based in London.)

Is this really a big deal?

Depends on your definition of “big” I guess.   It is estimated that $5 Billion in illicit funds were transferred.  But, move back a bit and you find that this is less than 1% of all cryptocurrency transfers, per Chainalysis.   Cybercriminals laundered about $8.6 billion in cryptocurrency in 2021, Chainalysis said in a partial release of its 2022 cryptocurrency crime report.   And due to fear of regulation, the exchanges are getting much better at understanding their customers.  Against this, there are still plenty of opportunities for those bad actors, including online gambling sites and over 11,000 Bitcoin ATMs globally.  And, it’s getting bigger.  Decentralized finance protocols are playing an increasing role in money laundering, with the total value of cryptocurrency laundered rising year over year by 30% in 2021, according to blockchain data platform Chainalysis Inc.

That said, there is still plenty of opportunity for good old-fashioned money laundering.  For instance, the report cited an estimate from the United Nations Office on Drugs and Crime that between $800 billion and $2 trillion of fiat currency—money issued by governments—is laundered each year.   So, laundering of cryptocurrency is a large problem, but it should be seen in context with the rest of the problem.

What is a criminal to do?

There are two main techniques used by cryptocriminials.   First, they can switch their ill-gotten gains quickly from one currency to another to help obfuscate their trail.  The other option is to pay somebody else to do it for them.  Think of these people as freight-forwarders.   These people take the ill-gotten gains, combine them with massive numbers of transactions of legitimate nature, and then give “clean” currency back to the originator.   Both procedures can be quite expensive, though.   And, if one uses highly trained forensic accountants, the trail CAN be un-twisted.

Have there ever been some really colorful examples of cybercriminals like this?

Well, yes, definitely.  Just a short while ago, the Justice Department arrested a couple and seized over $3.5 Billion in cryptocurrency, and charged them with trying to launder money stolen in 2016 from a cryptocurrency exchange.   The characters are the stars here.   He was a Russian immigrant who came to the U.S. with his parents for religious reasons.   She was a largely unsuccessful “rap artist” who was trying to gain a social media following.   Both had impeccable  relationships with friends and neighbors.  I’m pretty sure we’ve seen this movie before.

The Verdict

“We’re really in a period where there’s so much growth, so many new customers, so many new businesses in DeFi that it’s hard to know which ones are vulnerable and which ones are worth investing in,” said Kim Grauer, head of research at Chainalysis.  “But at the same time, users have ‘FOMO,’ a fear of missing out. So they are willing to maybe forgo some of the typical security checks in favor of investing in new platforms that might offer high yield.”  This seems to sum up the increasing tussle between law enforcement and cybercriminals who are determined to add money laundering to their resumes. 

When I was trained as a Certified Fraud Examiner, they drilled into our heads the Fraud Triangle.     They are Pressure, Rationalization and Opportunity.   In this case, the aspiring money-launderer might see the current situation as follows:

 Pressure – They have bills that they can’t seem to pay.

Opportunity – They already know the cryptocurrency game.  So, moving digital money around is no problem for me, right?

Rationalization – Look, if I don’t do it, somebody else will do it anyway.  I might as well profit personally and help my kids, right?

It’s a siren song in 3-part harmony, and many a vessel has been lured by it.  The new wrinkle is that all it takes is a few keyboard clicks.   Just like this.





Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.


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