Crypto Laundering and Bitcoin: A Discussion

Thursday October 14, 2021

Bitcoin has been a massive innovation for the world that enables faster processing of transactions, makes them easier to use, has no third parties and intermediaries, and offers greater security. The technology underlying Bitcoin is the blockchain, the decentralized ledger in which all Bitcoin transactions are stored.

At the same time, criminals are increasingly trying to take advantage of the latest technology for their financial gain. Bitcoin transactions actually have the ability to make money laundering easier for criminals, as cryptocurrencies are conducted, transferred, and stored online, allowing cyber criminals to move their funds across borders instantly.

This article explains the link between Bitcoin and money laundering, warning signs and how a lawyer can help you with your crypto problem.

Bitcoin as an attractive option for money laundering

One of the first questions many ask is why Bitcoin is such an attractive option for criminals looking to launder money.

The most important answer is that it is much easier to launder cryptocurrencies via online exchanges and then convert them into cash than it is often to launder moneybags across borders. Online transactions know no borders and eliminate the need to physically move illegal money from place to place. Hence, it’s easy and convenient.

Second, there is a degree of anonymity associated with Bitcoin transactions. While these transactions are not 100% anonymous, they are actually pseudonymous. This means that the Bitcoin public addresses used for transactions are not registered in the names of individuals.

The transactions are publicly stored on the blockchain (the public decentralized ledger where all transactions are stored), but only the person making the transaction has access to the account and the Bitcoin wallet. Hence, federal agencies will have a difficult time associating a particular Bitcoin transaction with a single person or entity. However, detection is not impossible.

To overcome this obstacle, criminals will use bitcoin mixing services, which allow the person to “mix” their bitcoins with other users and mess up the links between people’s addresses.

The aim is to make it practically impossible to identify the origin and destination addresses of these illegal Bitcoin transactions. This way, criminals can withdraw money without fear of ever being identified. In addition, many wallet providers and online crypto exchanges have few, if not no anti-money laundering (“AML”) or Know Your Customer (“KYC”) regulations, which is a very attractive option for cyber criminals.

Third, the lack of or inconsistent regulation of the cryptosphere makes the detection of large Bitcoin transactions less likely – both in the initial Bitcoin transaction and when the criminals attempt to “withdraw” their Bitcoins and convert them into cash.

Traditional finance and banking options are heavily regulated at both state and federal levels. On the other hand, cryptocurrencies are loosely regulated. This makes the use of cryptocurrencies attractive to criminals who believe they can evade the regulation and control of various law enforcement agencies at home and abroad.

Warning sign for crypto laundering

Crypto laundering is a crime. Despite the lack of federal guidance on the matter, many law enforcement agencies rely on existing laws and traditional investigative tools to uncover crypto laundering cases. Below are some warning signs for crypto laundering:

  • Transfer of cryptocurrency to wallets in unregulated or less regulated countries;

  • Multiple high value transactions in a short period of time;

  • Bitcoin or other transactions with total amounts just below the amount that would trigger reporting requirements;

  • Instant withdrawal of cryptocurrency deposits;

  • New accounts funded with an amount that is instantly withdrawn;

  • Transactions with multiple cryptocurrencies on many accounts;

  • Deposits from unregulated jurisdictions or jurisdictions with poor AML and KYC regulations; and

  • A wallet that is linked to multiple credit card accounts under different names, or a wallet that is linked to multiple bank accounts.

The above warning signs should be considered by anyone looking to do business with a company that trades cryptocurrencies, law enforcement agencies investigating certain individuals and companies, and AML reviews of crypto service providers.

In addition, the Financial Action Task Force (“FATF”) published a report on money laundering warning signals in 2020, which is intended to support crypto wallet and exchange companies as well as financial authorities.

How a lawyer can defend you against crypto laundering allegations

Federal agencies such as the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) have made particular efforts to investigate suspected crypto-laundry fraud cases. On June 29, 2021, “Doctor Bitcoin” pleaded guilty in an investigation by the DOJ to having operated an illegal business for converting cash into cryptocurrency. This underscores the importance of bringing in an attorney who is experienced in defending against allegations of crypto laundering. Below are some examples of how a lawyer can help you with your crypto problem:

  • Conducting fraud investigations with cryptocurrencies;

  • Advice on Security Token Offerings (“STOs”) and Initial Coin Offerings (“ICOs”);

  • Valuation of cryptocurrencies and assets;

  • Assistance in buying real estate or other assets with cryptos;

  • Advice on AML and KYC regulations;

  • Review of internal and external compliance;

  • Advice on wills, trusts and inheritances of crypto assets and crypto currencies;

  • Preparation of compliance documents or documents relating to coin issues;

  • Advice on customer due diligence;

  • Advice on identification and verification procedures for crypto transactions; and

  • Advising on monitoring crypto transactions for regulatory compliance, suspicious activity and certain money laundering warning signs.

“Using cryptocurrencies like Bitcoin to facilitate online transactions has both advantages and disadvantages. While crypto transactions offer speed, ease of use, and low transaction costs, they can also facilitate sophisticated money laundering programs, illegal purchases, and ransomware attacks. Bitcoin laundering, in particular, is becoming an inexpensive and extremely attractive option for cyber criminals looking to convert illegally acquired cryptocurrencies into legitimate cash. While there are few laws regulating cryptocurrencies, many federal agencies will prosecute companies and individuals who allegedly have been involved in fraudulent crypto transactions under pre-existing laws. Hence, the consequences can be just as severe – fines and penalties, levy orders, injunctions, and possibly jail terms. ”- Dr. Nick Oberheiden, founding attorney for Oberheiden PC

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Crypto laundering becomes a serious problem for law enforcement agencies as cyber criminals continue to exploit new and emerging technologies for financial gain. Criminals are attracted to the cryptocurrency Bitcoin because it is easy and practical to move digitized money, because these transactions are very difficult to track and because there is no uniform regulation of cryptocurrencies.

Recognizing warning signals is an important safeguard for individuals, businesses, and law enforcement agencies. In fact, law enforcement agencies have been particularly eager to investigate suspected crypto laundering cases based on certain warnings.

© 2021 National Law Review, Volume XI, Number 287

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