July 29, 2020 Andrew Tarpey



cryptocurrencies bitcoin, ripple,ethereum

A hack of the Twitter accounts of some of the United States’ most powerful and well-known business and political figures recently generated headlines around the world.  The Twitter accounts of Bill Gates, Jeff Bezos, Elon Musk, Barack Obama, Joe Biden and others sent out tweets which promoted the address of a Bitcoin wallet with promises to double any payments made to that wallet, with the donations purportedly being for charitable purposes.  The hack was shut down a couple of hours after the tweets were sent out, but it’s thought the hackers made off with at least $120,000 in Bitcoin.  The incident was widely reported in the media due to the public profile of those who were hacked, but there are countless other nefarious schemes involving cryptocurrency that don’t receive headlines, showing that governments and regulators are fighting a continuous battle against scammers who wish to use Bitcoin and other virtual currencies for illegal purposes.

A blockchain analytics company called Chainalysis, which specializes in the analysis of financial crime related to cryptocurrency, recently conducted a study that showed criminals laundered approximately $2.8 billion in Bitcoin in 2019, which is up from $1 billion in 2018.  While the amount of cryptocurrency laundered is only a small slice of the total amount of funds laundered globally, it’s still a huge increase and virtual currencies are proving to be increasingly attractive to hackers.  This raises the question as to why the amount of money laundered in Bitcoin has almost tripled in only a year’s time, especially considering that most cryptocurrency exchanges (businesses that allow customers to trade or exchange cryptocurrencies for conventional fiat money) are subject to Know Your Customer (KYC) requirements, meaning they need to identify their customers and fulfill other requirements to prevent their services from being used for money laundering.  The Chainalysis report suggests that much of the cryptocurrency being laundered is done through over the counter, or OTC, brokers.  These are brokers who act as middlemen between buyers and sellers of cryptocurrency, and they appeal to those who don’t want to conduct cryptocurrency transactions on an open exchange.  OTC brokers are similar to independent contractors in the cryptocurrency world, and as such they have lower KYC requirements than the larger exchanges.  While many of these OTC brokers are compliant and adhere to anti-money laundering requirements, as the saying goes, it only takes a few bad apples to spoil the bunch.

The need for authorities to ensure that cryptocurrency brokers and exchanges are subject to the same anti-money laundering supervision given to banks and other financial institutions is shown in the recent criminal case of Kais Mohammad.  Mohammad, an Orange County, California resident, is a former bank employee who ran Herocoin, the name he gave to his business of Bitcoin-cash exchange services which he ran from 2014 to 2019.  Despite the fact that his business engaged in large cash transactions and thus was subject to government regulations as a money service business, he initially failed to register his business as such with the U.S. Treasury Department as required.  He also failed to implement an anti-money laundering program, and as a result didn’t conduct appropriate due diligence on his customers or submit suspicious activity reports to the authorities when it appeared that transactions involved illicitly-derived cash.  Mohammad would often meet customers in public places and exchange cash and Bitcoin with them.  He later admitted to authorities that he knew some of the transactions involved cash which was the proceeds of criminal activity.  Mohammad set up Bitcoin ATM-type kiosks in malls, convenience stores and gas stations throughout southern California where customers could purchase Bitcoin with cash or sell Bitcoin in exchange for cash.  In 2019, undercover federal agents met with Mohammad several times and purchased Bitcoin from him with $16,000 in cash.  The undercover agents told Mohammad that they ran a prostitution ring which is where the funds used to purchase the Bitcoin came from.  However, Mohammad never filed a Currency Transaction Report (required for cash transactions of over $10,000) or a suspicious activity report as a result of this transaction.  He has agreed to plead guilty in the coming weeks to the charges of operating an unlicensed money transmitting business, money laundering, and failure to maintain an effective anti-money laundering program.  As evidence of how seriously authorities treat financial crimes such as those Mohammad is alleged to have committed, he is facing a maximum sentence of 30 years in federal prison.

Cryptocurrency-related crime isn’t restricted to the various scams and hacks that have become commonplace; it’s even reached into the world of high-level international conflicts.  In March of this year, the United States Department of Justice charged two Chinese nationals with laundering over $100 million worth of cryptocurrency that was stolen from a cryptocurrency exchange by North Korean hackers.  The DOJ alleges that Tian Yinyin and Li Jiadong worked in partnership with the hackers to launder the funds through hundreds of cryptocurrency transactions aimed at disguising their origins.  Court documents state that after the funds were stolen from the exchange, the North Korean hackers funnelled the currency to Yinyin and Jiadong, who in turn sent $68 million of the funds to nine Chinese banks.  U.S authorities aren’t sure of Yinyin and Jiadong’s whereabouts but they’re assumed to be in China.  Last year, a United Nations sanctions panel raised serious concerns about the level of North Korea’s involvement in cyberattacks against financial institutions and cryptocurrency exchanges, attacks which have helped generate around $2 billion for its nuclear weapons program.  As North Korea is economically isolated by sanctions, in recent years it has tried to generate large amounts of revenue through the hacking and theft of cryptocurrency.  However, the laundering of illicitly-derived cryptocurrency, especially large amounts of it, poses challenges.  The main challenge is that Bitcoin transactions can be traced, as all transactions have a record on a blockchain, even though the persons associated with them are anonymous.  However, the North Korean hackers devised a complicated web of transfers of the hacked cryptocurrency that made it difficult to determine when it is being exchanged from one person to another or when it’s just being moved to another account held by the owner.

Although cryptocurrency hasn’t shown itself to be a profitable or stable investment for institutional investors, the increase in hacks, thefts and other crypto-related crime shows that criminals still see it as an avenue to riches.  Identifying cryptocurrencies’ risks, enhanced regulatory enforcement and technological developments regarding security are the best ways to stem the criminal activities associated with cryptocurrency.


Andrew Tarpey

Andrew Tarpey is Southpac's Compliance Officer. He is responsible for ensuring AML and financial best practice is followed throughout the business.
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