The rapid ascent of cryptocurrency has ushered in a new era of financial innovation, but it has also created novel challenges in combating financial crime. A recent comprehensive report by Chainalysis sheds light on the intricate world of crypto-related money laundering.
The far-reaching study encompasses both crypto-native and non-crypto native methods, as well as strategies for prevention. Today we delve into the key findings, focusing on the most significant trends and data points, to provide a thorough understanding of this complex issue.
The Scale of Crypto Money Laundering
The magnitude of crypto-related money laundering is staggering. Since 2019, nearly US$100 billion in funds have been sent from known illicit wallets to conversion services.
The peak was reached in 2022, with an alarming US$30 billion identified, largely attributable to transactions involving sanctioned services such as the Russian exchange Garantex.
And contrasting with the non-crypto native space, the Hong Kong Monetary Authority (HKMA) just fined DBS Bank (Hong Kong) Limited, the HK subsidiary of DBS, a HK$10 million penalty for breaches of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO).
The HKMA concluded that the bank failed to continuously monitor business relationships, conduct enhanced due diligence in high-risk situations for a period, and maintain proper records for some customers.
These figures underscore the immense challenge facing regulators and law enforcement agencies in their efforts to curb illicit financial flows in the crypto space.
Crypto-Native Money Laundering Techniques
Intermediary Wallets: Over 80% of Laundering Channels’ Value
One of the primary methods employed in crypto-native money laundering is the use of intermediary wallets. This ‘layering’ process is designed to obscure the connection between illicit funds and their eventual integration into the legitimate financial system.
The Chainalysis report reveals that intermediary wallets often account for over 80% of the total value flowing through laundering channels, highlighting their critical role in these illicit operations.
The proliferation of intermediary wallets has been remarkable. In 2023, there were over 1.4 million intermediary wallets moving known illicit funds, representing a substantial increase from about 800,000 in 2022.
This growth indicates that criminals are becoming increasingly sophisticated in their attempts to evade detection, utilising more complex networks of wallets to obscure the trail of illicit funds.
Crypto Obfuscation Services: Mixers, Privacy Coins, and Bridges
Mixers, also known as tumblers, have seen fluctuating popularity as a tool for money laundering. These services blend the cryptocurrencies of many users together, making it difficult to trace the origin of funds.
Usage of mixers peaked in 2022, with over US$1.5 billion of value received in April alone. While usage declined following regulatory actions, some mixers like Tornado Cash have shown renewed growth in 2024, suggesting that criminals are adapting to regulatory pressures.
Privacy coins, particularly Monero, have seen increased adoption among those seeking to avoid scrutiny. Monero transactions have risen steadily, with a notable spike in March 2024 due to a spam event called Black Marble.
The enhanced anonymity features of privacy coins make them particularly attractive to illicit actors, posing significant challenges for law enforcement and compliance professionals.
Crypto bridges, which facilitate the transfer of assets between different blockchain networks, have become increasingly popular for money laundering. In January 2024, nearly US$234 million in illicit inflows were recorded moving through bridges – the highest value to date.
This trend highlights how criminals are exploiting the interoperability of different blockchain networks to further obscure the trail of illicit funds.
Destination of Illicit Funds
The report reveals that over 50% of illicit funds ultimately wind up at centralised exchanges, either directly or indirectly. This preference for centralised exchanges is likely due to their high liquidity and ease of converting cryptocurrency to fiat currency.
However, there’s been a notable downtrend in the volume received by centralised exchanges – from nearly £2 billion a month at peak to approximately £780 million a month.
This decrease suggests that the anti-money laundering (AML) programmes of centralised exchanges are becoming more effective at detecting and mitigating laundering activity.
Non-Crypto Native Money Laundering Methods
As traditional money launderers adapt to the digital age, they are incorporating cryptocurrencies into their operations. The Chainalysis report identifies several on-chain activity patterns that may indicate non-crypto native money laundering, providing valuable insights for compliance professionals and law enforcement agencies.
Transfers Just Under Reporting Thresholds
The report highlights noticeable surges in transfers just below the US$1,000, US$3,000, and US$10,000 thresholds. These thresholds align with various regulatory reporting requirements, suggesting that some actors may be structuring payments to avoid triggering additional scrutiny.
This behaviour, known as ‘smurfing’ in traditional finance, appears to have been adapted to the crypto world.
Use of Multiple Intermediary Wallets
Interestingly, the number of intermediary wallets used by bad actors is growing faster on exchanges with Know Your Customer (KYC) verification processes compared to non-KYC exchanges.
This trend may indicate that launderers are becoming more sophisticated in their attempts to evade detection on platforms with stricter verification processes, potentially using multiple wallets to fragment their activities and avoid raising red flags.
Consolidation Wallets
The use of consolidation wallets, which receive and combine funds from several sources, is another technique to watch for. In 2024, the top 100 bitcoin consolidation wallets received £968 million worth of bitcoin from over 14,970 distinct addresses.
Expanding the scope, over 1,500 consolidation wallets received a total of £2.6 billion worth of bitcoin in 2024, each receiving funds from at least ten different wallets.
This pattern of consolidation could indicate attempts to obscure the origin of funds before moving them to exchanges or other cash-out points.
Prevention Strategies
To combat both crypto-native and non-crypto native money laundering, a multifaceted approach is necessary. This includes robust regulatory frameworks, advanced technological solutions, and enhanced global cooperation.
Regulatory Frameworks
The report highlights various regulatory initiatives worldwide that are shaping the fight against crypto-related money laundering:
- The European Union’s Fifth Anti-Money Laundering Directive (5AMLD) and the updated Transfer of Funds Regulation (TFR) extend AML requirements to virtual asset service providers (VASPs) and implement the Travel Rule for crypto transactions.
- Singapore’s Payment Services Act (PSA) brings crypto businesses under regulatory oversight, imposing strict AML/CFT requirements.
- Hong Kong’s amendments to the aforementioned Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) formally cover the operation of virtual asset businesses, with a new regulatory regime for virtual asset trading platforms.
- The United Kingdom has implemented proactive national enforcement measures, including the authority to seize crypto assets suspected of being involved in money laundering activities prior to making arrests.
- The United Arab Emirates has amended Federal Decree-Law No. (20) of 2018 to introduce AML/CFT obligations for VASPs, with various regulatory authorities providing specific requirements within their jurisdictions.
- The United States continues to rely on the Bank Secrecy Act (BSA) as the primary legal framework governing AML regulations, with the Financial Crimes Enforcement Network (FinCEN) providing guidance on how these regulations apply to cryptocurrency businesses.
Technological Solutions
Advanced transaction monitoring systems play a crucial role in the fight against money laundering. The report highlights the growing adoption of blockchain analytics tools, with the number of transactions screened by Chainalysis Crypto Compliance solutions rising dramatically from less than 200 million in 2018 to over 1.4 billion in 2024.
These tools use machine learning and artificial intelligence to detect unusual patterns indicative of money laundering, providing real-time alerts to compliance teams.
Cross-Border Collaboration and Public-Private Partnerships
The report emphasises the need for global cooperation to address the borderless nature of cryptocurrency transactions. This includes harmonising regulations across jurisdictions, sharing intelligence, and conducting joint operations.
Public-private partnerships are also crucial, allowing for the exchange of information and best practices between government agencies and crypto businesses.
The battle against crypto-related money laundering is an ongoing challenge that requires constant vigilance and adaptation. As the cryptocurrency ecosystem continues to evolve, so too must the strategies to prevent its exploitation for illicit purposes.
By combining robust regulatory frameworks, cutting-edge technology, and international cooperation, the crypto industry can work towards building a more secure and trustworthy financial system.
Featured image credit: Edited from Freepik
