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On 13 August 2022, the Asia-Pacific Anti-Money Laundering Group (APG) – a Financial Action Task Force (FATF)-style regional body for the Asia-Pacific – published its annual typology report. The APG typologies report contains information on money laundering (ML) and terrorist financing (TF) trends. It also includes case studies and observations to help governments and other stakeholders in the Asia-Pacific region better understand existing and emerging PN and TF threats, and implement effective strategies to address them.

In particular, there is an entire subsection in the report dedicated to the use of cryptoassets in ML and TF, with 17 case studies from 11 APG members – including Australia, Singapore and Japan. The typologies involving cryptoassets identified by APG members fall into three broad categories. these are:

  • laundering proceeds of criminal activities from predicate crimes unrelated to crypto-assets;
  • schemes related to cryptoassets; and
  • the use of banknotes in banking and crypto transactions.

Laundering of proceeds of crime

Most of the case studies highlighted in the APG Typologies Report revolve around laundering the proceeds of crime from predicate crimes – such as illicit drug transactions, organized crime, fraud, illegal investments, embezzlement, bank account hacking and phishing – using crypto-assets.

Typical modus operandi involves a criminal syndicate that markets fiat proceeds derived from its criminal activities either to banks – before transferring them to crypto exchanges – or to crypto exchanges directly before converting them into various cryptoassets. If held in custodial wallets on crypto exchanges, these digital assets are then typically transferred to multiple existing or new unhosted wallets belonging to syndicate members to avoid any seizure and freezing by crypto exchanges. Afterwards, syndicate members can transfer the cryptoassets held in their wallets to another offshore crypto exchange to cash out or sell them via over-the-counter (OTC) trading platforms before transferring the cash to their bank accounts.

As laundering activities often require switching on and off to facilitate the placement and integration of proceeds of crime, red flags such as the use of automated teller machines (ATMs) for deposits, large personal cash deposits, and unusual transfers in both speed and size are likely to have alerted personnel who in accordance with the laws that follow fiat transactions to illegal activities. It can be seen that traditional compliance processes still play an important and complementary role for blockchain analytics in identifying money laundering through cryptoassets.

Astonishingly, Bitcoin (BTC) is the medium of choice for most criminals in cases that have identified a crypto-asset used for money laundering. Another crypto-asset mentioned in the case study is Monero, which was used in a Japanese drug-trafficking case as a means of payment for buyers. This illustrates the continued popularity of BTC for money launderers due to its liquidity, wide acceptance and high value (similar to large denomination notes).

Schemes related to cryptoassets

Another popular typology identified by APG members is the criminal exploitation of investors’ interest in cryptoassets to perpetuate fraud and make illegal profits. For example, there are several case studies of schemes involving cryptoassets where investors have either transferred fiat currency to a company that supposedly facilitates cryptocurrency trading or put money into crypto investments that supposedly have very high annual returns.

Without fail, the schemes turned out to be fraudulent and investors either did not receive the purchased cryptocurrency or the returns that were promised, other than the initial payouts to gain their trust – the hallmark of a Ponzi scheme. Scammers can be either companies with seemingly legitimate platforms or individuals claiming to be crypto experts on social media, such as a self-proclaimed Thai “crypto wizard.”

Similar to other scams in the fiat world, these scammers rely on the greed of investors, who fail to conduct proper due diligence before deciding to invest with them. Given the significant rise in prices over the last few years, such investors are easy prey, especially if they are prone to fear of missing out (FOMO) in crypto investments. The old adage that “if something seems too good to be true, it usually is” applies here as well.

There is an interesting Taiwanese case that highlights the vulnerability of crypto-businesses to hacks and exploits, and the importance of proper IT controls. Members of the criminal syndicate exploited a loophole in the crypto exchange’s trading system by logging into the system using different devices to confirm and cancel the same withdrawal transactions within a short period of time. These actions caused the system to fraudulently withdraw cryptoassets while simultaneously depositing the same amount back into the accounts, resulting in losses for the crypto exchange (probably from its own omnibus account). The syndicate then deposited their ill-gotten crypto assets into an unhosted wallet and sold them through the OTC market to disguise the source of the funds.

Use of Money Mules

One common feature that runs through many of the case studies in the APG Typologies Report is the use of banknotes to disguise the activity of layering in fiat and crypto transactions. In Australia, a syndicate involved in organized money laundering helped other criminals launder large amounts of cash by using money mules to deposit the cash into their bank accounts before converting it to Bitcoin and then transferring the BTC back to the criminal “clients”. A similar modus operandi was used by a cross-border fraud syndicate that used 15 money mules to open over 80 bank accounts in Hong Kong to launder their criminal proceeds – some of which were used to buy Bitcoin and Tether through various crypto exchanges.

In the second case, the money mule was the company that received the fraudulently obtained funds and that the victims transferred to their bank account. The company then bought Bitcoin using the funds and transferred it to the wallet of the suspected fraudster. The suspect then sent the bitcoin to a wallet belonging to the same company, which sold the BTC and returned the cash proceeds to the suspect. This circular transfer of illicit proceeds involving fiat and crypto assets is an effective way to layer and integrate, as well as to hide the trail of illicit funds.

The rise of money laundering in cryptoassets

The case studies described in the APG Typologies Report are not new to Elliptic. In our flagship typologies report published earlier this year, we identified key risks and typologies around cryptoassets that would sound very familiar to anyone who read the APG Typologies Report. These include the use of wallets on crypto exchanges, peer-to-peer or OTC platforms, multi-client cross-wallet activities, the use of privacy coins for layering, and the indirect exposure of banks to ML and TF risks by facilitating fiat transfers to crypto businesses.

With the increasing adoption of cryptoassets, more typologies of financial crime will undoubtedly emerge as illegal actors look for innovative ways to stop investors and businesses. As a second line of defense, it is more important than ever for risk and compliance professionals to understand the evolving nature of ML and TF risks in the cryptoasset space and protect their firm from criminal exploitation.

Learn more about it in Elliptic’s Financial Crime Prevention in Cryptoassets: 2022 Typologies Report.

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