Bitcoin was and continues to be both an innovation for businesses seeking to streamline operations with blockchain technology as well as a challenge for federal agencies pursuing uniform cryptocurrency regulation. At the same time, cyber criminals have capitalized on Bitcoin to help them perpetrate elaborate money laundering schemes.
Since Bitcoins are online currencies with no single financial authority and operate with relative anonymity, criminals prefer to turn towards online exchanges over physically laundering mounds of cash across international borders.
This article explains Bitcoin and its use in money laundering, the increase in money laundering, and recent federal investigations for crypto laundering and crypto fraud.
Bitcoin Meets Money Laundering: Crypto Laundering
Bitcoin was the first blockchain cryptocurrency that has become extremely valuable. People are increasingly willing to trade Bitcoin for goods, services, and cash. Bitcoin transactions are stored on the decentralized public ledger and are verified by using a substantial amount of computing power. “Decentralized” here means that no single entity or person controls the Bitcoin network.
Crypto laundering is defined broadly as concealing and moving illegally obtained digitized currencies in an effort to make them look and appear legal. Cryptocurrencies are becoming the preferred payment method for cyber criminals for a variety of reasons including the following: difficult to trace; lack of consistent federal regulation; low transaction costs; lack of financial intermediaries; ease in using cryptos; etc. Uncovering and tracing laundered cryptocurrencies continues to be a major problem for law enforcement agencies.
The Increase in Money Laundering Via Crypto Exchanges
The advent of blockchain technology secured by cryptography has allowed for an entirely new system of payment. Traditional financial systems require a central bank authority such as the Federal Reserve, while there are no central authorities or controllers with cryptocurrencies. The technology underlying cryptocurrencies such as Bitcoin is the blockchain—the decentralized ledger with no single controlling entity or person.
Prior to crypto transactions, money laundering fiat currencies required that the criminal have a bank account and complete all the bank’s verification and identification procedures before attempting to transfer the illegal funds across multiple bank accounts controlled by the criminal. Such activities are heavily regulated by a central banking authority.
Crypto exchanges are an innovation to the cyber criminal seeking to launder assets. With crypto exchanges, there are far fewer identification measures required and, most importantly, there is no centralized authority. Transactions only need the wallet address of the sender and recipient in order for transfers to take place. Such transfers are not monitored, flagged, or reviewed by any third-party intermediary or banking authority. There are also no paper trails with crypto transactions aside from the record on the blockchain.
In the beginnings of the crypto era, cyber criminals would “cash out” at one of the more common cryptocurrency exchanges. However, because of the increase in crypto laundering schemes, many crypto exchanges have increased their anti-money laundering (“AML”) and know-your-customer (“KYC”) rules. This has, in turn, necessitated that cyber criminals find an alternative way to complete their crypto scams.
Instead of turning to major exchanges, cyber criminals are now using unlicensed exchanges, many of which operate out of foreign jurisdictions with few or no AML/KYC rules or that do not have extradition treaties with the United States.
To complicate matters even more for law enforcement, cyber criminals have undertaken certain tools to further obscure the movement of their illegal funds such as “chain hopping” (moving quickly to and from multiple cryptocurrencies) or “Bitcoin mixing” (mixing up illegal funds with the legitimate coins of other users.)
“With the introduction of new technologies comes the potential for exploitation by cyber criminals. Criminals are capitalizing on the novelty of cryptocurrencies to launder money and evade multiple jurisdictions’ AML laws. Crypto laundering has caused many global regulators to take action and attempt to bring cryptocurrencies, online exchanges, transfers and trading, and other transactions within the purview of existing AML regulations or create new legislation. This increases federal scrutiny into the operations of companies that utilize blockchain technology and necessitates that an attorney be retained as soon as possible if you find yourself in the middle of a federal investigation for an alleged crypto laundering scheme.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
DOJ Investigations Involving Cryptocurrencies and Money Laundering
The Department of Justice (“DOJ”) has been particularly active in investigating cryptocurrency investment scams, ransomware attacks utilizing cryptos, and other illegal crypto schemes. Below is a list of a couple of recent DOJ investigations:
- September 8, 2021: The United States Attorney for the Southern District of New York announced charges against Mr. Ackerman and others for starting an alleged cryptocurrency “investment” fund and recruiting hundreds of investors into the investment club. The investors contributed U.S. dollars and were told that their investment would be used to invest in Bitcoin and other cryptocurrencies. Instead, the rates of return cited by Mr. Ackerman were false.
Mr. Ackerman had supported his false statements by doctoring account screenshots that investors were seeing. Instead of investing and trading for the investors in the investment club, Mr. Ackerman stole about $9 million of investor contributions and used this money to provide a lavish lifestyle for himself—which included the purchase of real estate, Tiffany jewelry, vehicles, travel, and personal security services. Mr. Ackerman pled guilty to orchestrating this multi-million cryptocurrency investment scheme that led to investor losses of over $30 million.
- June 29, 2021: The U.S. Attorney’s Office for the Northern District of Texas announced a plea by Mr. Hopkins—who called himself Doctor Bitcoin—for operating a cash-to-crypto conversion business and converting between $550,000 and $1.5 million over the course of about one year.
The plea agreement notes that Doctor Bitcoin admitted that he ran a business that converted U.S. dollars to Bitcoin for a fee and that he often sent Bitcoins to customers’ crypto wallets without verifying the source of the cash. He had also told one customer how to circumvent financial institution reporting requirements and told that customer to lie about the purpose of the business. In addition to failing to conduct thorough verification procedures under federal law, Doctor Bitcoin also failed to file currency transaction reports for high-value transactions.
- June 7, 2021: The DOJ seized 63.7 Bitcoins—valued at $2.3 million—that was paid to ransomware extortionists DarkSide. The funds are allegedly from a May 8th ransom payment paid to individuals in the group DarkSide which had targeted Colonial Pipeline. This was a very public ransomware attack which forced Colonial Pipeline to take portions of its infrastructure out of operation.
Specifically, DarkSide had accessed Colonial Pipeline’s computer network, and Colonial Pipeline was asked to and did pay a ransom demand of about 75 Bitcoins. Law enforcement was able to review the public ledger and track the multiple transfers of Bitcoin. This allowed law enforcement to identify the proceeds of the victim’s ransom payments. The FBI had the “private key,” which allowed it to access the assets from the specific Bitcoin address. The assets from this computer invasion and money laundering scheme were seized pursuant to both asset forfeiture statutes and criminal statutes.
As Bitcoin sweeps across the world with increasing acceptance, criminals remain one step ahead in the crypto sphere by constantly developing new ways to perpetrate online money laundering schemes involving Bitcoin.
Federal regulation of Bitcoin and other cryptocurrencies is inconsistent at best and non-existent at worst. Despite this, many federal agencies have increased their investigative tools and efforts into investigating and prosecuting individuals and companies alleged to have engaged in crypto laundering. The zealous attitude of many federal agencies such as the DOJ and SEC can put companies who use blockchain technology at risk of a federal investigation.