Nowadays, technology is advancing at a rapid pace. Because of technological advancements, consumers can now access all options via the internet. Technological advances help in the growth of the Financial sector. Hence, digital Money Laundering and Crypto Cleansing go hand in hand.
The development of the financial sector has introduced new money laundering risks. Hence, the use of mobile devices has increased the rate and effect of money laundering crimes.
What is Money Laundering?
A detailed piece on Money Laundering refers to the definition and its methods. Since the purpose of such crimes is to make money for the person or group who commits the act. Money laundering is the processing of unlawful proceeds to conceal their illegal origin. Therefore, this procedure allows the criminal to enjoy the gains without jeopardizing their source.
Additionally, illegal Income is obtained from extortion, insider trading, drug trafficking, and gambling. These funds are “dirty” and must be “cleaned”. Therefore, each of which varies in complexity and sophistication.
Money Laundering Steps
Money laundering consists of three steps:
First: Introducing cash into the financial system through some means known as Placement.
Second: Layering is a process of carrying out complex financial transactions. This helps to conceal the illegal source of income.
Third: Acquiring wealth generated from the illicit funds’ transactions known as Integration.
Depending on the circumstances, some of these steps is being omitted.
Digital Money Laundering
Since, electronic money, particularly wire transfers incorporating anonymity-protecting numbered bank accounts. Which provides as simple a method of moving value. Internet service providers and other network resource maintainers tend to sabotage that purpose. While several cryptocurrencies have sought to provide extra transaction anonymity for various reasons. Cryptocurrencies such as ZCash and Monero provide unlinkable anonymity. Hence, Let us understand Digital Laundering and Crypto Cleansing.
Ways of Digital Money Laundering
Additionally, a popular way of digital money laundering is to use a currency conversion business. This business covert dollars into digital currency. This digital currency refers to as Liberty Reserve. For a modest price, the receiver could change the Liberty Reserve currency back into cash. Hence, the US government shut down Liberty Reserve in May 2013. There are different ways in Digital Money Laundering and Crypto Cleansing.
Online gaming is another popular method of money laundering. After conversion, it then once again gets transformed back into real money. Examples of such online games are Second Life and World of Warcraft,
There are both legal and illegal online gambling sites. Regulators cannot supervise them as these sites are not registered. Money laundering through online gambling sites is done in a variety of ways. Chip Dumping is one of them. It is an application in which one or more players lose to another or transfer all their chips to a single player. So, the player who obtains all the chips can make money, and all the money played by all players becomes clean money.
Since the growth of the gaming business has increased the hazards of money laundering. Due to the lack of controls in this industry, it has become a potential target for money laundering. Financial criminals use illegal credit cards to buy in-game stuff. They sell these stuff at a price lower than that of the black market. As a result, they wash their black money and convert it to clean money.
People nowadays spend an increasing amount of time on social media. Financial crimes committed through social media platforms are on the rise. Money launderers can create bogus money-making initiatives on social media. They even try to entice people to take part in them. Money launderers use individuals and attack their networks. They even try to withdraw funds from their accounts. This means that financial fraudsters exploit these individuals as money mules. Hence, they usually target young people.
Criminals target people with accounts that have no criminal history. They do this to surpass any detection. Then the money to be laundered gets transmitted via bank transfer. The transfer takes place from the mule account to the third-party bank account. This money gets converted into a virtual currency, such as Bitcoin. Therefore, this technique is difficult to detect because of the complexity of the transactions.
Technological improvements have made it easier to set up E-commerce enterprises. It helps them to hide behind legitimate store websites. As a result, money launderers began to use e-commerce websites. They try to exploit this weakness and continue their operations. Usually, financial crimes that use these channels refers to as digital-age money laundering. Payment companies should deploy modern cyber intelligence technology to safeguard themselves from laundering. Therefore, this technique discloses hidden e-commerce networks, vendors, and related operations.
What is Cryptocurrency?
Cryptocurrency is decentralized digital money based on blockchain technology. You might know some well-known crypto’s like, Bitcoin and Ethereum. There are over 5,000 distinct cryptocurrencies in circulation. You can use cryptocurrency to buy conventional products and services. People invest in cryptocurrencies the same way they invest in assets such as stocks. Bitcoin is a fresh and interesting asset class. Investing in it can be risky. Hence, you must conduct extensive research to and grasp how each system operates.
How does Crypto Works?
A cryptocurrency is a digital, encrypted, and decentralized currency. It has no central body that manages and maintains its value. Instead, these responsibilities are distributed among cryptocurrency users over the internet.
Satoshi Nakamoto proposed the first cryptocurrency, Bitcoin. He published it in a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008. The idea was characterized by Nakamoto as “an electronic payment system based on cryptographic proof rather than trust.” That cryptographic proof takes the form of transactions. They are verified and recorded in a program known as a blockchain.
What is Crypto Cleansing?
In 2017, new bitcoin products capable of simplifying and decentralizing global commerce sparked broad public and investor interest in digital currency technologies. Digital Money Laundering and Crypto Cleansing are regarded as two different aspects. Unfortunately, these technologies also produce new money-laundering tools. It allowed governments such as Iran, North Korea, and Russia to avoid international sanctions.
Criminals and crime syndicates continued their interest in money laundering methods. The term “crypto cleaning” refers to digital money laundering. The steps involved in crypto cleaning are like those used in traditional laundering. Launderers may use pseudonyms using encrypted email services. They also set up anonymous e-wallets and use log-less VPNs to aid in the digital cleansing process.
Placement, Layering, and Integration Process
Placement: First, crypto holders must “deposit” their cryptocurrency. Rather than making a purchase or depositing monies into the financial system. Digital “placing” frequently entails sending tokens to a digital storage site (e.g., a “wallet”). A launderer will open many wallets.
Layering: Common layering methods include “mixing” or “tumbling” crypto and dividing crypto. To break the audit trail, one method of mixing is to exchange existing token addresses with temporary digital wallet ones. Services like Bitmixer and Helix exchange “dirty coins” for “clean coins”. Cryptomixer.io and Bitcoin Blender provides an alternative solution. The solution includes a high-volume mixer. Other types of layering include:
- Transferring tokens between wallets.
- Swapping tokens for various altcoins.
- Exchanging tokens for “privacy currencies”.
Integration: Cryptocurrency can be turned into fiat currency. Conversion takes place through digital exchange and is used in the traditional financial system. Digital money launderers might not need to incorporate the funds. As the popularity of digital money grows, so does the ability to use it for other reasons (legal or not). Even without having to swap it for fiat currency. To buy huge quantities of illicit substances from an offshore provider, for example.
The examples below show the process for laundering illicit funds using digital currency:
Scenario 1: Transition from fiat currency to primary digital currency.
If a global crime syndicate aims to purify unlawful money. It can enter cryptocurrency markets in two ways:
First: Buying digital currency from a digital exchange, using a syndicate’s bank account.
Second: By buying using cash or debit card at digital currency ATMs. This requires them to have anti-money laundering (AML) programs.
As a result, money launderers open online accounts with digital currency exchanges. Examples of such exchanges are Coinbase, Gemini, Bitstamp, or Kraken. They all accept fiat currency from regular bank accounts.
Launderers can increase their online privacy by using encrypted email services. They use anonymous e-wallets (e.g., Jaxx, Samourai, or BitLox). They also use log-less virtual private networks (VPNs) (e.g., Mullvad or Windscribe). This all helps them to stay hidden.
Use of Middlemen in Money Laundering
Account opening normally necessitates the submission of extensive personal information. This information helps in the account verification process. Launderers may use “straw men,” or money laundering middlemen. These middle have clean histories and confirmed employment. They also have direct deposits which provide an extra layer of separation. They can also buy verified accounts from users on social media networks such as Reddit. Digital Money Laundering and Crypto Cleaning are the main aspects.
Once authenticated, the digital exchange account can accept deposits in fiat currency. The deposit takes place by wire transfers, automated clearing house (ACH) transactions. The option of deposit through a bank account or credit/debit card number is also there. Hence, the funds can then be used to invest directly in a “main coin,” such as bitcoin, Ethereum, or Litecoin.
These basic coins can act as a bridge between fiat currency and alternative digital currencies. They are known as “alt-coins.” Alt-coins can only be purchased with primary coins. The purchase takes place on advanced exchanges (i.e. not with fiat currency). There are many different types of alt-coins, each with its own set of uses. Therefore, others include payment-oriented coins with lightning speed and privacy coins.
No Audit Trail
While some standard decentralized blockchain coins keep a complete transaction audit trail. While certain alt-coins do not. This private node to node (N2N) coin encrypts transaction details so that only the party making the transaction can see it. This allows computation of the data needed to help transactions without the need to decrypt it first. The data and “proof encryption”, which verifies transactions without revealing the details.
Scenario 2: Bitcoin blending: primary coins (basic exchange) to privacy alt-coins (advanced exchange)
Assume the launderer bought bitcoin using US dollars on the standard Coinbase exchange. The bitcoin digital wallet represents bitcoin ownership. Hence, it has its own unique and traceable digital address as well as a unique QR code.
Using Mixing or Tumbling techniques
Launderers use a technique known as “mixing” or “tumbling” to hide the audit trail of the primary coin. There are various Mixing services, like Bitmixer or Helix. They perform main coin address swaps against temporary digital wallet addresses. They don’t need authentication or verification. ShapeShift, enables the usage of a backup address in case if the transaction fails. Therefore, launderers purposefully use fake receiving addresses to re-route transactions to the backup address. They do this to circumvent the audit ledger.
The next stage is to move the mixed bitcoin holdings to a sophisticated digital exchange. But in the case of Litecoin and Ethereum, it just takes minutes.
First, the launderer’s bitcoin arrives in the advanced digital exchange bitcoin wallet. Hence, they exchange it for a privacy cryptocurrency like Zcash, Verge, Monero, Dash, or Desire. Desire is the first blockchain that offers its mixing service.
Scenario 3: numerous privacy coins, exchanges, and digital addresses are layered together.
The layering process is a succession of money movement techniques. This technique helps to conceal the illegitimate source of cash. Money launderers secretly layer cash across digital currency exchanges, privacy coins, and crypto-wallets. It can belong to anyone after purchasing privacy coins on an advanced exchange. Money launderers can break the audit trail after several levels. Therefore, they try to purify illicit cash for reintegration into the traditional financial system.
Scenario 4: Integration with a “bust-out”
If the launderer believes that reintegration into ordinary bank accounts is too hazardous, then the monies are moved into real estate. This helps in avoiding capital gains taxes.
Additionally, transferring digital assets to a portable crypto wallet is the most secure approach. It helps to shift funds securely for integration. These flash drive-sized devices enable couriers to avoid risky bulk currency smuggling. This takes place through transporting funds discreetly. A courier with a printout of the digital address or QR code can accomplish the same purpose. Laundering cells may further restrict access to funds throughout their logistical network. Hence, for doing this they need a complex pass known only to the source and intended recipient.
As a result, a currency cleansing operation like this could clean $10 million per 10 people each week:
- A total of $10 million is distributed among ten intermediaries. Each responsible for cleaning $1 million.
- Each middle man owns ten transferable digital currencies. This allows them to divide their $1 million into $100,000 chunks.
- Moreover, each middle man has wallet addresses for each digital currency. They have this with ten distinct exchanges. This allows segmentation down to $10,000 increments.
- Each middle man then withdraws $5,000 in two separate transactions. This withdrawal takes place in their accounts at ten different financial institutions.