Money laundering is a common issue in many crypto crimes. Bad actors use the anonymity of the blockchain to hide where their illegal profits come from. They try to turn these profits into cash and mix them with legal money in banks to cover their tracks. In this article, we will drill down on crypto money laundering and discuss measures such as Bitcoin AML check that prevent illegal activities.
How Cryptocurrency Money Laundering Works
Here are the most common ways criminals use crypto for fraud activities:
- Nested services often misuse exchanges for money laundering. These services use the addresses of exchanges, making transactions appear as if they originate from the exchange instead of the real service. In an incident from August 2020, the U.S. Department of Justice filed a complaint against 280 cryptocurrency addresses involved in laundering around $28.7 million stolen by North Korean hackers (Lazarus Group) from an exchange. The illicit funds were laundered through Chinese OTC crypto traders after being stolen from an exchange.
- Mixers blend digital assets from various addresses to increase anonymity before sending them to legitimate businesses or major exchanges. In March 2023, the US Department of Justice announced the global takedown of ChipMixer, responsible for laundering over $3 billion in crypto.
- Crypto money launderers frequently use gambling platforms, where funds are deposited through a mix of identifiable and anonymous accounts. These funds are then either cashed out or used for bets, often in collaboration with affiliates. By legitimizing the money through payouts from the gambling account, it gains legal status.
Cryptocurrency AML Checks
Crypto exchanges and other providers of Virtual Asset Services (VASPs) adhere to guidelines set by the Financial Action Task Force (FATF) to reduce the risks connected with crypto in money laundering and terrorist financing. They must have strict compliance requirements, that touch upon:
- Listing on crypto exchanges (they conduct due diligence on projects before allowing them to list their tokens to ensure that the crypto project is not associated with money laundering or other illicit activities).
- User onboarding (AML checks are integral during the onboarding process for new users on exchanges. This involves verifying the identities of users through know-your-customer (KYC) procedures to prevent illicit activities).
- Crypto payment processors (exchanges may engage with crypto payment processors, necessitating AML Bitcoin checks to verify the legitimacy of transactions processed through these services).
- Crypto wallet services (AML crypto checks are essential to verify user identities, monitor transactions for suspicious activities, and maintain the secure use of digital assets).
These efforts help protect exchanges against fraud activities, related to money laundering, financing of terrorists, and bypassing sanctions, ensuring a secure crypto environment.
