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Cryptocurrency and Anti-Money Laundering

Learn how the feds prosecute these federal fraud-related crimes

Federal anti-money laundering laws are often the downfall for criminal organizations and individuals who are involved in illegal lucrative schemes. A white-collar offense, money laundering is the process through which a person or organization introduces money that is derived from illegal activity into the financial system with the end goal of obscuring the source of the money to evade detection by law enforcement.

The anonymous nature of cryptocurrency very quickly became attractive to the criminal world, where virtual currency can be exchanged from one party to another through encrypted digital transactions that are executed in the complete absence of a central bank. Until recently, the lack of a central bank has meant currency can be moved around without worry of triggering red flags or keeping money in institutions that must comply with federally-mandated reporting guidelines, thus providing a breeding ground for cryptocurrency fraud in Fort Lauderdale and throughout Florida and the United States.

How crypto money laundering works

In contrast to traditional money laundering, which consists of three stages, crypto money laundering, sometimes referred to as “crypto cleansing” works in four stages. In Stage 1, the person or organization uses proceeds from illegal activity in the form of fiat currency, which is paper money or coins that have no intrinsic value outside of government backing; the U.S. dollar and other paper currencies are examples. The fiat money is used to purchase cryptocurrency from a basic digital exchange by linking a bank account, or with cash or debit card at a bitcoin ATM. Purchasing from a basic digital exchange is preferable because bitcoin ATMs are required to maintain anti-money laundering programs. Money launderers often use middlemen with clean records to make crypto purchases from online exchanges through their bank accounts. Purchasing online also allows for the use of a pseudonym and virtual private networks to add more layers of anonymity.

The newly purchased bitcoin is now stored in what is referred to as a coin wallet, a virtual space that has its own QR code and traceable address. To further obscure the money trail, Phase 2 consists of engaging in “mixing” or “tumbling,” a process through which the primary digital wallet address is switched with temporary addresses. Mixed bitcoin holdings are then transferred to an advanced cryptocurrency exchange with the intention of obtaining privacy coins. Once in a wallet within an advanced exchange, bitcoin may be exchanged for privacy coins, altcoins that are designed to give users even more anonymity. Dash, Zcash, Monero, Verge, and Desire are popular examples of privacy coins; Desire even offers the advantage of providing its own mixing service within the blockchain.

Phase 3 involves money layering or sending the privacy coins to and from different wallets, which may even belong to intermediaries, and buying and purchasing other altcoins to sever the links between the cryptocurrency and its original illicit source. At this point, the illicit proceeds have been converted to multiple cryptocoins and are thoroughly laundered until ready for return to the traditional government-regulated financial system.

By the time the process reaches Phase 4, the “bust out” integration phase, there are several options for reintroducing the cryptocurrency back into the traditional money system. Privacy coins may be converted back to the primary cryptocurrency used for purchased and then be sent back to a wallet within original basic currency exchange and finally withdrawn into a bank account. Bitcoin may also be transferred and reintroduced into the money supply by simply using the cryptocoins to purchase real estate.

Florida anti-money laundering measures for digital currency 

With the recent explosion in the popularity of cryptocurrency, the state of Florida, in cooperation with the federal government, have clarified their guidelines on financial reporting requirements within the crypto space. Since 2013, federal government agencies and Congress have been moving to tighten reporting restrictions for entities that are in the business of exchanging or transmitting cryptocurrency. In addition, startups have joined the government’s anti-money laundering efforts by licensing forensic software to help law enforcement track bitcoin transactions and detect suspicious activity. Financial institutions have also sought out the help of startups in creating software to help maintain compliance and meet SEC and Treasury Department data collection and monitoring requirements. The battle against crypto money laundering is being fought on multiple fronts; therefore, the likelihood of being investigated for suspicious trading is greater than it once was just a short few years ago.

Defense for cryptocurrency fraud in Fort Lauderdale

People and businesses who are being investigated for suspicious cryptocurrency activity should immediately contact an experienced defense attorney who understands the nature of the newly-emerging encrypted virtual currency space. There is still much gray area surrounding reporting requirements and even the roles of various parties who are involved in different aspects of cryptocurrency trading. Speaking with a federal money laundering defense attorney prior to communicating with law enforcement can help individuals who may be accused of a serious federal crime protect their rights and avoid self-incrimination in a very technical, complex matter.

The international community is cracking down on cryptocurrency fraud, adopting new regulations almost weekly. Those who are convicted of money laundering may be sentenced to 20 years in prison and ordered to pay tens of thousands in fines. Therefore, an investigation for potential money laundering in Fort Lauderdale or elsewhere in Florida should be taken seriously by retaining legal counsel as soon as a federal agency makes contact.

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