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Cryptocurrencies and the fight against money laundering

Sam Chadwick
Sam Chadwick
Director of Strategy and Innovation, Refinitiv
Men in balaclavas typing on keyboards. Photography: Dado Ruvic
Photography: Dado Ruvic

As the global use of cryptocurrencies continues to gather momentum, what are the potential risks and implications for compliance professionals and how can they stay a step ahead of money launderers?

  1. Criminal networks are adept at exploiting loopholes in regulations, making the risk of cryptocurrency-related reputational fall-out very real.
  2. Regulation of cryptocurrencies is still uncertain, but that’s no excuse for KYC and AML failures if your business inadvertently deals with money launderers.
  3. RegTech solutions provide the tools needed to establish and verify customer and counterparty identity with greater speed and efficiency.

Bitcoin, arguably the most widely recognized cryptocurrency, is fast approaching a decade of existence. In January 2009, the first version of Bitcoin was released and later that month the first ever Bitcoin transaction was concluded.

It’s also worth remembering that cryptocurrencies are decentralized, meaning that they are not backed or regulated by a specific government or central regulator.

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Are cryptocurrencies playing into the hands of money launderers?

Virtual currencies are traded on peer-to-peer networks that criss-cross the globe and rely on market demand to determine their relative prices. These prices therefore rely heavily on perception at any given time.

Do cryptocurrencies help money launderers?

In the world of money laundering, there are a number of requirements common to all players, with convenience and anonymity possibly the two most important of these.

Since both are offered by often anonymous digital currencies, it is unsurprising that these digital currencies hold a natural appeal for money launderers.

Many people have heard of Bitcoin, but the list of perhaps lesser-known cryptocurrencies is extensive — Litecoin, Dash, Ethereum, Stellar — the list goes on.

Some of these currencies, such as Monero and Zcash, are entirely anonymous and cannot be linked to an individual or entity.

This means that cryptocurrencies can have the very real potential to aid and abet the cause of the money launderer.

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Money laundering schemes

Of course, there is a counter-argument in that some cryptocurrencies — such as Bitcoin, Litecoin and Ethereum — work because their transaction information is public and permanent, providing a substantial open source of data for analysis.

By making this data public, these cryptocurrencies hinder money laundering efforts. Startups like CoinfirmChainalysis and Elliptic offer services that are based on this.

However, a recent view to emerge in the 2017 U.S. Department of Justice Drug Enforcement Administration report was that “emerging as a money laundering threat, virtual currencies, such as Bitcoin, enable transnational criminal organizations (TCOs) to easily transfer illicit proceeds internationally.”

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The report went on to highlight China as a pivot point for many money-laundering schemes.

Essentially, these TCOs purchase goods from China using digital currency and then ship them to other locations (often Mexico or South America) where they are paid in local currency.

The bitcoin economy

Regulation of cryptocurrencies

It is evident that there is currently no clear global view on the regulation of cryptocurrencies.

This, allied to the fact that sophisticated criminal networks are adept at exploiting any loopholes in regulations, means that the risk of cryptocurrency-related reputational fallout is very real.

For risk and compliance professionals navigating ever-increasing regulations governing KYC and AML, inadvertently doing business with money launderers is nothing short of akin to disaster.

This growing risk simply adds to the juggling act already facing many compliance departments — one in which they must manage ongoing regulatory change, reduce costs and effectively do more with less.

How can RegTech help drive innovation in KYC?

Developments in the regulatory technology — RegTech — space, however, are rising to the challenge.

The aim of RegTech is to harness the power of technology to improve the efficacy and efficiency of workflows in compliance departments, reducing the time and cost associated with remaining compliant.

Cost reduction is sorely needed: our 2017 Cost of Compliance report reveals that approximately half of respondents continue to expect bigger compliance budgets in 2018.

Buoyant bitcoin stirs crypto-bubble fears
Buoyant bitcoin stirs crypto-bubble fears

How can RegTech help drive innovation in KYC?

Financial institutions act as vital gatekeepers by screening new customers and carrying out ongoing checks so that those with criminal intent don’t use banks and businesses to launder money and conduct corrupt business practices.

RegTech solutions provide the tools needed to help establish and verify customer and counterparty identity with greater speed and efficiency, although this is a continuing challenge in the world of crypto transactions.

Part of the solution could be offered by centralized utilities that enable sensitive customer identification information to be uploaded, verified and maintained in a secure online portal.

Such repositories are an additional resource for regulators as they continue their efforts to close in on money launderers and their activities.

One thing is certain: Cryptocurrencies are here to stay and compliance professionals should take urgent steps to understand the new risks they introduce, so that they can equip their teams to better navigate an ever-changing risk landscape.

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