The term money laundering does not require an introduction. The practice of cleaning dirty money is old. It is a plague that has infested our financial system. Many innovative methods of money laundering were unearthed in the past. Criminals were punished, but money and money laundering are destined to remain partners forever. In the 21st century, the Blockchain technology has taken this criminal practice to new highs.
Many people believe Blockchain hides identities of its users, but there are methods to apprehend modern criminals. Digital wallet addresses do not provide names of owners, but since the money trail is open for everyone to see on public Blockchains financial forensic experts have devised techniques to map the money trail. These techniques, when combined with IT expertise pinpoint the exact locations of the bad guys.
The shutdown of the Silk Road and Silk Road 2.0 brought to light the strong links between Cryptocurrencies and criminal world. Though the Silk Road was a marketplace for illegal goods and services, for regulatory authorities it was enough to panic. They are preparing themselves to fight money laundering being done through Cryptocurrencies.
Cryptocurrency zealots are adamant that money laundering is only done via traditional banking channels and that by pointing fingers at Cryptocurrencies regulatory authorities are maligning the crypto world. The year 2018 saw regulatory authorities warming up to crypto but with caution. However, the debate that crypto is used for money laundering is troubling regulatory authorities which is why they view Cryptocurrencies with skepticism.
Bitcoin being the oldest member of the pack is the most revered Cryptocurrency despite the steep decline in its value from its all-time high of (approx) US $20,000. Therefore, it gains more attention from regulatory authorities when money laundering through crypto is discussed.
Bitcoin digital wallets are not anonymous. The money trail is easy to find. The funds can be blocked before the user attempts to convert it to fiat. This is common knowledge for all people who deal with crypto. However, Bitcoin enters the gray area when we talk about Bitcoin ATMs. This is where the leak is and it requires repair on a war footing basis.
Many Bitcoin ATMs, also known as BTMs, have popped up around the world. They can be found at airports, subway stations, branded food chains, casinos and even local stores. Coin ATM Radar, a website which is the BTM industry standard to find BTMs around the world lists over 4,000 BTMs worldwide out of which 2,561 (as of 29 January 2019) BTMs are in the US. With a price tag of just less than US $10,000 (a standard BTM) the count of BTMs around the world is growing at a fast pace.
BTMs allow both buying and selling Bitcoin (and even altcoins at some machines). The following information will make it easy to understand the BTM industry.
These companies’ manufacture and sell physical machines (BTM)
These are licensed companies which buy BTMs and lay their network of machines
These are physical locations where BTMs are installed. BTM sites can be high-security zones (e.g. airport) or zero security areas (e.g. a brick and mortar store in a slum neighborhood)
These are the authorities who grant money service business license and monitors activities of money service businesses. For example, in the US the Financial Crimes Enforcement Network’s (FinCEN) monitors compliance of anti-money laundering policies and procedures.
Unlike registered users of Cryptoexchanges, the buyers and sellers of Bitcoin at BTMs do not have to pass strict compliance checks. The Cryptoexchanges have adequate staff strength and automated checks to process millions of dollars worth of transactions 24/7/365. Their data banks store transaction details of billions of transactions. BTM operators have limited resources because of which the compliance checks are not thorough and database capacity is limited.
If we talk about the US, reports submitted by BTM operators to FinCEN contains gaps, especially when a BTM user tries to bypass the US $10,000/- daily limit reporting requirement by transacting small amounts at different BTMs. There are some BTM operators who allow anonymous transactions too (no enrollment/registration, no picture identity verification and no mobile number verification).
The lack of strong internal controls (in place at BTM operators) makes it easy for a person to deposit cash in any US BTM, transfer the bought Bitcoins to another person’s (let’s assume the other person is sitting in Mexico) digital wallet who then sells it at any Mexican BTM and withdraws the cash. The transaction is traceable on Blockchain, but it will come on radar only when BTM operators’ system issues a red flag which has a low probability of happening and if the transactions get processed through anonymous BTMs, there will never be a red flag. President Trump should cancel his plans of building a Mexican border wall, no pun intended!
BTMs are convenient for crypto holders who like to cash out their holdings anywhere in the world, but they are also convenient for money launderers. The rates charged by BTM operators (anywhere between 5-15%) are exorbitant but are lower than the estimated going rate for clean cash in the underworld which is about 30%. No hassle of transporting bundles of cash or routing money through separate bank accounts.
BTM Industry: How to control illegitimate transactions
The security controls should be applied using a “Top-down” approach.
- Biometric features in BTMs must be made mandatory. Physical inspection of BTM manufacturing sites should be carried out by regulatory authorities to check compliance with this regulation.
- Separate operating procedures must be designed for BTM operators. They should no longer be treated as general applicants while applying for money business license.
- Additional reporting requirements must be introduced for BTM operators.
- Third party compliance audits of BTM operators must be made mandatory.
- All BTMs allowing anonymous transactions must be immediately closed. BTM users must register (enroll) with BTM operators before using their BTMs.
- KYC requirement at the stage of enrollment must be enhanced.
Money laundering is a global problem. It is not restricted to the US. The US has enforced strict anti-money laundering measures yet BTMs are posing a threat to their financial system.
Money laundering cannot be eliminated. However, it can be minimised by applying security controls and updating those controls regularly. Good controls in BTM industry will make sure that the industry grows. If concrete measures are not adopted at this stage, then BTM industry will fail.