Cryptocurrency prices and money laundering – Is there a link?

Written by Framroze Pochara on Wednesday February 1, 2017

As Bitcoin prices rose from $1,000 to $19,000, Ethereum from $8 to $715 and Ripple XRP up from $0.0064 to $3.79 in under 12 months, I found myself wondering, can this all be true? What is the story behind these obscene gains? Is this a wonder drug promising immortality to mankind?

As a compliance and financial crime compliance (FCC) specialist, I wanted to find out more, and explore firsthand what financial crime risks could be posed by the world of cryptocurrencies and the initial coin offerings (ICOs). I decided to buy $100 worth of any cryptocurrency. I therefore took the first step of opening an account on one of the ‘crypto’ platforms.

The initial registration was pretty straightforward. The usual stuff – name, address, date of birth, nationality, bank account details and upload of identity documents. A message flashed on the screen: ‘Thank you for uploading the documents. Please allow us one month’s time to complete the identification and verification process’. My immediate thought was: one month to open an account? They must be joking: even the banks do it faster.

I still wanted to buy the Bitcoin on that day itself. So I registered myself on another cryptocurrency platform but got pretty much the same response – 15 days for account opening. As a compliance person, whilst I was happy that the basic customer due diligence (CDD) processes were being followed, I wondered if these digital platforms carry out checks for source of funds, politically exposed persons (PEPs), sanctions, etc. I am pretty sure they do not.

While waiting for the account opening process to be completed, I thought of buying a physical cryptocurrency wallet for safe keeping of the ‘cryptos’ I would eventually buy. During my day-to-day work in financial crime compliance, I have heard many stories of digital currencies being hacked from the digital exchange platforms (Mt. Gox) and even from people who had bought a sizeable number of Bitcoin when the price was $100-$150 and thought of retiring early, only to realise that the Bitcoin had disappeared into thin air.

I did my research and decided on the Ledger Nano S. However, the company website said they were out of stock and the next batch of these wallets were available for shipping only after 75 days. I then found a Singapore-based distributor with the Ledger Nano S in stock. The distributor was selling the Nano S for SGD250 as against the original price of €79 (approximately SGD125). This whole process was becoming hard work.  

I put my thinking cap on and considered what is it that drives the price of a product which has no intrinsic value by 1,800% to 9,000% in one year, and why a cryptocurrency wallet would have a waiting period of more than two months. Could the runaway prices be just speculation or simple greed to get rich overnight? Or is it the criminals, the terrorists, tax evaders, the traffickers who have come across a gift from heaven (cryptocurrencies) to launder their illegal proceeds? I believe the latter certainly plays a part. The anonymity and the ease of carrying out cross-border transactions offered by cryptocurrencies has made it almost impossible to trace the money and the launderers. Similarly, the initial coin offerings (ICO) where digital tokens can be purchased using any cryptocurrency or even fiat currency are being lapped up.

There are many real life cases which make me believe that this is indeed the case – last year’s Wanna Cry computer attacks immediately springs to mind, where ransom payment was demanded in Bitcoin. Similarly Liberty Reserve, a US-based digital currency operator who’s founder was sentenced to 20 years behind bars after laundering hundreds of millions of dollars, involving proceeds from child pornography, drug trafficking and credit card fraud.

A major challenge for the compliance professionals in 2018 and beyond would be to implement processes to detect and manage financial crime issues arising from cryptocurrencies as they become mainstream and get entwined with regular banking and daily e-commerce transactions. 

About the author

Framroze Pochara is a Course Director for International Compliance Training Academy. Framroze is a senior financial crime compliance and risk management practitioner, and subject matter expert within our Singapore office. With a keen interest in AML, anti bribery and corruption, sanctions and client due diligence, Framroze’s expertise within the faculty is renowned.

International Compliance Training Academy deliver training leading to the award of ICA's professional qualifications (which are also awarded in association with Alliance Manchester Business School, the University of Manchester). International Compliance Training Academy covers a diverse territory comprising of Singapore, Malaysia, Hong Kong and the rest of Asia. Headquartered in Singapore, International Compliance Training Academy remains the only training provider accredited under the Institute of Banking and Finance (IBF Standards) in the fields of compliance and anti money laundering.

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