The news will often focus on how cybercriminals, including hackers, steal money from unsuspecting victims. However, for the one stealing the funds, there is one step that needs to be overcome to continue their wicked ways and get paid. That is to get the money they stole, in reality, a portion of it, in their hands. To do this, the cybercriminal needs to launder the stolen funds. Money laundering can be defined as
“…the illegal process of making large amounts of money generated by criminal activity, such as drug trafficking or terrorist funding, appears to have come from a legitimate source. The money from criminal activity is considered dirty, and the process “launders” it to make it look clean.”
In the above definition drug trafficking and terrorist funding are given as examples. Organized crime is a big player in the money laundering network and we should not forget that cybercriminals need to use these networks to get access to money they stole. For instance, a ransomware gang successfully comprises and encrypts the network Fortune 500 company, the company ignores best practices and pays the ransomware gang in Bitcoin to a specified wallet address controlled by the gang. In contrast, this makes the headlines, how the gang laundered the extorted funds rarely does. In this article, we will explore several ways cybercriminals launder cryptocurrency.
Cryptocurrency Exchanges
First, it is important to preface that cryptocurrency exchanges have proved important to the success of the asset class in general. Many exchanges apply anti-money laundering (AML) regulations and Know Your Customer (KYC) policies which are legitimate operations crucial to the market. That being said, not all exchanges are born equal and some have been found to be implicitly supporting laundering operations as well as fraud.
While exchanges that do not follow AML laws or KYC best practices are extensively used by cybercriminals to deposit one kind of cryptocurrency, exchange it for another and withdraw the newly exchanged alt-coin. This is often just the first step in the process to make illegally gained funds appear legitimate. It is important to remember that legitimate exchanges can also be used by criminals by the criminal’s subverting controls. In the past, fake identification documents, or stolen ones, were used by criminals to open accounts on legitimate exchanges. To combat this abuse, some exchanges require potential customers to have a Skype call where random text needs to be provided along with showing ID documents to the camera to prove the potential customer’s identity.
Cryptocurrency Mules
The use of cash mules has been a staple tactic for money launderers around the world. A mule is referred to as someone that transfers funds on behalf of the money launderer. Typically the launderer will utilize numerous money mules, break up, and divide large funds between them in an attempt to remain undetected. The mule will get paid a portion of the proceeds and often are targeted by launderers due to low-income status or poor financial health.
In many ways, the same tactics and techniques apply to cryptocurrency mules. Typically the cryptocurrency launderer will first look to open numerous accounts at exchanges or other cryptocurrency service platforms using the mules as a front with false documents to surpass identification and verification to convert the funds. The second step involves transferring illicitly gained cryptocurrency into recently opened accounts using the created wallets that were done when the accounts were created.
The third step is to open traditional banking accounts so as to turn the cryptocurrency into fiat currency. These accounts are often opened up by mules in a different country, and followed by the last step which is to transfer money from the exchanges to the newly opened accounts. These accounts rarely see balances in excess of 30,000 USD and are only kept open for short periods, in a bid to keep the money laundering operation undetected.
Tumblers
Technically referred to as Cryptocurrency Mixing Services, but simply referred to as tumblers or mixers, these are services that split up the cryptocurrency, move it to different addresses, often change what currency is used via exchanges, and then are later recombined. This results in a new, relatively clean, and very hard-to-trace amount of cryptocurrencies that can now be changed into fiat currency without too much attention drawn.
In cases that involve tumblers, the launderer will use a legitimate wallet, that is relatively easy to trace. It will then be transferred to a wallet or wallets offered on the Darkweb, then sent to numerous other wallets, sent to a second wallet hosted on the Darkweb and then only brought back into a legitimate wallet. The cryptocurrency can then be exchanged for fiat currency like dollars or euros.
Decentralized Peer-to-Peer Networks
Peer-to-Peer (P2P) networks can be defined as a,
“…service is a decentralized platform whereby two individuals interact directly with each other, without intermediation by a third party. Instead, the buyer and the seller transact directly with each other via the P2P service. The P2P platform may provide services such as search, screening, rating, payment processing, or escrow.”
These have proved popular with money launderers looking to clean cryptocurrency as they lower the legal risks associated with attempts to clean ill-gotten gains. Often unsuspecting third parties are used to send funds on their way to the next destination. Most cryptocurrency money laundering schemes end with the clean coin funneled into exchanges in countries with little or no AML regulations. In this regard, the money launderer will look for the P2P network with the least control. It’s here that they can finally convert it into local fiat and use it to purchase luxury or other high-end items such as sports cars or upscale homes.
Crypto is NOT all that bad
While this article focussed on how criminals exploit cryptocurrencies for their ends, the technology is promising and has the potential to completely replace paper and plastic money. Many large corporations now accept digital currency as payment for goods and services, and many banks are considering the use of blockchain technology. It is for that reason it is important to thoroughly investigate how the flaws of this relatively new technology can be used illegally. Through such investigations how these digital assets are used in money laundering is uncovered and important steps are made in developing counter-technologies to combat the crime.
Summing the above, here are the salient points concerning crypto currencies,
- Anonymity and Pseudonymity: While cryptocurrency transactions are pseudonymous (only wallet addresses are visible), this feature can be exploited by individuals engaged in illegal activities, making it difficult for authorities to trace and track transactions.
- Money Laundering: Cryptocurrencies can be used for money laundering due to their relatively high level of privacy and the ability to quickly move funds across borders without the need for traditional financial institutions.
- Ransomware Payments: Cryptocurrencies have been used to facilitate ransomware attacks, where hackers demand payment in cryptocurrency to unlock encrypted data. The pseudonymous nature of transactions makes it challenging for law enforcement to trace and recover the funds.
- Darknet Markets: Illegal goods and services are sometimes traded on darknet marketplaces, which often rely on cryptocurrencies for transactions due to the increased difficulty in tracking these transactions.
- Fraud and Scams: Cryptocurrency investment schemes, initial coin offering (ICO) scams, and Ponzi schemes have defrauded individuals of significant amounts of money due to the lack of regulatory oversight and the speculative nature of the market.
- Regulatory Challenges: The decentralized and borderless nature of cryptocurrencies can make it challenging for governments to regulate and enforce laws related to taxation, consumer protection, and financial stability.
- Volatility: The high price volatility of many cryptocurrencies can lead to significant financial losses for investors and discourage their adoption as stable forms of value.
- Lack of Consumer Protections: Unlike traditional financial systems, cryptocurrency transactions are irreversible. This lack of chargebacks and refunds can leave consumers vulnerable to fraud or mistakes.
- Misuse of Privacy Coins: Privacy-focused cryptocurrencies can provide enhanced privacy features that are attractive to users seeking anonymity, but these features can also be exploited by criminals for illegal activities.
- Cybersecurity Concerns: The digital nature of cryptocurrencies makes them susceptible to hacking and cyberattacks. Exchanges, wallets, and other platforms can be compromised, leading to the loss of funds.
It’s important to note that while cryptocurrencies have legitimate use cases, these risks and drawbacks do exist. Regulatory efforts are ongoing to address these issues and strike a balance between innovation and consumer protection.