Illicit funds from organized crime are being laundered through cryptocurrencies. Image: iStock
Image: iStock

American law enforcement agencies are worried that large drug cartels and transnational criminal organizations are making increasing use of cryptocurrency channels to conduct their money laundering operations.

The issue attracted much attention at a US congressional hearing into Mexican drug cartels and border security on December 12, with several senior government officials speaking of the growing threat posed by the crime syndicates and difficulties in tracking illicit money.

“The participation of Asian money launderers has become more prominent in some areas,” said Paul Knierim, deputy chief of operations in the Office of Global Enforcement at the US Drug Enforcement Administration (DEA).

“The shift toward Chinese and Asian money launderers is believed to be, in part, due to the natural relationship created by the large volume of both licit and illicit trade goods and chemicals imported from China. The use of an Asian money broker simplifies the money laundering process and streamlines the purchase of precursor chemicals and paraphernalia utilized in manufacturing drugs for street sales,” Knierim said.

Crypto-based operations represent only a tiny percentage of the estimated US$2 trillion in global money laundering turnover —  including the drugs trade, which generates about $60 billion in annual drug sales in the US alone. However, crypto transactions are rising.

Janice Ayala, director of the US Department of Homeland Security’s Investigations Joint Task Force, specifically addressed the role of Chinese transnational criminal organizations (TCOs) at the hearing. She said they often worked on a contract basis, and were responsible for a “recent significant increase in money laundering using cryptocurrency”.

Ayala highlighted another disturbing trend in which a huge amount of Chinese counterfeit foreign identity documents had also been detected in the laundered funds flowing back to Mexican criminals.

The DEA said TCOs were increasingly relying on crypto because of its anonymous nature and its ease of use

Professor Celina Realuyo, who is with the US National Defense University’s Perry Center for Hemispheric Defense Studies, told the congressional hearing of the growing concern surrounding the amount of laundered funds flowing through China, and in particular, Chinese banks.

The DEA reported in its 2017 National Drug Threat Assessment report, issued a few weeks prior to the congressional hearing, that there was an emerging laundering vulnerability over “Bitcoin and other virtual currencies [which] enable TCOs to easily transfer illicit proceeds internationally”.

“Since 2010, there has been a steady decrease in the gross amount of bulk cash seizures throughout the US. The decrease in seizures could be indicative of the use of other, more discreet methods of moving illicit money, although other factors such as changes in interdiction operations tempo and law enforcement budgets could also play a role,” it said.

One important laundering channel, said the DEA, involves the Chinese Underground Banking Systems (CUBS), which “are operated by cash brokers who employ agents [in order to] circumvent China’s capital controls and sometimes are used to launder US drug proceeds”.

The agency added: “China prohibits its citizens from transferring more than $50,000 USD outside of China’s borders per year. As a result, cash brokers do steady business collecting cash from Chinese nationals who want their money available in the United States.”

The DEA said TCOs were increasingly relying on crypto because of its anonymous nature and its ease of use.

“Bitcoin is the most common form of payment for drug sales on dark net marketplaces and is emerging as a desirable method to transfer illicit drug proceeds internationally. Bitcoin is the most widely used virtual currency due to its longevity and growing acceptance at legitimate businesses and institutions worldwide,” the agency reported.

Bitcoin is becoming attractive for TCOs engaged in Trade-Based Money Laundering schemes, which involve the purchase of Chinese goods and hardware using illicit funds. It is attracting the attention of CUBS too.

“Bitcoin is increasingly used by Over-the-Counter (OTC) Bitcoin brokers who conduct very high-risk Bitcoin trading consistent with Chinese capital flight and ML,” the DEA reported.

“These high-risk OTC Bitcoin brokers likely use foreign Bitcoin wallet-hosting services and exchanges that do not properly conduct ‘know your customer’ or anti-money laundering monitoring on Bitcoin purchases. OTC Bitcoin brokers primarily attract two types of clients: those who want to use Bitcoin to move their money out of China and those who want to convert large quantities of cash into Bitcoin.

Cryptocurrencies are not replacing old ML methods. And cartels are not relying on them more than cash

“CUBS money brokers sell Bitcoin to drug traffickers for cash earned from drug sales in the US, Australia, and Europe. This drug cash is then sold to Chinese nationals in exchange for Bitcoin the Chinese nationals use to transfer the value of their assets outside of China.

“The increasing use of OTC Bitcoin brokers, who are capable of transferring millions of dollars in Bitcoin across international borders, as part of a capital flight scheme, is expected to continue to intertwine criminal ML [money laundering] networks with capital flight.”

Yaya Fanusie, director of analysis at the Center for Sanctions and Illicit Finance at the Washington DC-based Foundation for the Defense of Democracies, told Asia Times that he has not seen a lot of specific evidence of Mexican cartels using crypto to date, and the DEA report only mentions some general trends.

“Evidence of organized crime using crypto has been sparse.  Cryptocurrencies are not replacing old ML methods. And cartels are not relying on them more than cash,” said Fanusie. “Cryptocurrencies offer a new element into the mix for criminals to obfuscate money movements.

“Cryptocurrencies by themselves are a tricky and vulnerable method for laundering because most of them can have their transactions viewed on their respective blockchains. So, people trying to launder with crypto often take more complicated, additional steps to try to throw off investigators, like using real people, seemingly unrelated to criminal activity, as ‘cut outs’.”

Fanusie said moving money in small amounts, which does not attract scrutiny from law enforcement and customs personnel, is important to the wider operations of criminal organizations.

“You can imagine that criminals might take the same steps with exchanges, opening up multiple accounts and using many digital wallets,” he said. “Using crypto brings some advantages for criminals because of the digital, peer-to-peer nature of the technology, but it comes with transparency that deters how widely it could be used.

“In terms of recommendations, there needs to be a stronger emphasis on training in cryptocurrency analysis for law enforcement,” added Fanusie. “Cryptocurrencies will likely become a bigger part of the cybercrime realm, so any police and intelligence departments dealing with cyber issues need to deepen their expertise on cryptocurrencies and blockchain technology.”

Earlier this year, for example, the Japanese newspaper Mainichi Shimbun published an eye-opening account of an ML operation based in the heart of Tokyo “where a total of some 30 billion yen [$280 million] was funneled through various overseas exchanges since 2016.”

It said a large number of people in Tokyo routinely exchange information about crypto online “through members-only blogs and social media sites to meeting face-to-face. Japanese and English fly back and forth with specialized terms relating to cryptocurrencies mixed in”.

Bitcoin and Ethereum were distributed to several accounts held at exchange companies which could be opened without any identification documents

A USB drive served as the primary source of evidence in this instance, showing that large-scale ML operations based in Tokyo were often conducted via “ZDM”, which stands for “Zcash”, “DASH” and “Monero”. The newspaper said the pool of ZDM cryptocurrencies is well known for cloaking the identities of both senders and recipients.

From June 2016 to February 2018, a total of 29.85 billion yen (US$270.6 million) flowed via virtual ML, and a more recent amount of  130 million yen (US$1.1 million) used “several hundred transfers.” The amount involved was described by the newspaper as “lower than normal, due to scandals surrounding cryptocurrency exchanges at the time”.

Bitcoins and Ethereum obtained from Japanese exchange operators were distributed to several accounts held at exchange companies which could be opened without any identification documents being presented. A Russian exchange known as “YoBit” was specifically mentioned by the Mainichi Shimbun report.

The ML process was fairly simple: Bitcoin or Ethereum were converted into “ZDM” and then “several exchange operators (were contracted) to move the virtual currency over dozens of transactions to cover their tracks, with collaborators in Russia making the last transaction into the local physical currency”, the paper reported.

A Japanese gang member was cited as a source for the story and the report also quoted a Chinese man who played a central role throughout the operation. This same man told the Mainichi Shimbun that “gangs were attracted to the anonymity associated with cryptocurrencies from the beginning. Now, its use is not limited to just money laundering, but is also being used as a venture to generate capital”.

Although not directly related to Mexican drug-based ML, this one example demonstrates the very sophisticated transnational character of crypto laundering throughout East Asia. The important role of a Chinese coordinator and the CUBS connection are both very relevant to the broader discussion of Mexican TCOs and their covert yet seemingly very effective ML connections worldwide. Beijing does seem concerned.

A joint statement between the Chinese and Singapore governments issued on November 15 during an official visit by Chinese Premier Li Keqiang to Singapore said the two countries “had agreed to strengthen cooperation on disaster management and emergency rescue, and law enforcement cooperation, including combating transnational crimes, corruption, money laundering, cybercrime and narcotics”.

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