Revealing crypto’s red flags

Binance investigations and FTX bankruptcies have shattered the cryptocurrency myth. Nick Henderson-May at VinciWorks explains the urgent need to address money laundering risks 

 

It’s of little surprise to those closely watching the collapse of crypto that Binance, the world’s largest cryptocurrency exchange since the bankruptcy of FTX and the indictment of its founder Sam Bankman-Fried, is under investigation by French prosecutors for money laundering. 

 

This latest crisis for the crypto world comes just days after Binance was charged by the SEC with a litany of financial offences. Binance and its crypto billionaire CEO Changpeng Zhao have disputed the charges in an angry series of tweets. 

 

But the company isn’t finding much favour in other parts of the EU. The company has announced it is pulling out of the Netherlands because it cannot meet its money laundering obligations. It has also appealed to Cypriot authorities to delist it, just weeks after it pleaded with UK authorities to do the same thing.

 

What’s gone wrong with crypto? Many traced the industry’s sudden and spectacular collapse to the start of 2022, when several providers took out expensive ads during that year’s Super Bowl.

 

Legions of cryptocurrency companies bombarded the airwaves with their celebrity spokespeople, leading many to ask why a supposed ‘currency’ emphasising security and high returns would need such an expensive marketing campaign. By the middle of 2022, Bitcoin, the industry standard, had sunk to less than $20,000 from its high of $68,000 just months earlier.

 

The value of another major exchange, Coinbase, tanked after being fined hundreds of millions of dollars by New York state authorities for lack of due diligence procedures. FTX, once valued at $32 billion, went bankrupt as its founder was arrested for perpetrating one of the biggest frauds in history. 

 

BlockFi, a cryptocurrency lender, filed for bankruptcy in November 2022, a casualty of the collapse of FTX. Core Scientific, one of the US’s largest publicly traded crypto mining companies, filed for bankruptcy in December that year, citing falling crypto prices and rising energy costs.

 

Meanwhile, hackers stole $4.3 billion worth of cryptocurrency in 2022, which equates to a 37% increase over 2021.

 

While cryptocurrencies might still hang on, regulators unsurprisingly seek to tighten their grip on this seemingly wild west of digital currency and its freewheeling use by criminal actors. 

 

A new EU supervisory authority, the Anti-Money Laundering Authority (AMLA), is touted to become operational in 2023, and crypto risks will likely be high on its agenda, particularly given the crypto links with proliferation financing. Firms can expect renewed focus, coordination, and cooperation between countries and Financial Intelligence Units (FIUs) to facilitate adherence. 

 

Also, new legislation introduced by the European Parliament extends the “travel rule”, which already exists in traditional finance, to cover crypto-asset transfers. The rule requires that information on the source of the asset and its beneficiary is stored on both sides of the transfer and “travels” with the transaction.

 

The EU is considering a stand-alone cryptocurrency regulator beyond AMLA. At the same time, the UK’s National Crime Agency has called for regulation of “decentralised crypto-mixers”, which can be used to disguise transactions otherwise traceable on blockchains.

 

Crypto has also begun to fall afoul of the high pace of sanctions against Russia due to the invasion of Ukraine. The US Department of Justice has charged a Russian national and majority shareholder of Bitzlato, another major crypto provider, of not only failing to conduct adequate KYC or due diligence but essentially acting as the crypto exchange of choice for dark web clients including drug traffickers and terrorists attempting to evade Russian sanctions. 

 

However, where do Bitzlato and other crypto customers go next, and where does their cryptocurrency come from?

 

While the EU, US and UK may be cracking down on cryptocurrencies and forcing them to go straight, on the streets of Caracas, drug traffickers regularly deposit blood-stained wads of cash into Bitcoin ATMs. In El Salvador, the crypto-bro dictator has spurred FATF warnings by making the volatile bitcoin legal tender, potentially opening the door to state-sanctioned money laundering.

 

As the crypto market continues to experience extreme volatility and its businesses face harsher crackdowns, any non-criminal investors still left are likely to become increasingly desperate to offload their falling assets.

 

Like any industry in trouble, crypto assets will become an even greater target for nefarious actors. Money launderers can buy up crypto assets with sellers desperate for hard cash and then launder these assets worldwide.

 

The Australian regulator, AUSTRAC, has noted that cryptocurrencies have displaced traditional forms of money laundering. Head of Intelligence, John Moss, raised concerns about the growing use of even regulated crypto-ATMs and vulnerable people being used as mules to put a large amount of cash into them, which is then quickly moved around the world.

 

These ATMs are also key points of integration for criminal gangs in Venezuela and El Salvador. 

 

New York regulators have said lax compliance at cryptocurrency exchanges makes them “vulnerable to serious criminal conduct, including, among other things, examples of fraud, possible money laundering, suspected child sexual abuse material-related activity, and potential narcotics trafficking.”

 

While questions about the future of crypto and what regulators will do next are high on the agenda, the main issue facing financial services firms and the wider regulated sector is what should be done about crypto right now.

 

Supposedly the blockchain, a secure register of crypto transactions, can enable investigators to unweave the complicated web. Firms should strongly consider asking for that evidence when faced with crypto-related due diligence.

 

Given the vast amounts of illicit cash laundered through crypto, and the seemingly endless chain of bankruptcies, investigations and indictments hitting even the largest crypto exchanges, there is little reason left not to treat the whole industry as high risk for money laundering.

 

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Nick Henderson-May is Director of Learning and Content and Head of D&I at VinciWorks a leading compliance training and software company. He helps businesses understand compliance across a diverse range of business critical areas including AML, GDPR, diversity, sanctions, bribery and H&S.

 

Main image courtesy of iStockPhoto.com