The role that cryptocurrency plays in money laundering is hotly debated. Some say that the anonymity afforded by currencies like Bitcoin makes it easier for criminals to shift funds undetected, while others argue that the blockchain and it’s unchangeable, publicly visible ledger actually provide far greater transparency.
For the former camp, the news that the U.S. Department of Justice and the Internal Revenue Service (IRS) are currently conducting an investigation into the cryptocurrency platform Binance for suspected money laundering may seem like a validation. According to Chainalysis, which specializes in providing blockchain-related intelligence to firms and governments around the world, Binance is a popular destination for illicit cryptocurrency. Of the $2.8 billion worth in Bitcoin that the company traced moving from criminal organizations to exchanges, 27.5% went to Binance, more than any other exchange.
Binance is currently banned in the United States because it offers derivatives linked to digital tokens despite not being registered with the U.S. Commodity Futures Trading Commission. As part of their investigation, officials are looking into whether the platform has enabled American investors to perform illegal trades, and consequently facilitated money laundering and tax evasion. In response to the news, a spokesperson for Binance said in a statement that the company has “worked hard to build a robust compliance program that incorporates anti-money laundering principles and tools used by financial institutions to detect and address suspicious activity.”
The increased scrutiny into Binance’s dealings comes as the IRS looks to crack down on cryptocurrency-related tax evasion. According to IRS Commissioner Charles Rettig, the government fails to collect over $1 trillion worth of taxes each year, partly because of the difficulties involved with tracking and taxing cryptocurrencies. This makes cryptocurrency highly desirable amongst money launderers, as it represents an opportunity for them to wash their funds in ways that not even government agencies can track.
With that said, a relatively small proportion of cryptocurrency activity is illicit. Research by Chainalysis has found that in 2020, only 0.34% of the total transaction volume was due to illegal activity, compared to 2.1% in 2019. Moreover, because transactions conducted using blockchain are recorded on a public ledger, it is possible to identify patterns that mark illicit activity, as well as the addresses that are the recipients of illicit funds.
While it is clear that cryptocurrency can be used to facilitate money laundering, it has not yet become the preferred modus operandi of money launderers. As cryptocurrency moves further into the mainstream and is subject to increased scrutiny by regulators, its appeal will likely diminish further, as money laundering can only really occur in the absence of appropriate regulatory oversight.
That does not mean, however, that businesses can remain complacent when it comes to compliance. As Binance’s example shows, companies that turn a blind eye to potential money laundering can end up paying a heavy penalty later on. What’s more, they can’t rely on other institutions to raise red flags first; they have to be proactive in identifying and dealing with money launderers on their platforms.
At the moment, there are, sadly, many avenues apart from cryptocurrency that money launderers can – and do – use to wash their funds clean. Schemes involving cryptocurrency might be getting all the flashy headlines, but there are myriad ways to disguise the movement of illegal funds. All-cash real estate purchases, online trading accounts, double invoicing – there are numerous opportunities for money launderers, and businesses need to be cognizant of all of them in order to identify suspicious activity and protect themselves from legal action.
Martin Cheek is Vice President of SmartSearch, a provider of an Anti-Money Laundering verification service based in Lehi, Utah.