Money laundering and digital currencies
- 18 August, 2015 15:46
Seven percent of the world's $5 billion worth of supply of Bitcoin is circulated in Australia.
A statutory review by the Attorney-General's Department is considering assessing whether digital currencies, such as Bitcoin, should be incorporated into Australia's anti-money laundering and counter-terrorism financing (AML/CTF) regime.
The report of the recent Senate inquiry into digital currencies strongly supported "applying AML/CTF regulation to digital currency exchanges, noting that similar steps have been taken in Canada, the UK and Singapore."
Digital currencies such as Bitcoin have been attractive to criminals because they offer additional 'layering': Criminals can exchange one digital currency for another before converting them into real-world currency.
Such activity leaves little or no trail for investigators in pursuit of those money launderers.
Last year saw a rapid rise in the popularity of digital currency. And in 2014 alone, experts estimate that the equivalent of over US$500 million was lost via fraudulent activity involving digital currencies.
This has led to fears that increased monitoring of activity within the digital realm will reveal new cases of money laundering, with serious consequences for associated businesses.
For example, in 2013 more than 20 people in Australia were arrested for importing drugs through ‘DarkNet’ sites, many of which relied on Bitcoin-based payments.
In a high-profile case, Australian police raided a South Brisbane coffee shop with ties to a biker gang, seizing a Bitcoin ATM along with delivery vans and other objects of interest.
More worryingly, Australia’s anti-money laundering agency — AUSTRAC — released a report that identified online payments and digital currencies as an "emerging terrorism financing risk".
Off the back of this, the government announced AUSTRAC would receive a further AU$20 million funding to increase surveillance to stop money being channelled to fund terrorism.
Then there is the question of Bitcoin itself and whether it was ever intended to be used as a legal tender.
Bitcoin was the subject of a notorious and highly publicised money laundering scandal when Charlie Shrem — a co-founder of BitInstant, as well a founder of the Bitcoin Foundation — faced allegations of conspiring to launder US$1 million Bitcoin to ‘deep web’ black market Silk Road.
Shrem was sensationally arrested and then sentenced in December to two years in prison for transferring money deposited in bank accounts by Silk Road customers who used it to buy illegal drugs. Shrem also had to surrender US$950,000 in profits.
Fellow BitInstant co-founder Gareth Nelson, said he was deceived by Shrem and that he had no idea his company was being used to launder money.
In Shrem's indictment, it was alleged he offered advice to a Silk Road merchant on how to avoid detection and being included in an AML ‘suspicious activity report’.
One of the biggest challenges for all participants at this new frontier is therefore being able to identify and investigate suspicious transactions in a domain that has libertarian roots and occupies a fast-disappearing regulatory vacuum.
As part of a commitment to a healthy regulated environment, applying anti-money laundering (AML) and Know Your Customer (KYC) regulation to digital currency exchanges in Australia is vital.
If approved, all digital currency exchanges would be required to implement AML and KYC processes into their operations. AML and KYC are part of the framework in those countries that have already passed Bitcoin regulations, and mark a huge turning point for digital currencies.
As a result it is crucial to find the knowledge, skills and experience to implement effective risk-based AML processes and practices.
Applying AML and KYC regulation can help tackle these concerns and bring digital currencies into the mainstream. But given the anonymous nature of digital currencies and the fast turnaround of digital transactions, detecting money laundering can be a daunting task for many digital money exchange businesses.
Technology exists however, that can help businesses comply with AML regulations in an efficient and cost-effective way.
There is software that can integrate AML controls into an organisation’s structure, based in a hosted environment. This takes away the need for the organisation to run the system itself. AML software works by allowing the user to set transaction monitoring rules that are enforced automatically to detect money movements that could be associated with laundering activity.
This is imperative, as with the fast turnaround of digital currency transactions, it would be almost impossible for organisations to watch activity in enough detail without installing an automated alert system.
AML solutions provide companies with a comprehensive system to prevent individuals or business using them to transfer illicit funds.
With advanced KYC functionality through integration of internal client lists with third party lists which include sanctioned or politically exposed persons (PEPs), software automatically alerts staff where clients appear on either internal or external lists.
This coupled with effective due diligence and preventative measures can go a long way to curb potential misuse of their platforms.
By adopting AML and KYC measures, even in the absence of regulations, Bitcoin businesses are insulating themselves from any blowback due to sudden implementation of regulations.
Significant support available from the technology sector is available that will alleviate the pressure of compliance and help ease the new regime into part of every organisation’s regular routine.
These are exciting times for payment systems that will support the future of global trade. They are however challenging times for regulators, AML officers and financial crime investigators.
All must quickly become cyber-enabled to deal with a movement that could morph and grow rapidly as a domain for organised crime.
Jon Piercey is vice-president, APAC, at software vendor Wynyard Group.