Crypto Laundries: Are Criminals Cashing Out Billions with Crypto?

• Europol, the European Union Agency for Law Enforcement, estimated that about 3-4% of all illicit proceeds in Europe are laundered through cryptocurrencies.
• The  United Nations Office on Drugs and Crime (UNODC) estimates that between 2-5 % of the global GDP is laundered each year in the world. That's $610 billion and $1.7 trillion each year. Known crypto laundering only made up $23.8 billion, less than 4% of the most conservative money laundering estimates.

Breaking curses

Crime has entered all spheres of our society, and there is nothing unusual about that. Malicious actors have been doing a really good job in keeping up with emerging technological developments as opposed to regulatory authorities and government agencies that are typically a step behind.

Blockchain and cryptocurrencies are still considered as a new technology that is on the path of mass adoption. Throughout the last few years, it became a significant source of earning through mining, trading or starting new projects and gathering capital through Initial Coin Offerings (ICOs). 

The involvement of multiple industries such as gaming, finance and retail in the development of the crypto market has added up to its growth and earning attractiveness.  

If you are a frequent reader, you probably remember that we explained how to avoid typical scams luring in the crypto space in this article: ‘The most common crypto scams & how to avoid them’. 

Money laundering is just a type of crime that found its place within the crypto ecosystem just as it did within the traditional financial system. While blockchain technology is full of useful perks, criminals took advantage of some of these traits. 

In this article, we will guide you through the concept of money laundering and how it corresponds within the crypto space. There have been many prejudices against cryptocurrencies, but crypto isn’t any different from the traditional system when it comes to criminal activities.  

Blockchain technologies and crypto assets, especially Bitcoin, got a bad name due to criminal activities and made headlines frequently. Now it is time to do some myth-busting once again by explaining the traditional crime of money laundering within the crypto space. 

Understanding money laundering

Most criminals have one thing in mind, and that’s monetary profit. Malicious actors get their hands on money, yet a second question arises: how to make it look legitimate? The money needs to be incorporated into the legitimate financial system. 

Making ‘dirty’ money appear legitimate – this is the simplest definition of money laundering. A more complex definition goes like this – money laundering refers to the illegal process of making large amounts of money, generated by criminal activity, such as drug trafficking or terrorist funding, that appear to have come from a legitimate source. 

Money laundering encompasses devastating social and economic consequences. Primarily, it provides fuel for drug trafficking, terrorism, arms dealing and other types of criminal activities. There is a wide range of anti-money laundering laws and regulations in the world that were set out long before crypto even stepped on the scene.  

Criminals are always on their toes when it comes to finding new ways to disguise illegal money. They can do self-laundering or hire professionals to do that for them. In fact, there are many ways to launder dirty money. 

For example, the smurfing technique refers to a criminal actor breaking up large chunks of cash into a broad number of small cash transactions spreaded over many divergent accounts. Banks are required to report large cash transactions and other suspicious activity that might be signs of money laundering, but money launderers go unnoticed by making many small transactions.

Other money laundering common methods include investing in commodities, gambling, counterfeiting, using shell companies or using wire transfers, currency exchanges and cash smugglers. In other words, there is an imaginary big book on how to launder money, and crypto is just a recently added section.

The three stages of money laundering

The whole process usually includes three steps. First we have the placement stage where the dirty money is being injected into the legitimate financial system. Secondly, the layering stage is about disguising the source of the dirty money through a number of transactions and bookkeeping hacks.

Finally, the integration stage means that the money has been laundered and withdrawn from a legitimate account. 

Money laundering presents a crime per se, and criminals don't want to risk getting caught for two crimes. They have invented sophisticated schemes to trick financial institutions. Basically, it has been said that financial crime strikes at the core of our economic security.

Mapping the cryptocurrency laundering ecosystem

Same as traditional money laundering, crypto money laundering refers to the activity of making cryptocurrency obtained through criminal activities appear legitimate. Criminals need to wash their dirty crypto assets by converting them into fiat money and integrate it into the legitimate financial system. 

Typically, crypto laundering includes sending crypto assets to unregulated or risky crypto exchanges or committing fraud by presenting fake or stolen identity documents at a regulated crypto exchange. 

We have mentioned variants and stages of traditional money laundering. Since blockchain technology is a new development, the crypto space includes some specific activities. 

For example, token swapping and mixing are common methods in the crypto laundering space. If criminals decide to mix, they usually insert their cryptocurrency into specific software tools that scramble crypto assets from numerous addresses.  

When conducting the token swapping activities, malicious actors use decentralised exchanges to trade less liquid assets for those that are more liquid and accepted on major exchanges, such as Ether and Bitcoin. 

Some other techniques include, for instance, chain hopping. Chain hopping involves hopping between multiple cryptocurrencies, typically in rapid succession, in order to avoid detection or to employ cryptocurrencies with more anonymity.

Still, it resembles traditional money laundering. For example, money laundering through real estate transactions involves overvaluation or undervaluation of properties, along with trading properties in rapid succession and by using third parties that are able to distance these transactions from the criminals.

Why do criminals use crypto?

If you wonder why money launderers are now all about crypto, here is the answer: they're really not.

The use of crypto for illicit purposes is still a minute part of crypto use -- as little as 1% according to data from as early as 2017 and as recent as 2022.

Nevertheless, there are some aspects of crypto tech and crypto markets that are poorly understood by criminals and by enforcement. Some venues in the market are vulnerable to financial crime due to its rapid development, lack of regulation, and perceived anonymity.  

For example, a research by the blockchain analytics firm Elliptic found that cross-chain bridges are used to send crypto assets across blockchains, bypassing a centralised service that is able to trace transactions.

However, keep in mind that most of these activities don’t happen on the blockchain and its core infrastructure, yet in the surrounding ecosystem such as cryptocurrencies’ issuers and wallet providers. Much like you'd expect from any kind of money, and in fact, to a greater degree in traditional money markets owing to a lack of transparency in conventional banking and finance (different from the blockchain's transparent architecture of transactions).

On the bright side, a number of forensic companies are engaged in developing tools for analysing illicit activities on the Bitcoin network, which may further discourage the few criminal groups from taking further action and developing other crypto laundering techniques.

The dark side of exchanges

 When cryptocurrencies emerged, criminals would just cash out using big crypto exchanges. In the meantime, crypto exchanges began to worry, and many of them implemented Anti-Money Laundering (AML) and Know-Your-Customer (KYC) procedures.  

Stricter rules pushed criminals towards unlicensed exchanges that usually don’t care about compliance with AML laws or request KYC information. The main downside for criminals when dealing with dark exchanges lies in their lower liquidity. 

Darknet markets provide money laundering services as well. However, some other criminals also like to use on-chain money mixers to convert dirty cryptocurrency by obfuscating blockchain transactions or traditional intermediaries such as shell companies or offshore accounts. 

Additionally, there has been a growing use of chain hopping, especially by North Korean hackers and criminal groups. Their preferred method is using decentralised finance (DeFi) platforms for swapping cryptocurrency without taking custody of funds or KYC proceeds.

Cross chain bridges are vital to the development of DeFi as an alternative to traditional financial institutions, but the flipside is that they have been used for conducting criminal activity.

Criminals are becoming more security aware. Even though Bitcoin remains the most used cryptocurrency, a shift towards more privacy-oriented crypto assets is taking place. Since there are over 20,000 cryptocurrencies and around 500 exchanges, it is obvious why the crypto space is attractive to bad actors.

Stages of crypto money laundering

Similar to its traditional counterpart, the first stage of crypto money laundering is known as the placement stage. Dirty money can be present in two divergent forms, either as a cryptocurrency or in the form of fiat currency which is used to purchase crypto.

The second layering stage, criminals tend to conduct transactions to disguise the funds’ illicit origin. Crypto money laundering relies on the fact that crypto transactions are semi-anonymous.

Additionally, criminals may use extra methods of anonymising to further disguise the illicit origin due to the fact that blockchain transactions are theoretically traceable.

In most cases, crypto launderers tend to further disguise the funds by using crypto exchanges and conducting more financial transactions or participating in ICO.

The Bitfinex laundering

Back in 2016, the crypto exchange Bitfinex was hacked, and the perpetrator stole 119,754 Bitcoin worth about $71 million. A few years after the hack, a married couple, Heather Morgan and Ilya Lichtenstein appeared in federal court due to charges of attempting to launder the stolen cryptocurrency.  

Following the Bitfinex hack, the stolen Bitcoin was rapidly transferred to an outside wallet. At first, Morgan and Lichtenstein weren't accused of the hack, only of laundering the proceeds of the hack.

However, it appeared that the young couple never tried to launder most of the stolen coins since approximately 80% of the total amount never left the wallet. Was it a change of heart or is laundering crypto really hard? It is for sure that the level of difficulty rises when it comes to large sums. 

The government seized approximately 95,000 of the stolen Bitcoin from the crypto wallet owned by the defendants. The truth was revealed; Lichtenstein used numerous advanced hacking tools to gain access to Bitfinex and fraudulently authorised more than 2,000 transactions. Lichtenstein covered his tracks and asked his wife to launder the stolen cryptocurrency. 

The couple utilised many sophisticated techniques to launder Bitcoin such as using fictitious identities, setting up online accounts, utilising computer programs to automate transactions, along with depositing funds into account on darknet markets and exchanges. 

In 2023, Lichtenstein pleaded guilty to conspiracy to commit money laundering, while his wife pleaded guilty to one count of money laundering conspiracy and one count of conspiracy to defraud the United States.

Taking out the 2023 crypto laundromat

In March 2023, law enforcement on both sides of the Atlantic reported shutting down a broad money laundering operation using a cryptocurrency mixer. Allegedly, criminals had managed to launder 152,000 Bitcoins through the ChipMixer platform.  

The money was linked to dark web marketplaces, illegal goods trafficking, stolen crypto assets and ransomware groups. ChipMixer, an unlicensed crypto mixer, blocked the blockchain trail of the funds which was attractive to money launderers and other criminals. 

The deposited funds have been turned into chips as small tokens with equivalent value which were then mixed together. The main goal was to erase trails to the illegal origin.  

As stated by Europol, the whole ChipMixer infrastructure was taken down for its suspected involvement in money laundering. 

Back in 2022, the U.S. Treasury Department blacklisted Tornado Cash, another crypto mixing platform, alleging that it was used to launder more than $7 billion worth of cryptocurrency since 2019.

Can blockchain become an AML tool?

Even though the crypto space is prone to money laundering, it isn’t more significant or threatening than traditional money laundering. The connection between crypto and criminals is a frequent misconception. Such prejudice mainly arises due to insufficient knowledge of how blockchain technology truly works. 

Given its main features, blockchain is a tool not good enough for criminals, but it may be a decent tool for AML compliance. The hype surrounding crypto as an anonymous form of payment tricked many criminals into thinking they could get away with it, and ended up being arrested. 

While it is true that the development of a truly successful blockchain solution for AML compliance is not yet here, the technology demonstrates a big potential to succeed in areas where other methods have failed.

Money laundering in the world of fiat currencies is usually considered a black box that can be opened by acquiring a search warrant and examining the suspect’s bank records. On the other hand, the blockchain’s immutable nature means that each node has a record of the entire ledger and that each node is needed to validate changes.

Additionally, blockchain analysis tools can be efficiently used to analyse transactions recorded on the blockchain to get a better insight into how criminals are laundering funds. If used right, an immutable ledger could act as a deterrent to money laundering.