Financially-motivated crimes take many forms. In a prior investigation for instance, Coinfirm identified 15 general classifications of crypto fraud schemes alone. The majority of criminally-obtained financial gains eventually winds up being attempted to be laundered for use in the legal economy.
Some tell-tale signs of money laundering in the traditional financial system are also utilized by criminals in the crypto system. Experienced MLROs (Money Laundering Reporting Officers) will be familiar with suspicious transaction patterns like ‘U-turn transactions’ and ‘layering’, whereby many small-sized chunks of funds – typically below a certain jurisdiction’s reporting dollar amount threshold – are sent between many accounts to obfuscate their original and intended end account.
However, some traits associated with suspected money laundering of funds are unique to crypto such as the involvement of;
- ‘Mixers’ or ‘tumblers’, cryptographic tools built to pool clean and illicitly-tainted assets together to be redistributed as a ‘mix’ of clean and illicit funds – with the objective of confusing tracking methodologies between the two – amongst those that deposited capital.
- ‘Privacy’ wallets and coins, such as Wasabi wallets and CoinJoin transactions, cryptographic systems and protocols built to obfuscate transaction data of amounts and counterparties.
- ‘Passing funds through miners’, where a sender and miner of a transaction are suspected of carrying out money laundering when the transaction fee is far higher than average. Miners are free to privately mine a transaction nobody knows about into a block.
- ‘ICO issuers or beneficiaries’ are a crypto-unique money laundering risk where creators of ICOs or their beneficiaries use newly created protocols or tokens as vehicles – much akin to criminals in the traditional financial system creating shell companies or seemingly legitimate businesses (i.e. ‘fronts’) – to clean tainted funds.
- ‘Transporting crypto assets across borders’ via the use of decentralized/unhosted, hardware or paper wallets is another strong money laundering marker and purposeful law authority evasion tactic utilized by criminals.
More red flag indicators in relation to crypto-assets can be found in the Financial Action Task Force’s extensive Virtual Assets Red Flag Indicators guidance.
A common misconception is that cryptography tools make illicit financial behavior easier to conduct. Whereas the reality is that as everything is on the blockchain ledger, the transaction history of coins and tokens can be traced back multiple ‘hops’. Advanced analytics can determine whether coins have been passed through mixers, are passing higher than usual fees to miners and have conducted other suspicious behavior that warrants a SAR (Suspicious Activity Report) submission to an FIU (Financial Intelligence Unit).