The crypto money laundering continues to be a major threat in the digital currency industry. Cryptocurrencies have become an attractive option for criminals to launder money because of their anonymous and decentralized nature. By using various methods of crypto money laundering, criminals can obscure the origin of illicit funds and integrate them into the legitimate economy. With the rise of non-fungible tokens (NFTs), the threat of money laundering in the crypto industry has become more complex.
Crypto Money Laundering Methods
The first 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 and break up and divide large funds between them so that they don‘t 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. To convert cryptocurrency that is deriving from illegal activities, such as ransomware and fraud, into fiat currency, the money launderer opens numerous accounts using money mules as frontman with false documents to surpass identification and verification.
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.
The second cryptocurrency money laundering is quite simple and involves using prepaid cards. Believe it or not, nowadays prepaid debit cards can be loaded with cryptocurrency. Once the prepaid debit card is loaded, the funds can then be used to fund different types of illegal activities, they can be traded for other currencies, or they can be handed off to third parties.
The third cryptocurrency money laundering method is also rather simple and involves online gambling. Numerous online gambling and gaming websites 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 online games.
The next cryptocurrency money laundering method is a little bit more sophisticated and involves the use of automated teller machines or ATMs. As of September 2019, there were 5,457 Bitcoin ATMs worldwide. Continually connected to the internet, Bitcoin ATMs allow 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 that can be 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 of under EUR 1.000.
Money Laundering Threats Using NFTs
Due to the lack of laws and regulations around the trading of NFTs, the money laundering risk is considered as high. This technology can raise alarm bells from a money laundering and financial crime perspective. To start with, NFTs are most often purchased with cryptocurrencies on online marketplaces. Cryptocurrencies are routinely exploited for malicious means, like complicating the source of criminal proceeds and, despite the fact that transactions can be traced, more sophisticated criminal actors use a variety of techniques to disrupt investigations by law enforcement. Along with the financial crime risks arising from cryptocurrency usage, money launderers may exploit the trade and sale of NFTs in a similar way to which they exploit physical art.
For example, an individual may attempt to replicate a famous piece of art work and sell it as a criminal activity such as forgery. Similarly to physical art, there are other opportunities for money launderers to forge NFTs. In March 2021, a hacker created a piece of digital artwork and put it up for sale on an online marketplace claiming it was a limited edition Banksy print. To add authenticity, the creator hacked into the official Banksy website and posted a link to the NFT. The token sold for roughly £244,000. In a final twist however, the funds were returned by the hacker following the sale.
An art heist is also possible within the NFT realm. Criminal actors can hack into user accounts on NFT marketplaces and transfer NFTs to their own accounts. After transferring the NFTs, the hacker can quickly sell the stolen token(s) and attempt to launder the proceeds. The digital aspect of these tokens also provides room for other novel risks. During the creation process of an NFT, it is possible for creators to ‘hide’ information within the NFT. This hidden information could, for example, be about a newly identified security vulnerability in a piece of software with the NFT used as the transfer mechanism to share this information between two criminals parties.
The record sales of NFTs in recent times show a very volatile market where exorbitant amounts of money may be involved which has raised concerns around the globe whether these amounts of money spent on NFTs can be used in order to facilitate illicit financial transactions and/or circumvent the increasingly robust anti-money laundering (AML) legislation both at the EU and international levels. It is intriguing, after all, that collectors want to spend vast amounts of money for just a digital image when they can buy traditional art with the same amount of money.
From a more critical perspective, the rise of NFTs coincides with the traditional art market being subjected to strict AML rules in the EU. Putting the traditional art market on the radar of AML rules and law enforcement agencies (LEAs) may have driven criminals to search for alternative methods of laundering their criminal proceeds. NFTs, blockchain technology, anonymity and the lack of a legal framework create an ideal space for such criminal activities.
The methods of crypto money laundering are constantly evolving, and the rise of NFTs has introduced new challenges in the fight against money laundering in the crypto industry. Criminals can use various methods such as mixing services, multiple wallets, privacy coins, and decentralized exchanges to obscure the origin of their funds.
However, regulators and law enforcement agencies are taking steps to combat these threats by increasing their focus on the crypto industry, implementing stricter KYC and AML regulations, and monitoring NFT marketplaces. It is crucial for stakeholders in the crypto industry to remain vigilant and work together to prevent the abuse of digital currencies for criminal purposes. By doing so, we can ensure the integrity of the financial system and protect against financial crimes.