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Crypto adds complexity to AML

The rise of cryptocurrency has ushered in a new era of increasingly complex money laundering scandals, with regulators outpacing the new digital avenues of fraud.

Napier AI
January 17, 2023

They’ve been called Bitcoin’s Bonnie and Clyde. In New York City, in February 2022, married couple Ilya “Dutch” Lichtenstein and Heather Morgan were charged with conspiring to launder stolen cryptocurrency. After their arrest, US authorities confiscated a staggering $3.6billion in Bitcoin, calling it “the “largest financial seizure” in the nation’s history.

It turns out that, back in 2016, an unknown hacker had broken into a virtual currency exchange called Bitfinex. According to court documents, Lichtenstein and Morgan then allegedly conspired to launder the proceeds of over 119,000 Bitcoin stolen from the exchange.

In an official statement , the US Department of Justice made the following allegation:

“Over the last five years, approximately 25,000 of those stolen Bitcoin were transferred out of Lichtenstein’s wallet via a complicated money laundering process that ended with some of the stolen funds being deposited into financial accounts controlled by Lichtenstein and Morgan. The remainder of the stolen funds, comprising more than 94,000 Bitcoin, remained in the wallet used to receive and store the illegal proceeds from the hack.” The case was particularly brought to public attention owing to the astronomical fraud amount involved and the eccentric presence of both Lichtenstein and Morgan on their multiple social media accounts.

The crackdown on crypto crime

The US Department of Justice, meanwhile, is using the arrest of this married couple to reinforce the message that they are cracking down on crypto crime. “Today’s arrests, and the department’s largest financial seizure ever, show that cryptocurrency is not a safe haven for criminals,” said Lisa Monaco, deputy attorney general at the department. “In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a labyrinth of cryptocurrency transactions. Thanks to the meticulous work of law enforcement, the department once again showed how it can and will follow the money, no matter what form it takes.”  

The different types of cybercrime

Over the last decade or so, the meteoric rise of cryptocurrency has ushered in a new era of increasingly complex cybercrime. On the dark web, Bitcoin has been used to buy all manner of illegal items ranging from drugs, guns, and bombs to poisons, human body parts, fake college diplomas, and even uranium.

One particularly lucrative crime is what’s known as ransomware, whereby hackers break into a commercial computer system and hold it hostage until the owners pay a ransom in crypto. Infamous ransomware cases include the 2018 cyberattack on the city of Atlanta, in the state of Georgia, and the 2021 attack on the US oil pipeline system Colonial Pipeline. Other methods of stealing digital assets include phishing (encouraging people to reveal sensitive information online), spoofing (disruptive algorithmic trading), rootkit (access to protected computer systems), cloaking (deceptive search engines) and brute-force attacks (relentless password guessing).

As criminal methods become more sophisticated, so do the criminals themselves. Well-funded illegal syndicates sponsored by rogue states are hacking and stealing cryptocurrencies, sometimes for monetary gain, other times to purchase illegal arms or fund terrorism.  

Bankruptcy and crime

The recent collapse of crypto exchange FTX and the filing for Chapter 11 bankruptcy by crypto lenders such as BlockFi, Celsius Network, and Voyager Digital have triggered alarm in the industry, spooking investors and drawing scrutiny from regulators all over the world. Extra scrutiny should be welcomed. Not only will it protect investors, but it will also help in the battle against the laundering of cryptocurrency.  

One company which monitors crypto crime very closely is the US blockchain analyst Chain analysis. In February this year the New York City-based group published its 2022 Crypto Crime Report , in which it warned that this form of crime is at an all-time high, with illicit online operators receiving US$14 billion over the course of 2021. Within that figure, it’s estimated that $8.6 billion of cryptocurrency was laundered – up from $6.6 billion in 2020, but down from $10.9 billion in 2019, one of the worst years on record.

How crypto is laundered  

The laundering of cryptocurrency clearly works differently to money-laundering of fiat currencies. The anonymity of digital assets means criminals can often disguise their activities in a way they wouldn’t be able to with traditional banks. Cryptocurrency is still a fairly new industry, so that most banks and regulators lack the expertise they need to trawl the dark web for evidence of laundering. There’s the added problem that criminals work across national boundaries, while government and financial regulators in different countries struggle to share information efficiently on the crimes they are monitoring.  

Regulators are making some headway, however. In 2021 the US Treasury Department sanctioned two Russia-based digital asset companies for money-laundering. One was a broker called Suex which received tens of millions of dollars of cryptocurrency from addresses associated with ransomware, scams and other criminal activity. The other was a crypto exchange called Chatex.  Nevertheless, Chainanalysis suggests crypto crime ought to be considered from a certain perspective. So enormous is the overall global cryptocurrency market – with total transactions of $15.8 trillion in 2021 –  that, as a percentage, criminal activity is very low by comparison. “In fact, with the growth of legitimate cryptocurrency usage far outpacing the growth of criminal usage, illicit activity’s share of cryptocurrency transaction volume has never been lower,” Chainanalysis states in its report. So, it seems, crime is becoming a smaller and smaller part of the cryptocurrency ecosystem.  

Regulators are fighting back

The other spark of good news is that law enforcement agencies are cracking down on the money-laundering of digital assets. In late November this year, for example, two Estonian citizens were arrested in the Estonian capital Tallinn for allegedly defrauding hundreds of thousands of victims to the tune of $575 million before using shell companies to launder the proceeds and  purchase property and luxury vehicles.

“The size and scope of the alleged scheme is truly astounding,” said Nick Brown, US attorney for the Western District of Washington. “These defendants capitalised on both the allure of cryptocurrency, and the mystery surrounding cryptocurrency mining, to commit an enormous Ponzi scheme. They lured investors with false representations and then paid early investors off with money from those who invested later.”

Perhaps it’s this allure and mystery that has clouded the judgment of so many cryptocurrency investors. And this is why it’s so important investors arm themselves with all the information they need before handing over any money.  

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Photo by MJH SHIKDER on Unsplash

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