4 Emerging money laundering trends
4.1 Virtual Currencies
Virtual currencies (also known as crypto-currencies) are distributed, open-source, mathsbased
peer-to-peer currencies that have no central administrating authority and no central
monitoring or oversight. Examples include Bitcoin, Altcoin, Dogecoin and the like.
An FATF discussion paper on virtual currencies issued in June 2014 defines virtual
currencies as “a digital representation of value that can be digitally traded and functions as
- a medium of exchange; and/or
- a unit of account; and/or
- a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any
jurisdiction.
A decentralized virtual currency is not issued nor guaranteed by any jurisdiction, and
fulfils the above functions only by agreement within the community of users of the virtual currency.”
Virtual currencies are not of themselves illegal and indeed the JFSC has recently issued a
permit for a collective investment fund dealing in Bitcoins. Virtual currencies and in
particular Bitcoin may become the ‘internet of money’ and, the architecture that underpins
it, the mainstream payment system and validation protocol of the future. However, it is
necessary to identify and manage the risks just as that process has been necessary with
credit cards and other transactional cards.
The distinct features of virtual currencies and vulnerabilities that criminals currently seek to
exploit the most are:
- virtual currencies may allow greater anonymity than traditional non-cash payment
methods, as they can be traded on the Internet in non face-to-face relationships and may
permit anonymous funding of illicit activities; - virtual currencies may also permit anonymous transfers due to the lack of formal
identification of sender and recipient; - virtual currencies allow almost instantaneous global reach and greater anonymity than
traditional electronic money-based products. For example, Bitcoin protocol does not
require or provide identification and verification of participants or generate historical
records of transactions that are necessarily associated with real world identity; - virtual currencies commonly rely on complex infrastructures that involve several
entities, often spread across several countries, to transfer funds or execute payments
making policing and monitoring transactions extremely difficult; - use of additional software and anonymisation techniques that obscure the source of a virtual transaction and facilitate anonymity;
- there is no central oversight body, hence there is no centrally deployed monitoring system which can identify suspicious transactions; and
- law enforcement is unable to identify one central location for investigative or asset seizure purposes.
Recent law enforcement actions outside Jersey against virtual currency system participants
have included:
- criminal charges brought against Liberty Reserve, a Costa Rica based money remitter,
and seven of its principals and employees for operating an unlicensed money service
business; - charges brought against two principals each running a Bitcoin exchange for allowing
large quantities of Bitcoins to be purchased and subsequently used to buy drugs on Silk
Road, a notorious underground cyber drug-marketplace; and - a recent seizure of 388 Bitcoins (worth roughly €200,000) from a purportedly illegally
operated Bitcoin exchange in France (potential charges on illegal banking, money
laundering and operating an illegal gambling website are being considered).
The inherent anonymity of Bitcoin and other crypto-currencies is recognised as a major
obstacle for the law enforcement community to trace crypto-currency denominated
transactions used to buy and sell various contraband and engage in subsequent laundering
activities.
Law enforcement intelligence in Jersey suggests that local individuals ordering controlled
drugs from online drug marketplaces have used Bitcoins as a means of payment for the
drugs supply. One of the cases featured an online, over-the-counter marketplace platform
for trading Bitcoins called Bitcoin-OTC11 (operating outside Jersey), which was used as a
means to obtain Bitcoins.
Bitcoin-OTC is a trusted, online Bitcoin trading platform where registered individuals can
either use the order aggregation service provided by the platform or set up trades on a
person-to-person basis without interacting with the platform. A wide variety of payment
methods ranging from traditional payment methods (wire transfers, credit card payments)
to internet based payment systems (PayPal) can be used to purchase or sell Bitcoins via
Bitcoin-OTC.
A raft of Bitcoin addresses along with several Bitcoin-OTC traders were engaged by suspects
in Jersey to source Bitcoins that were subsequently used as a payment method for drugs on
illicit online drug markets. A combination of a completely unregulated online trading
platform and a multitude of Bitcoin addresses generated to facilitate the receipt and onward
transfer of Bitcoins have emerged as crime facilitating factors just as the Internet has enabled
the development of traditional crimes.
In order to address potential opportunities that Bitcoin and other virtual currencies may
offer to would-be launderers and terrorist financiers, an in-depth analysis of all relevant
AML/CFT risks and their key drivers has been prepared for consideration by the Strategy
Group in order to determine the most effective and proportionate legislative, regulatory and
law enforcement response to mitigating risk in this area.
In the meantime, relevant persons should apply additional scrutiny to customers whose
business activities involve the exchange of, or trade in, virtual currencies.
Members of the Strategy Group are also actively monitoring the approach of other
jurisdictions and international standard setters to mitigate the AML/CFT risks associated
with this fast moving area. If an internationally accepted standard is adopted, Jersey will
implement appropriate measures to adopt the international standard.
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