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Crypto currency and fraud – Part 3: money laundering through crypto currencies

Part 3: money laundering through crypto currencies

2017 was the year of crypto currencies, in addition to the many possibilities of this technology, there are also risks involved. A five-part series, with the third subject 'Money laundering with crypto'.

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2017 was the year of the Bitcoin, Blockchain and the year that everyone could make a fortune by investing in crypto currencies. 'Experts' had high expectations and price increases of thousands of euros per day were no exception. Crypto currencies also have a downside, though: they lend themselves perfectly to all kinds of fraud. This five-part series highlights the various forms of crypto currency related fraud, including shady exchange offices, market manipulation, money laundering, crypto currency as a means of payment for criminal activities and Initial Coin Offering (ICO). Today we will discuss our third subject: money laundering through crypto currencies.

Our first two blogs on crypto currency and fraud highlighted the risks associated with online exchanges (BLOG 1) and the chances of malpractices through market manipulation and insider trading (BLOG 2). In this blog, we are going to discuss money laundering and how to make dirty money from criminal activities appear legitimate, for example by using bitcoins.

What is money laundering?

Money laundering gets its name from Al Capone 'laundering' money through launderettes. In short, it means making criminal assets appear legal, which is all about concealing the origin of the money.

This is usually done in three stages: 1) Placement: for example, cash earned from drug trafficking is deposited in a bank account via a so-called money mule. 2) Hiding: the money is being obscured by transactions such as buying and selling real estate and becomes increasingly difficult to trace. 3) Integration: the money cannot be easily traced to the crime anymore and is now used to buy, for example, a Ferrari. The criminal has a seemingly legitimate explanation: he has earned his money in real estate.

How to: launder money through cryptos

Money laundering through crypto currencies has also become a well-known phenomenon in 2018. Transactions made in crypto currencies can (!) be fairly anonymous, which may lead to various possibilities for money laundering. If we consider the three stages of money laundering and slightly adapt them to this form of currency, there are several ways of using or abusing crypto currencies:

  1. Placement: buying crypto currencies with cash, for example on Satoshi Squares. These are a kind of Wall Streets for Bitcoins, where crypto traders gather to trade in crypto currencies.
  2. Hiding: there are special bitcoin services that, under the flag of 'privacy’, aim to break the link between crypto transactions, whereas these transactions can normally be followed via the blockchain. Initial Coin Offerings (ICOs) or regular exchanges can also be used for this; in particular when one type of coin is bought with another type of coin and the origin of the digital money can no longer be easily traced.
  3. Integration: you can easily 'explain' the crypto coins you bought with dirty money by pretending it to be the result of profit, for example from appreciation of this volatile currency. Or you can set up a fictitious (online) company that accepts bitcoin payments and thus 'legitimises' your income.

The question is, however, whether this form of money laundering poses a real risk... A report published by the UK Treasury in November 2015 shows that virtual currencies mainly pose a higher risk of cybercrime. They flag the risk of money laundering as 'low’: it does happen, but there are no signs that it takes place on a large scale.

Controlling money laundering and legal framework

Money laundering is punishable by law and disciplinary actions amount to a maximum of 4 years imprisonment or a fine of the fifth category (82,000 euros). Six men were convicted of money laundering for others in Utrecht at the beginning of April this year, using crypto currencies: for a share of 10%, they laundered between €10,000 and €10 million in cash with crypto currencies. Their punishment? 1 to 3 years imprisonment.

FIU-Nederland, the Financial Intelligence Unit of the Netherlands, is also active in this area and has drawn up several crypto currency trading typologies since August 2017. Banks and other institutions may use these typologies as a tool to recognise 'unusual transactions' and subsequently report them. It is then up to the FIU, the public prosecutor and the FIOD, the Dutch anti-fraud agency, to investigate the matter further.

At a European level, the European Central Bank called for better regulation of the crypto currency world last February. Regulators have to ensure that audit trails of transactions are created and are accessible to supervisors. Crypto currencies also fall within the scope of the 4th AML directive (AMLD4). So whereas market manipulation with crypto coins is not yet effectively dealt with (see our previous blog), steps are being taken in the public domain with regard to money laundering. Shouldn't the government follow this example and ban and prosecute market manipulation as well?

In addition to these new forms of crime, crypto currencies are also used as a means of payment for more traditional criminal activities. Read more about this in our next blog.

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