red 
This year marks the 20th anniversary of the Trafficking Victims Protection Act of 2000, the first comprehensive law in the US to address one of the most heinous types of criminal activity, the exploitation of some of society’s most vulnerable – human trafficking. On January 15, 2020, the Tom Lantos Human Rights Commission held a hearing on the effectiveness of the Trafficking Victims Protection Act (TVPA), and Elliptic was humbly invited as a witness to address the effectiveness of the TVPA, as well as recommendations for future legislative action.
Unfortunately, human trafficking is one of the most lucrative forms of criminal activity and now generates over $150 billion annually. Because of the amount of money involved, the police regularly work with financial institutions to help detect human trafficking through distinctive patterns in financial transactions.
Traffickers use various techniques to disguise their activities when engaging in these transactions; online payments, prepaid cards, informal banking systems, anonymous fictitious companies and real estate transactions. Human trafficking is an agile criminal enterprise that constantly adapts to the regulatory environment, law enforcement capabilities, and new technologies at their disposal. Over the past few years, cryptocurrency has been one of the emerging technologies that traffickers have begun to exploit.
Cryptocurrencies like bitcoin can be considered digital cash. Like cash, they have properties that make them attractive to criminals – such as the lack of a central authority that can block transactions or seize funds. There is also a perception that cryptocurrency transactions are anonymous and untraceable, but this is not the case.
Backpage.com, the largest online marketplace for buying and selling sex in the US, was suspended by Visa and Mastercard in 2015, making it unable to accept payments from those who buy ads on its platform. In response, Backpage instead turned to accepting payments in bitcoin, knowing it couldn’t stop them from doing so. In 2018, the co-founders and others associated with Backpage were accused of making hundreds of millions of dollars from facilitating prostitution and human trafficking.
Until early 2018, Welcome to Video was the largest child sexual exploitation marketplace on the dark web. He sold access to 250,000 videos depicting child sexual abuse, which have been downloaded over a million times. Payment is accepted in bitcoins, presumably to make it more difficult to trace and identify the transactions of buyers and sellers of this material.
However, cryptocurrencies such as bitcoin are not actually anonymous. Transactions take place between wallets that can be identified by their ‘address’, which is similar to an account number. The blockchain ledger behind a cryptocurrency such as bitcoin or ether details all transactions between these addresses, including sending and receiving wallets. Blockchain analytics techniques have been developed by Elliptic and others to link these addresses to real-life identities. Tools based on these techniques are used by law enforcement agencies in the US and elsewhere to track the proceeds of crime and identify victims and perpetrators.
Enormous strides have been made in the fight against all types of financial crime in cryptocurrencies over the past decade – both through the development of law enforcement capabilities and through regulation. In 2013, the Financial Crimes Enforcement Network (FinCEN) issued guidance stating that certain types of cryptocurrency businesses, including exchanges, would be treated as money transmitters and subject to the requirements of the Bank Secrecy Act. This obliges them to assist government agencies in detecting and preventing the laundering of the proceeds of criminal activities, including human trafficking.
Cryptocurrency exchanges act as key gateways to the crypto economy, enabling the buying and selling of cryptocurrencies. Thanks to the inclusion of these businesses in the scope of the Bank Secrecy Act, the vast majority of exchanges operating in the US implement strict know-your-customer and anti-money laundering programs. These programs include user identification, the use of blockchain monitoring to identify high-risk transactions, and the submission of suspicious activity reports that provide valuable intelligence to financial intelligence units and law enforcement. Elliptic has also worked with cryptocurrencies to develop a library of typologies that can be used to detect cryptocurrency transactions that may be related to human trafficking.
The anti-money laundering regulatory regime in the US holds cryptocurrency businesses to the same standard as comparable traditional financial institutions, and has helped deny criminals a way to cash in on their proceeds. In fact, our analysis shows that in 2019, less than 0.5% of all bitcoin transactions were related to the purchase of illicit goods or services on the dark web, and we expect this to continue to decline.
However, some risks remain. Cryptocurrencies do not respect borders – it is very easy for criminals to cash out or launder funds by sending them to an exchange abroad that does not carry out anti-money laundering checks or has less stringent regulations than the US. Anti-money laundering regulations must be applied globally to be truly effective, and the recent work of the Financial Action Task Force (FATF) is a good first step towards this.
When we spoke before the commission on January 15, we made the following three recommendations for the future work of the Congress:
- Congress should ensure that attention is drawn to jurisdictions that do not implement FATF guidelines on the regulation of cryptocurrency service providers. ​
- Congress should insist that US banking regulators and banks take additional efforts to mitigate the mainstream financial sector’s exposure to cryptocurrency-related risks. This should include calling on US banking regulators to issue formal guidance clarifying their expectations that US banks must be able to identify and manage cryptocurrency risk exposure.
- Congress should call on FinCEN to issue additional guidance that will further clarify its expectations of U.S. cryptocurrency companies that enable the use of privacy coins.
Cryptocurrencies have the potential to create a secure, open financial system that will promote innovation, competition and access to financial services worldwide. However, it may take time for law enforcement capabilities and financial regulations to catch up with new financial innovations. Meanwhile, these technologies may be open to criminal exploitation, including by human traffickers. This was the case with cryptocurrencies and challenges remain, but we already have the tools, capabilities and a strong regulatory framework in the US to help ensure that this activity can be detected and prevented.
The US is well-positioned to take the lead in regulation by setting standards that others follow globally. Existing financial regulations in force do not need to be torn up to create a new set of laws specifically dealing with cryptocurrencies. It’s proof to Congress that they’re willing to hear the industry’s views to help shape their decisions, and drawing on years of research, we were very happy to share our perspective with them.
America’s Law Enforcement Regulations
