We will now look at different cryptocurrency money laundering methods. Like for non-crypto-related money laundering, in practice, cryptocurrency money laundering involves one or more of these methods, sometimes alone standing, sometimes in combination.
Inevitably, this knowledge is of great benefit to detect irregular activities and build internal safeguards to protect against the cryptocurrency money laundering risk.
Cryptocurrency Money Laundering Methods
While they may not be a competitor to the currency in terms of laundering volume at the moment, the growing use of cryptocurrency, as well as its unregulated or less-regulated nature in many jurisdictions, means that the financial world has a lot to be concerned about.
The same sentiment can be found at the 2019 G20 Finance Ministers and Central Bank Governors meeting in Japan. “While crypto-assets do not currently pose a threat to global financial stability, we remain vigilant to risks, including those related to consumer and investor protection, anti-money laundering, and counter-terrorism financing,” according to a meeting note.
Crypto advisors frequently claim that laundering money with cryptocurrencies is extremely complex and risky, rendering it an ineffective strategy when compared to traditional methods. They also argue that digital currency transactions are more transparent and accountable than fiat currency transactions.
Another argument is that money laundering with cryptocurrencies is comparatively small in terms of volume, and the mainstream media focuses on criminal activities related to digital currencies rather than technology and innovation. There is no doubt that cryptocurrencies are being used to facilitate money laundering, albeit on a small scale.
Method Number 1: Cryptocurrency Exchanges
The first money laundering method involves cryptocurrency exchanges. Numerous cryptocurrency exchanges are regulated, comply with applicable laws and regulations, and cooperate with law enforcement authorities. The majority of them also require customer identification and conducts customer due diligence.
However, there are still cryptocurrency exchanges that aligned their services with the needs of criminals. They enable cryptocurrency transactions without a proper form of identification. Exchanges that are not compliant with AML practices and fail to perform strict and thorough identity checks allow cryptocurrencies to be traded repeatedly across various markets, deposited onto unregulated exchanges, and traded for different altcoins.
Either way, criminals can also use legitimate exchanges and apply various techniques to circumvent verification processes and take advantage of exchanges’ payment methods. Fake identity documents are available online and via Darknet markets enabling criminals to stay anonymous. Some exchanges have already upgraded their customer due diligence requirements. They are now putting in Skype verification calls or requiring customers to produce self-generated images holding their IDs and papers with random text written on them. However, criminals already found new ways to bypass the current verification processes.
Virtual currencies exchanges offer different payment methods to buy or sell virtual currencies, predominately bank transfers and credit or debit card payments. Some also offer the use of Money Service Businesses such as Western Union and MoneyGram, PayPal, bank cheques, and even cash, including cash deposits and cash-in-mail. Money laundering vulnerabilities associated with the use of cash are commonly known.
The use of cash is widely recommended by criminals discussing in online forums as a simple means of avoiding tracking or detection. Money launderers can engage in crypto-to-cash transactions either with their associates or with third parties they encounter.
Let’s take a look at probably one of the most scandalous cases of the recent past. Following an investigation led by US authorities, a Russian national operating one of the world’s largest virtual currency exchanges was arrested in Greece in July 2017. This exchange was, by all means, an exchange for cybercriminals worldwide. It was one of the principal entities used to launder and liquidate criminal proceeds from digital currencies to fiat currencies.
The authorities found that it lacked basic anti-money laundering controls and policies and was therefore very attractive for concealing criminal proceeds. The exchange facilitated serious crimes, including computer hacking, ransomware, fraud, identity theft, tax refund fraud schemes, public corruption, and drug trafficking.
Finally, it is also important to bear in mind that virtual currency exchanges convert virtual into fiat currency and vice versa. Exchanges can also convert a virtual currency into another, including the more recent and enhanced anonymity virtual currencies.
Method Number 2: Cryptocurrency Smurfing Scheme
The second cryptocurrency money laundering method involves the use of so-called money mules or smurfs. A money mule is a person that transfers funds on behalf of the money launder. Money launderers usually utilize numerous money mules, break up, and divide large funds between them to get detected easily. Cryptocurrency money launderers apply the same principle and utilize money mules as well. They usually do this in 4 quite simple steps.
The first step is opening verified accounts at crypto exchanges. The launderer opens numerous accounts using money mules as front man with false documents to surpass identification and verification to convert the funds.
The second step is transferring the dirty cryptocurrency from crypto addresses or wallets to the exchanges. The money launderers then use tumblers or mixers for transferring the cryptocurrency to the verified account opened at an exchange with false identification documents.
The third step is opening bank accounts with money mules. The money mules open several bank accounts in a third country with false foreign identification documents. All the documentation associated with the opening of these bank accounts is then delivered to the money launderer.
The last step is transferring the cryptocurrency from the exchanges to the local bank accounts opened by money mules, at this stage since the criminal money was already separated from its source. Then money launderer can use the money for whatever purpose. Usually, these bank accounts are used for short periods, and their balance typically does not exceed EUR 30,000.
Method Number 3: Prepaid Cryptocurrency Cards
The third method is quite simple and involves using prepaid cards. Believe it or not, but nowadays, prepaid debit cards can be loaded with cryptocurrency. Once the prepaid debit card is loaded, the funds can then fund different types of illegal activities. They can be traded for other currencies or handed off to third parties.
Method Number 4: Online Gambling
The next cryptocurrency money laundering method is also rather simple and involves online gambling. There numerous online gambling and gaming websites that accept cryptocurrencies. Cryptocurrency can be used to buy credit or virtual chips. Usually, the money launderers would play for a few rounds and then cash out again after just a few small transactions. By doing so, the money launderer has an explanation for the origin of the funds right away. He can simply claim that the funds are the proceeds from winning in online games.
Method Number 5: Cryptocurrency ATMs
The fifth cryptocurrency money laundering method is a bit more sophisticated and involves automated teller machines or ATMs. As of September 2019, there were 5,457 Bitcoin ATMs worldwide. Bitcoin ATMs continuously connected to the internet, allowing anyone with a credit or debit card to purchase Bitcoin. Additionally, they may possess bi-directional functionality allowing users to trade Bitcoins for cash using a scannable wallet address.
Bitcoin ATMs can also accept cash deposits, providing a QR code scanned at a traditional exchange and used to withdraw Bitcoin or other cryptocurrencies. Regulations used by financial institutions to obtain a record of customers and transactions for these machines vary by country and are often poorly enforced. Criminals can exploit loopholes and weaknesses in cryptocurrency ATM management to get around Bitcoin money laundering risks.
Money launderers are increasingly making use of Bitcoin ATMs to launder illegally obtained money. Whereas previously banking transfers or remittance services such as Western Union or MoneyGram were used, criminals now instruct their money mules to withdraw money from compromised bank accounts and to use it to buy Bitcoins via a Bitcoin ATM. To avoid any identification procedures, the criminal depositors would apply smurfing techniques to split the funds into batches under EUR 1.000.
Method Number 6: Cryptocurrency Peer-to-Peer Networks
The sixth cryptocurrency money laundering method involves the so-called peer-to-peer networks. Many criminals turn to decentralized peer-to-peer networks to lower crypto money laundering risk, which is frequently international. Here, they can often use unsuspecting third parties to send funds on their way to the next destination. Most cryptocurrency money laundering schemes end with the clean coin funneled into exchanges in countries with little or no AML regulations. It’s here that they can finally convert it into local fiat and use it to purchase luxury or other high-end items such as sports cars or upscale homes.
Method Number 7: Local Stores
The seventh cryptocurrency money laundering method involves using local stores. Nowadays, the possibility exists to trade cryptocurrencies Face-to-Face. It’s possible to find private vendors that wish to sell cryptocurrencies for a small fee on the internet. Several sites on the Internet offer to match individuals willing to buy or sell Bitcoins in person. LocalBitcoins.com is the most famous of such market places. Some sellers prefer cash as payment while others may allow various payment forms such as online payment service, bank or money services businesses-transfers, or others.
According to information provided by a European Police Authority, it was found that a money laundering organization that was traditionally dedicated to place and layer criminal funds derived from the trafficking of cocaine from Spain to Colombia via the use of a bank account smurfing techniques had updated its modus operandi and was now using LocalBitcoins.com to carry out its international transfers.
After picking up considerable amounts of criminal cash from drug traffickers in Europe, this money laundering organization continued to use its smurfing techniques to split and deposit funds into many bank accounts under their control. After several transfers to other bank accounts, the funds were ultimately used to purchase Bitcoins from private vendors located in different European countries via the LocalBitcoins platform.
To then move the value of the obtained Bitcoins to Colombia, the money laundering organization uses two simple options:
Option 1: On the same day, the exact amount of purchased Bitcoins in the European Union was resold by the money laundering organization by again using the services of Local.Bitcoins.com. But this time, the Bitcoins were sold to private buyers in Colombia that pay with bank transfers directly into Colombian bank accounts, in Colombian pesos.
Option 2: On the same day, the LocalBitcoin wallet, in which the purchased Bitcoins and the necessary information to access and use the wallet were stored, was delivered to the cocaine trafficking criminal organization in Colombia. They can then use the value stored in that wallet in Colombia or anywhere in the world.
Method Number 8: Cryptocurrency Mixing Services (Tumblers)
The last cryptocurrency money laundering method involves mixing services, known as tumblers. Tumblers can be used to split up the dirty cryptocurrency effectively. Tumblers send it through various addresses and then recombine it—the reassembly results in a new, rather clean, and hardly traceable amount of cryptocurrencies.
In most laundering cases that involve tumblers, the cryptocurrency starts in a legitimate wallet on the whitenet. It is then transferred to a wallet in the dark web making multiple hops before landing in a second dark web wallet. At this point, the currency is clean enough to bring it back up to the whitenet and trade it on a legitimate cryptocurrency exchange or even sell it for fiat currency, such as Euro, Dollar, or Pound.
Cryptocurrencies’ status as a mainstream medium of value exchange in the digital era is gradually changing. Many large corporations now accept digital currency as payment for goods and services, and many banks are considering the use of blockchain technology.
Having said that, cryptocurrency has the potential to completely replace paper and plastic money. As a result, it is critical to investigate the flaws that allow these currencies to be used for money laundering and to develop appropriate counter-technologies to combat the crime.