Author: Niall Hearty
5 May 2023
3 min read
Niall Hearty of financial crime specialists Rahman Ravelli details the money laundering challenges facing the crypto sector.
The potential for crypto assets to be used in money laundering has been highlighted in a survey.
The survey, conducted by anti-money laundering software specialists First AML, showed that nearly 70% of compliance professionals are worried about the growing threat of money laundering (AML) via the use of cryptocurrencies in business. Of those surveyed, 41% of companies had identified instances of money laundering where cryptocurrency was involved.
More than half of the respondents (53%) said that they believe current business practices only partially address the threat posed by crypto – and 78% of senior business figures said they thought their company’s anti-money laundering procedures could be improved.
It should be remembered that the findings of a survey should not be taken as comprehensive, established facts. But First AML’s findings do appear to be backed up by findings from elsewhere.
Earlier this year, a report by Chainalysis, which analyses blockchain - a type of shared database used in cryptocurrency transactions – showed that illicit addresses sent nearly $24 billion worth of cryptocurrency in 2022. Almost half of this was sent to mainstream, centralised exchanges. Such exchanges usually have compliance measures in place to report suspicious activity and take action against the users in question - but they do also offer the opportunity to convert cryptocurrency into cash. As the aim of money laundering is to move funds around so they cannot be identified as the proceeds of crime, the appeal of cryptocurrency to money launderers is obvious.
Money laundering in cryptocurrency will usually involve intermediary services - such as cryptocurrency exchanges - and wallets, which store users' public and private keys, provide a means of managing crypto balances and help support cryptocurrency transfers through the blockchain. The launderers will also use fiat off-ramps - a service enabling the exchange of cryptocurrencies for fiat, which is government-issued legal tender such as the US dollar or the Euro.
There is also, however, an increasing trend for money launderers to use underground services that are not widely known about or accessible and tend to be advertised on darknet forums.
Such situations present challenges – both for law enforcement agencies and for those who operate in the crypto sector and need to ensure they are meeting their AML compliance obligations.
For those with such obligations, they have to contend with the difficulty of identifying and tracking suspicious actors. This was a problem mentioned by more than a quarter (27%) of those surveyed by First AML. A lack of clear regulatory guidance was also highlighted as a problem by 17% of those who took part in First AML’s survey.
Such issues emphasise just how hard it can be for those in the crypto sector to stay abreast of constantly-evolving money laundering techniques in order to remain legally compliant. Those in the sector also need to ensure they stay up to date with regulatory guidance and develop new practices to ensure they meet the obligations placed upon them.
Taking such a course of action cannot be regarded as a matter of simply going through the motions in order to create the appearance of doing what is required. The consequences for not meeting the obligations can be large.
To take one example, cryptocurrency exchange Coinbase was fined $50 million in January by New York State's Department of Financial Services (DFS) for what were called “significant” compliance failures. Coinbase is also having to invest another $50 million in its compliance programme to settle the regulatory investigation into failures in its anti-money laundering practices.
This was the result of investigators finding that Coinbase’s know your customer/customer due diligence, transaction monitoring, suspicious activity reporting and sanctions compliance systems were all inadequate for a financial services provider of its size and complexity. This, according to the DFS, left Coinbase vulnerable to serious criminal conduct, including fraud, money laundering, suspected child sexual abuse material-related activity and drugs trafficking.
Such a case should not be viewed in isolation. This year alone has already seen US regulators warn banks to be on guard against the risks posed by exposure to the crypto sector, and the US Internal Revenue Service (IRS) aiming to hire hundreds of new agents and work with crypto companies to combat financial crime. The UK’s National Crime Agency (NCA) is creating a new ‘crypto cell’ to help tackle crypto-related criminal activity. Last month saw the European Union approve its first piece of EU legislation for tracing transfers of crypto assets, in order to block suspicious transactions blocked.
There can be little doubt that the cryptocurrency sector is under scrutiny.
Niall has a wealth of corporate crime expertise and an ability to coordinate global bribery and corruption cases. His achievements in such investigations have made him a logical choice for corporate clients.