Detecting money laundering using Crypto currency transactions

I have been in a lot of never ending discussions with die-hard supporters of crypto currencies in highlighting the fact that these are transparent, traceable and much more controlled and hence should not be “blacklisted” as a high risk method of laundering. Let’s not get into this discussion here. The fact of the matter is, crypto, should be seen as one another medium (similar to cash, check, gift cards etc.) where it can work as a channel for money laundering. Please put this scope into perspective and read further and try to understand the challenges traditional banks are facing.

Nowadays not many banks allow crypto exchanges to hold accounts with them so narrowing down the scope even further, it comes down to customer’s trading in crypto assets. With the Bitcoin hype in the last few years, you will notice more and more individuals jumping into this arena. There are several online exchanges (e.g. Coinbase, eToro etc.) who facilitate easy onboarding, allowing users to get started right away. Taking this use case I would like to highlight some key risks you should consider in your risk assessments, monitoring rules and other relevant controls. As an example, I would like to limit the scope of this article to the flow shown below.

1. Monitor holistically : We always end up looking for patterns. In this situation I will recommend take an approach to monitoring crypto behaviour from a level higher, at your portfolio level. A single customer making some profit out of a crypto, good for them 😉…however if there is a pattern where several customers are either sending money to an exchange or receiving money from the exchange in a regular fashion in same similar amount can indicate something suspicious going on. Possibly this can be an indication of money mule activity using crypto as a channel. Or it can also be layering of illegal money acquired elsewhere and channeled via crypto exchanges;

2. Is it the extra? More often than not you will hear people say they are using "spare cash" to make some extra money in the crypto space. What you need to focus on is look at behaviours where this outgoing flow to the crypto exchange does really indicate that extra cash? Thinking from a criminals mindset, they may use the bank to just channel the dirty funds so ideally there should be no built-up of balance and cleaning up towards a crypto exchange. So you can try taking out possibilities where a part of huge balance is funnelled towards crypto, instead try focusing on the outgoings and what is the percentage crypto transactions take and is that normal.

3. Hiding from tax authorities : I will take a practical example from Netherlands and most likely other countries have similar tax regime. For calculating tax, year end balance of your bank account has to be notified to the tax authorities. If you see a major movement of funds to crypto exchanges (as outgoing payments) around the end of tax year, you should pay special attention. Your doubts can be validated if you see similar funds returning back after the beginning of new tax year. Using this technique the customer may try to offload money from their bank account (taking the balance to a much lower value) and then bringing back the funds later on. Of course thorough investigations may have to be done to look at source of funds etc. etc.

4. Peer group around crypto - This is something you should definitely put extra emphasis on. Crypto space is still relatively new and people learn from one another and invest accordingly. In addition to other factors (such as age/regions/occupation etc.) try adding the dimension of who is investing in crypto. If you have good peer groups defined, looking at the odd ones out from a crypto transaction perspective may give some good insights.

5. Are they going with the tide? Recently all of you may have heard about Bitcoin and Ethereum skyrocketing. Majority of fence sitters will go with the tide and start investing to get some advantage. I think you should try avoiding the noise. Looking for consistency. For someone with dirty cash, they really don't care whether the prices are rising of falling, all they care about if offloading this cash to a secure place. If you see some customers who are just too consistent and do not bother about the market movements, there is a need to look deeper.

6. Purpose of account - By this I mean - take a note of situations where the customer may be using their account as just a pass-through where the funds are moved in from multiple sources and then immediately moved out to a crypto exchange. This can help in easily removing traceability by performing layering or funds. This can be more tricky if these accounts were only opened recently. For our FinTech banks they should be extra careful of such schemes.

7. Businesses offloading to crypto - I have seen situations where SME's and some small to mid-sized businesses try to leverage the crypto wave to make money from their sitting funds. The behaviour you would expect is funds going out for crypto and then after a period some funds (hopefully with profit) coming back in. However if there is no incoming, you need to look closer. There have been some instances where bribes have been paid in crypto due to the relative anonymity it can provide. If you see such one way street on business accounts, you need to start digging deeper.

I can continue on listing several possible use cases but the intention of this post is to give you some direction to think along. By now you should have some idea what kind of behaviours can expose your bank to a risk of money laundering via crypto currencies. Trust me, this is just a start and we have a long way to go!