Written by Kane Pepi on Thursday September 28, 2017
Anonymity, discretion and confidentiality: terminology often associated with shell companies incorporated in jurisdictions with high secrecy laws. However, does the virtual economy – notably Bitcoin, the de facto currency of choice – facilitate the very same mechanisms that criminals attempt to abuse? This brief article will explore some of the key similarities between a shell company and a Bitcoin address, with a view to answering the question ‘Are Bitcoin addresses shell companies in disguise?’
Anonymity or pseudonymity – does it really matter?
When attempting to obfuscate illicit profits from the scope of law enforcement, criminals often strive for absolute anonymity (Stressens, 2000). Therefore, without ascertaining the true identity of beneficial owners in the fight against financial crime, legislative or technical measures are rendered highly ineffective. Furthermore, with offshore financial centres competing amongst one another with the hope of maximizing its market share of foreign investment, there is a common desire to deregulate as much as possible (Morriss, 2010). Consequently, as illustrated in recent money laundering scandals such as the infamous Panama Papers leak, criminals are able to remain anonymous by relying on strict confidentiality laws, or simply distancing themselves by using the services of a nominee director. As argued by Palmer (2016), tax havens would lose their unique selling point if it was in the business of divulging confidential information to third parties, and as such client details are supplied only in the case of a criminal inquiry (and even then, only after a potentially lengthy due legal process).
Commentators such as Brito and Castillo (2015) argue that Bitcoin is more pseudonymous than anonymous, noting that although every transaction that has occurred is publicly viewable on the Blockchain ledger, data is not linked to anyone's identity. Further proponents in the feasibility of Bitcoin anonymity argue that IP addresses are captured when users interact with the Bitcoin protocol. On the contrary, Chandna (2017) criticises this deniability, stating that would-be criminals can simply hide behind third-party anonymous browsers such as Tor, obscuring the true location of the individual. Moreover, the same author explains that although law enforcement agencies can view the public ledger, additional third-party tools can be used to encrypt multiple-unrelated transactions into a single movement of funds, making it virtually impossible to determine the true value and destination of the transfer.
The same terminological argument could be had for ‘anonymous’ shell companies. For example, the tenant register of 1 Hyde Park, a block of luxury flats located in London’s affluent Kensington, is dominated by shell companies held in secrecy jurisdictions (Leigh, Frayman and Ball, 2012). It is to the authors knowledge that information pertaining to the true beneficial owner of several of these properties remains unknown, other than a flamboyant company name such as Shoolin Investments Ltd or Wondrous Holding and Finance Inc. Strong similarities exist in the virtual economy, whereby wealth ownership is also identified by a string of alphanumeric characters (although more challenging to the eye) such as: 12sENwECeRSmTeDwyLNqwh47JistZqFmW8.
The aforementioned Bitcoin address is infamous within the cryptocurrency arena, as it relates to the single largest Bitcoin transaction to date. 194,993 Bitcoins worth approximately $147 million at the time the transfer was made in 2013, although not free from speculation – the identity of the transacting parties remains unverified (Lee, 2013). Much like several of the luxury Kensington apartments mentioned above, asset ownership is identified by an insignificant (either chosen or randomly assigned) set of characters, rather than transparently stating the true beneficial owner.
Law enforcement endeavours
Due to the opaque mechanisms listed above, shell companies are a hindrance to law enforcement agencies in the detection and recovery of illicit flows of capital. This is further amplified by the ability to create multiple layers within a business structure, with entities quite often located across several different jurisdictions (Prasad, 2016). Although Bitcoin’s cryptographic framework ensures that transactions are borderless – without central authority and tied to no central bank – it could be argued that users also have the facilities to create a complex trail of transactions with the hope of avoiding detection.
For example, users can create a new Bitcoin address for each subsequent transfer (Sammons, 2015), further hindering the ability to link a transaction to a specific individual. However, for those striving to prevent public traceability in a more robust manner, users can also utilise the services of a coin mixer. Such providers mix one set of coins with those controlled by other users, thus limiting the ability to trace the Bitcoins back to the original owner (Karame and Androulaki, 2016).
Non-formalities often required
History suggests that some of the most high-profile money laundering convictions in recent times have been a result of an extraordinary circumstance, rather than the product of an effective financial investigation. For example, the Panama Papers leak revealed that Brodway Commerce Inc, a shell company with more than $12 million sitting on its fictitious balance sheet, was controlled by Chacón Rossell – a Guatemalan criminal dubbed by the US Department of the Treasury (2012) as a ‘major drug trafficker’. Without the actions of an unknown whistle-blower, it remains to be seen whether the identified drug proceeds would have ever resulted in judicial success.
A similar act of misfortune was also required in the arrest of Silk Road creator Ross Ulbricht. Known only by his infamous pseudonym Dread Pirate Roberts, Ulbricht was not identified by the tracing of historical transactions, Bitcoin addresses or an IP location, rather a series of careless flaws allowed investigators to correlate social media activity to that of Ulbricht’s identity (Pamplin, 2014). Therefore, much like the example of Chacón Rossell listed above, it must be questioned whether the US authorities would have had the capacity to unravel Ulbricht’s pseudonymity, had it not been for an extra-ordinary act of carelessness.
This purpose of this article was to identify some of the key similarities between a shell company and a Bitcoin address. It has been argued that for those attempting to conceal assets anonymously both the offshore and virtual economies allow individuals to distance themselves from public traceability. Whether this is by creating a complex trail of entities located across a variety of secrecy jurisdictions, or using multiple, unrelated Bitcoin addresses through an anonymous browser such as Tor, law enforcement agencies are severely hindered when attempting to detect illicit flows of capital. However, an interesting terminological argument could be had for both shell companies and Bitcoin addresses, whereby perhaps a more suitable analysis is that criminals can only hope to achieve pseudonymity, rather than the desired anonymity. By also comparing the investigatory successes behind drug-trafficker Chacón Rossell and Silk Road mastermind Ross Ulbricht, it has also been questioned whether financial intelligence units have the resources to effectively de-anonymise criminals attempting to launder illicit flows of capital, held in the form of either an offshore shell company, or a Bitcoin address.
This piece was written for ICA by Kane Pepi, guest contributor.
Kane Pepi is a recent graduate of the University of Central Lancashire, earning a Master's Degree in Financial Investigation. Kane's research interests include money laundering offences and legislation, judicial powers available to financial investigators and private sector AML compliance. Due to enroll onto a PhD programme researching the money laundering threats within the virtual economy, Kane is using his academic background within the financial crime arena to contribute content on a variety of issues.
If you would like to take part in the ICA’s Big Compliance Conversation, and contribute to a likeminded community, please get in touch at firstname.lastname@example.org
Brito, J. and Castillo, A. (2013). Bitcoin: A Primer for Policymakers. Mercatus Center at George Mason University, p.9.
Chandna, V. (2017). The Curious Case of Black Money and White Money: Exposing the Dirty Game of Money Laundering. Notion Press.
Karame, G. and Androulaki, E. (2016). Bitcoin and blockchain security. London: Artech House, p.98.
Lee, T. (2013). Here’s who (probably) did that massive $150,000,000 Bitcoin transaction. [online] Washington Post. Available at: http://washingtonpost.com/news/the-switch/wp/2013/11/23/heres-who-probably-did-that-massive-150000000-bitcoin-transaction/ [Accessed 12 Sep. 2017].
Leigh, D., Frayman, H. and Ball, J. (2012). One Block in London, Many Secret Owners. [online] International Consortium of Investigative Journalists. Available at: https://www.icij.org/offshore/one-hyde-park-london-secret-owners [Accessed 12 Sep. 2017].
Morriss, A. (2010). Offshore financial centers and regulatory competition. 1st ed. Washington, D.C.: AEI Press, p.17.
Palmer, M. (2016). Hidden Assets, Nominee Directors and Ultimate Beneficial Owners (UBOs). [online] Available at: http://www.cachet-inter.com/articles/ubo.htm [Accessed 11 Sep. 2017].
Pamplin, B. (2014). Virtual currencies and the implications for U.S. anti-money laundering regulations. ProQuest Dissertations Publishing, 1564625
Prasad, D. (2016). The Financing of Terrorism. Vij Books India Pvt Ltd.
Sammons, J. (2015). Digital Forensics: Threatscape and Best Practices. Syngress, p.8
Stessens, G. (2000). Money Laundering: A New International Law Enforcement Model. Cambridge: Cambridge University Press.
The U.S. Department of the Treasury, (2012). Treasury Targets Top Guatemalan Drug Trafficker. [online] Available at: https://www.treasury.gov/press-center/press-releases/Pages/tg1395.aspx [Accessed 27 Jan. 2017].
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