By Martin Cheek, Vice President, SmartSearch
As technology has evolved, so too have the methods used by money launderers. The development of increasingly sophisticated online banking and investment tools have enabled money launderers to move large sums of money around quickly and anonymously. Meanwhile regulators find themselves playing a game of whack-a-mole – as soon as one loophole is closed, another one opens up.
For some regulators, cryptocurrency is just another one of those loopholes that is enabling criminals to funnel billions of dollars from their criminal enterprises into legitimate holdings. As the values of cryptocurrencies rise, so too does the chorus of voices demanding more oversight and greater penalties for wrongdoers. Governments are increasingly looking to implement checks to ensure that cryptocurrencies like bitcoin can’t be used to launder money or finance terrorism. The question is, how much of this is fear mongering? Moreover, is there any evidence to suggest that bitcoin users are more likely to engage in these kinds of illegal activities?
As it turns out, there isn’t. In fact, the opposite is true: bitcoin is used less for money laundering than cash is. According to a report by Chainalysis, there was actually a sharp decrease in cryptocurrency-related crime in 2020, with illicit activity making up just 0.34% of the total transaction volume (compared to 2.1% in 2019). However, it should be noted that in the same period, there was a threefold increase in the amount of cryptocurrency activity – so while fraudsters make up a small proportion of cryptocurrency users, their activities are still significant enough to warrant further investigation.
A recent report found that a mere 270 blockchain addresses are responsible for 55% of all cryptocurrency-related money laundering. Despite the relatively low rates of illicit activity involving cryptocurrency, authorities around the world are looking to increase their oversight. At the end of last year, the Financial Crimes Enforcement Network (FinCEN) proposed regulations that would make transactions involving cryptocurrency subject to the same anti-money laundering reporting requirements as financial institutions. In essence, this would mean that the entities responsible for facilitating cryptocurrency transactions involving sums over $3,000 would be required to, in the words of FinCEN, “submit reports, keep records, and verify the identity of customers.”
On the one hand, having more robust protocols in place to prevent money laundering in all its possible forms is good. On the other hand, it is important to remember that cash is still the preferred medium for money launderers. While people can transact anonymously using bitcoin, the nature of the blockchain technology that underlies the currency creates a public ledger where anyone can see the transactions that have taken place. Given that one of the principal aims of money laundering is to disguise where the money is coming from and where it is going, the relative transparency of cryptocurrency makes it counterproductive for money launderers’ needs.
Cryptocurrency has developed a reputation for being the commodity of choice for money launderers and criminals. However, as the numbers show, illegal activity makes up a miniscule percentage of transactions. This is not to say that money laundering via cryptocurrency does not exist, nor does it mean that companies should ignore the risk that cryptocurrencies potentially bring. But the fact remains that there are easier ways for people to launder money – methods that largely stay under the radar because they’re not as flashy.
Companies should remain attuned to the more “conventional” methods of money laundering and keep an eye out for suspicious activity of all kinds. More than that, they need to take steps to ensure that they are capable of recognizing said suspicious activity and protect themselves against it.
The most effective way to do that is with an online single solution digital platform that automates ID checking and verification requirements. Not only drawing from global databases to perform complete ID checks, but also monitors for sanctions and politically exposed persons (PEP) on an ongoing basis.
It may be that criminals are increasingly looking to technology to carry out their deeds, but everyday law-abiding businesses can make sure they keep a step ahead with the latest innovations on their side.
SmartSearch is a Lehi, Utah-based provider of Anti-Money Laundering verification services.