Cryptocurrency as a Money Laundering Tool

DEFINITION OF CRYPTOCURRENCY

Crypto is a digital or virtual currency that uses cryptography technology for security. Unlike physical money, crypto is not regulated by the government or Central Bank, but operates on a decentralized network called blockchain. This allows direct transactions between users without intermediaries, like a Bank.

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Crypto, as a decentralized financial system, is defined as a system that is not regulated by a single authority. Instead, transactions are carried out directly between users through a distributed computer network (read blockchain). Each user has full control over their assets, and transaction rules are determined by the protocol run by the network, not by a specific institution. Thus, no one party can unilaterally control or change the rules.

Meanwhile, the conventional (centralized) financial system is a system in which certain authorities such as Banks and the Government have full control over transactions and the flow of money. An example is a Bank, where all transactions must go through the bank as an intermediary, and the Bank has the authority to regulate financial policies, such as money transfers. The Bank can freeze accounts, change rules, and restrict access.

DEFINITION OF MONEY LAUNDERING

Money laundering is the process of concealing the origin of money obtained from illegal activities, so that it appears to be obtained from legal sources. The main purpose of money laundering is to obscure or clean up the traces of illegal money, so that the money can be used in the financial system without arousing suspicion, and without knowing that the money comes from illegal sources. Money laundering is often associated with crimes such as drug trafficking, fraud, or corruption.

Money laundering usually consists of three main stages as follows:

1. Placement (placement), is usually done by depositing money into a Bank to buy valuable assets such as cars, property, and other luxury goods, or breaking up cash into several small parts to avoid detection by the authorities.
2. Layering (layering), is carried out by breaking the connection between money and its source, by making transfers between accounts, buying or selling assets, and using complex transactions to make it difficult to trace. The aim is to obscure the trail of money so that it is difficult to trace.
3. Integration (integration), at the final stage after going through the layering process, the money re-enters the formal financial system and looks like money from legal and legitimate activities. At this stage, the money that has been “cleaned” is used to buy assets, property, or official goods, making it difficult for the authorities.

COMMON MONEY LAUNDERING SCHEMES

1. Smurfing (Structuring), which is an activity carried out by dividing a large amount of money into several small transactions so as not to be detected by the authorities.
2. Use of fictitious companies, which is using fake companies or shell companies to launder money through seemingly legitimate fund flows.
3. Casinos, perpetrators launder money by gambling at casinos by buying chips with cash, playing a few games, and then exchanging the chips back for checks so that it appears to be a legitimate win.

The methods above are common and have been widely used by money launderers. Some of the money laundering schemes above can be anticipated by law enforcement, so they are no longer relevant and pose a high risk of being detected by the authorities. Along with the advancement of technology, financial systems and mechanisms are also developing. Like a double-edged sword, technology on the one hand can facilitate human activities, while also increasing new options for criminals.

Crypto technology in principle stems from criticism of the banking system which is too central, so crypto emerged as a decentralized digital currency platform as an answer to the gap above. The decentralized crypto system is used by criminals as a transaction medium, a place for money laundering, and as a currency for other criminal activities. However, we certainly cannot blame technology; technological progress is inevitable and cannot be stopped.

Money laundering through crypto platforms has become a major concern for the authorities, due to its anonymous and difficult-to-trace nature and the absence of a central authority overseeing transactions. This money laundering mechanism involves a series of techniques designed to obscure the origin of illegal funds, making them appear difficult to detect. 

CRYPTO CHARACTERISTICS THAT FACILITATE MONEY LAUNDERING

1. Anonymity, there are several cryptos that are indeed designed to provide full privacy to their users, so that user identities will not be revealed in transactions.
2. Decentralized, crypto operates on a blockchain network where there is no central authority overseeing transactions.
3. Fast international transactions, crypto allows cross-border transactions quickly and cheaply without time and region restrictions.
4. Lack of regulation, the absence of established regulations related to crypto in various countries allows criminals to exploit this loophole.

MONEY LAUNDERING SCHEMES THROUGH CRYPTO

1. Placement (Placement)

• Direct purchase of crypto directly, the perpetrator buys crypto with money from crime through an exchange platform, which has lax or non-existent user identification (KYC) procedures.
• Peer-to-peer (P2P) Exchange, users can directly buy crypto from other people without intermediaries or without KYC, making it difficult for authorities to track.

1. Layering (Layering)

• Tumbling, buying crypto using a mixing method from various other users, then the user will receive an equivalent amount back, but from a different source, making transaction tracking very difficult.
• Cross-chain Transfer, the perpetrator transfers between cryptos, such as from Bitcoin to XRP, to complicate transaction tracing.
• Multiple wallets, the perpetrator can have many digital wallets on various platforms and store the crypto in a dispersed manner across each wallet, making transaction tracking difficult.
• Decentralized Finance (DeFi) is a decentralized financial system that operates on a blockchain without intermediaries. Transactions using DeFi will obscure the origin of user funds.

1. Integration (integration)

• Reselling crypto for cash, after the funds go through the process of layering, the perpetrator can exchange their crypto for fiat currency on an exchange.
• Investment in legal assets, by buying legal assets using crypto, then reselling them as a legitimate source of funds.
• Using fictitious businesses, the perpetrator can create fictitious businesses that accept payments via crypto, then these businesses can claim that the funds were obtained from legitimate commercial activities.

PREVENTION AND LAW ENFORCEMENT SOLUTIONS

Addressing money laundering through cryptocurrency requires a comprehensive and collaborative approach. Here are some steps that can be taken by law enforcement and regulators:

1. Clear Regulations: Introducing and implementing specific regulations for cryptocurrency, including a clear definition of what cryptocurrency is and how transactions should be reported.
2. KYC and AML: Ensuring that all cryptocurrency exchange platforms implement Know Your Customer (KYC) and Anti-Money Laundering (AML) policies. This includes user identity verification and reporting of suspicious transactions.
3. International Cooperation: Given the global nature of cryptocurrency, cooperation between countries is essential. This includes sharing information and best practices in law enforcement.
4. Training and Capacity: Providing training to law enforcement and regulators on blockchain technology and how to detect suspicious transactions that may be related to money laundering.
5. Monitoring Technology: Adopting technology that can assist in monitoring cryptocurrency transactions. The use of data analysis tools can help detect suspicious patterns.
6. Public Education: Raising public awareness about the risks of money laundering associated with cryptocurrency and how to report suspicious activity.
7. Strict Sanctions: Implementing strict sanctions against individuals or entities involved in money laundering through cryptocurrency to provide a deterrent effect.
8. Policy Research and Development: Continuously conducting research to understand new developments in cryptocurrency technology and their impact on money laundering, as well as developing policies that are responsive to these changes.

Money laundering through cryptocurrency occurs by exploiting technological advancements and riding on the anonymous, decentralized nature of crypto. Perpetrators can use various methods as described above. With an integrated approach, law enforcement and regulators can be more effective in preventing and combating money laundering through cryptocurrency.

Author:

Mhd. Fadly Siregar, S.H.

Dr. Utary Maharany Barus, S.H., M.Hum.

Dr. Affila, S.H., M.Hum.