Cryptocurrencies and NFTs or non-fungible tokens, have become increasingly popular in recent years, not only among investors and traders but also among criminals, including money launderers. Money laundering is the process of disguising the proceeds of illegal activities as legitimate funds. Cryptocurrencies and NFTs have become an attractive tool for money launderers due to their perceived anonymity, ease of use, and lack of regulation.
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 conduct of customer due diligence. However, there are still a few cryptocurrency exchanges that aligned their services with the needs of criminal clients by enabling purchasing and selling of virtual currencies without requiring a proper form of identification or verifying the provided identities.
Criminals can certainly use legitimate exchanges and apply various techniques there to circumvent verification processes and take advantage of the payment methods offered by exchanges. 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 and are now putting in Skype verification calls or requiring customers to produce self-generated images holding their ID and papers with a random text written on them. However, criminals already found new ways to bypass the current verification processes.
Exploring How Cryptocurrencies and NFTs Are Being Exploited by Money Launderers
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 the 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 simply engage in crypto-to-cash transactions either with their associates or with third parties they encounter.
Another simple way to stay anonymous is the use of prepaid credit and debit cards which can be bought in supermarkets, stores, or online. There are exchanges where customers can buy cryptocurrencies with prepaid credit and debit cards instantly without the need to supply any proper form of identification.
Another avenue through which criminals can undertake Bitcoin money laundering is unregulated cryptocurrency exchanges. Exchanges that are not compliant with AML practices and which fail to perform strict and thorough identity checks allow for cryptocurrencies to be traded over and over again across various markets, deposited onto unregulated exchanges, and traded for different altcoins.
The repeated exchanges of one type of cryptocurrency for another can slowly clean the funds, which criminals can eventually withdraw to an external wallet.
Following an investigation led by US authorities, a Russian national operating one of the largest virtual currency exchanges in the world was arrested in Greece in July 2017. This exchange was, by all means, an exchange for cybercriminals worldwide, and one of the principal entities used to launder and liquidate criminal proceeds from digital currencies to fiat currencies, including U.S. dollars, Euros, and Rubles. This exchange lacked basic anti-money laundering controls and policies, such as Know-Your-Customer, and was therefore very attractive to those who desired to conceal criminal proceeds.
The exchange facilitated serious crimes, including computer hacking, ransomware, fraud, identity theft, tax refund fraud schemes, public corruption, and drug trafficking.
To use the exchange, a customer created an account by accessing the respective website. Unlike the majority of virtual currency exchanges, this particular exchange’s business model obscured and anonymized transactions and sources of funds. The exchange allowed opening accounts anonymously as they did not require providing basic identity information, but only a username, password, and an email address.
The users of the exchange could not fund an account by directly transferring money from their bank accounts to a bank account of the exchange itself but rather had to wire funds to bank accounts of one of the exchange’s shells or affiliate entities. It was also possible to send or receive fiat currencies and virtual currencies from other users, but users could not withdraw funds from their accounts directly.
Instead, they were required to make deposits or withdrawals through the use of third-party exchanges, thus enabling the exchange of questions to avoid collecting any information about its users through banking transactions or other activity that would leave a financial paper trail.
According to the authorities, users even openly and explicitly discussed criminal activity on the exchanges user chat and the exchange’s customer service representatives offered advice on how to process and access money obtained from illegal drug sales on darknet markets like Silk Road, Hansa Market, and AlphaBay.
Finally, it is also important to bear in mind that virtual currency exchanges do not only serve the purpose of converting virtual into fiat currency and vice versa but they can also be used for the conversion of a virtual currency into another, including the more recent and with enhanced anonymity virtual currencies.
New cryptocurrencies such as monero, zcash, dash, or pivx allow anonymous transactions. Especially monero and zcash provide private transactions keeping amounts, balances, and source and destination addresses anonymous and thus making it hardly possible to trace back transactions or identify their real owner. Others such as dash and pivx simply mix transactions involving multiple sources into a single transaction.
The attraction of cryptocurrencies and NFTs to money launderers is their perceived anonymity, ease of use, and lack of regulation. While these features have made cryptocurrencies and NFTs popular among investors and traders, they have also made them a tool for criminals to launder money. As the use of cryptocurrencies and NFTs becomes more widespread, it is important for regulators and law enforcement agencies to develop effective measures to combat money laundering and other illicit activities. This may include increased regulation of cryptocurrency exchanges and digital wallets, as well as improved methods for tracing transactions on the blockchain.