Money Laundering through Bitcoin Transactions Creates More Challenges for Law Enforcement

By Dr. Jarrod Sadulski
Faculty Member, Criminal Justice at American Military University

Money laundering is a problem that has plagued the United States and the world economy for a long time. To put this problem in perspective, the United Nations Office on Drugs and Crime estimates that between $800 billion and $2 trillion is laundered globally a year. That is two to five percent of the world’s Gross Domestic Product (GDP).

History of Money Laundering

In response to the billions in profits that criminals laundered during the 1980s cocaine era, Congress enacted the Money Laundering Control Act of 1986. This law made money laundering a federal crime and provided new civil and criminal forfeiture guidance for violations.

Most importantly, the Money Laundering Control Act required banks to create and maintain records to ensure compliance with the Bank Secrecy Act of 1970. During the next 20 years, several other laws and reforms were established in regard to money laundering.

The most recent major piece of legislation was the Intelligence Reform & Terrorism Prevention Act of 2004. This law addressed the reporting of cross-border electronic transactions of money and provided the Treasury Secretary with more authority to combat money laundering and terrorism.

How Does Money Laundering Work?

Money laundering involves three stages – placement, layering and integration. Probably the most significant stage is layering because it separates large amounts of money from the source.

Traditionally, this separation was done by creating shell companies and collaborative foreign banks. A classic example involved the HSBC bank, which was caught failing to monitor over $200 trillion in wire transactions between the company’s Mexico and U.S. subsidiaries. Authorities found that the Sinaloa and Norte de Valle drug cartels moved $881 million in narcotics cash from unmonitored HSBC wire transactions.

Introduction of Bitcoin Now Makes Money Laundering Harder to Detect

The HSBC case shows the impact of traditional money laundering. However, the cryptocurrency Bitcoin, which was introduced in 2009, has created major problems for law enforcement. Due to global implications, money laundering transactions via digital currency are very difficult to investigate.

Prior to the advent of Bitcoin, investigators simply needed to track down the offshore accounts where criminals had deposits to find the illicit money. Bitcoin and other digital currencies, on the other hand, have no centralized authority and user identities are hidden by a lack of oversight.

Digital currencies like Bitcoin enable criminals to engage in various illegal activities. They include the purchase and sale of drugs, human trafficking, weapons, child pornography and other illicit activity through the dark web.

If criminals could launder money in amounts greater than $200 trillion through unmonitored bank wire transactions at HSBC, the amount of money that could be laundered through Bitcoin and digital currency is unimaginable. In addition, terrorist organizations also use digital currency to quickly transfer money globally and privately.

How Bitcoin Transactions Occur in Money Laundering

There are no global regulations on digital currency exchanges. That is why the use of digital currency in money laundering is so problematic.

In the layering phase of money laundering, criminals purchase privacy coins on a digital currency exchange service. They anonymously layer funds throughout digital currency exchanges, various privacy coins and a storage program called crypto wallets that anyone can own.

For example, privacy coins can be exchanged for primary coins, also referred to as just coins. These coins can be used to purchase a wide range of merchandise and services.

Criminals can negate any risk of an audit trail by following this process and creating several layers. As a result, the money is digitally “cleansed” and can then be integrated back to the traditional financial system.

Coordination Between Countries Needed to Stop the Money Laundering Threat

To address the threat of money laundering through Bitcoin and digital currencies, countries must work together to develop consistent regulations. Interpol may be an effective resource to assist in developing a collaborative effort against money laundering through Bitcoin and digital currencies. With regard to the man-hours that the FBI spends on financial crime investigations, about 75% is spent investigating digital currency.

The anonymity of privacy coins presents a major obstacle for law enforcement, so investigations should begin with the digital exchanges themselves. Those investigations can provide access to the trades made and balances within money launderers’ digital wallets.

Money laundering is associated with criminal activity and has a seriously adverse impact on crime prevention. The creation of Bitcoin and digital currencies has only magnified the money laundering problem.

About the Author

Dr. Jarrod Sadulski has been with the Coast Guard since 1997. His expertise includes infrastructure security, maritime security, homeland security, contraband interdiction and intelligence gathering. He has also received commendations from the Coast Guard. Currently, Jarrod is a supervisor in the Reserve Program and provides leadership to Reserve members who conduct homeland security, search and rescue, and law enforcement missions.