Money laundering through cryptocurrencies - analysis of the phenomenon and appropriate prevention measures
| DOI | https://doi.org/10.1108/JMLC-02-2021-0017 |
| Published date | 14 June 2021 |
| Date | 14 June 2021 |
| Pages | 79-94 |
| Author | Christoph Wronka |
Money laundering through
cryptocurrencies - analysis of the
phenomenon and appropriate
prevention measures
Christoph Wronka
Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Frankfurt, Germany
Abstract
Purpose –The aim of this paper is to assess the relevance of cryptocurrencies with regard to the money
laundering risk on the market and to present widespread money laundering techniques and recognizable
patternsof abuse. In addition, this paper aims to find an answer to the question to what extent the measuresof
the fifth EU Anti-MoneyLaundering Directive (AMLD) as well as other appropriatepreventive measures are
sufficientto reduce the money laundering risk in the area of virtual currencies (VC).
Design/methodology/approach –Firstly, the analysis requires a consideration of the theoretical
foundations of money laundering methods, as well as a presentation of the technical foundations of
cryptocurrencies and their ecosystem. Secondly, it is discussed towhat extent VC are suitable for money
laundering,which characteristics enable them to launder money and which new moneylaundering techniques
result from this. In addition,a comparison of different money laundering risk classificationisdone in relation
to VC from the perspectiveof different actors in the financial market.
Findings –Owing to theirsimple electronic storage and transferability,crypto assets pose a concrete riskof
money laundering. Their inclusion in the fifth AMLD was therefore a necessary step by the European
legislator. However, the question arises to whether the directive and the further preventive measures
presented in thispaper sufficiently fulfil the objective of reducing the money launderingrisk in relation to VC.
One positive aspect is the inclusion of the crypto custody business as a financial service in the German
Banking Act. Accordingto the definition in Section 1 (1a) sentence 2 no. 6, the offering of wallets is subject to
authorization and the offeringparty becomes an obligated party within the meaning of the Germany Money
Laundering Act.From a supervisory point of view, the new licensingrequirement is very much welcomed, as
the custodyofprivate cryptographic keys entails considerable risks.However, non-custodian wallet providers
who do not store the privatekeys of their users, are not covered. A closer analysis of the amending directive to
the fourth EU AMLD reveals that other relevant players in the crypto market, such as mixer and tumbler
services,are also not covered.
Originality/value –It is quite clear that cryptocurrenciesand the blockchain technology will continue to
accompany one in the comingyears. Further credit institutions arising in the market exposedto the described
risks will be seen. The paper will therefore present and evaluate possible risk reduction/options for anti-
money launderingfor new and existing financial institutions.
Keywords Bitcoin, Anti-money laundering, Risk reduction, Blockchain, Cryptocurrency, Darknet
Paper type Research paper
1. Introduction
In the draft law on the implementation of the fifth EU Money Laundering Directive
(AMLD) published on 19 December 2019, the topic of virtual currencies (VC) was included
for the first time. However, it is questionable whether the measures adopted in the
directive are sufficient to achieve the goal of reducing the risk of money laundering in
relation to VC.
Money
laundering
79
Journalof Money Laundering
Control
Vol.25 No. 1, 2022
pp. 79-94
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-02-2021-0017
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
The purpose of the paper is to assessthe relevance of cryptocurrencies with regard to the
money laundering risk on the market and describewidespread money laundering
techniques and recognizablepatterns of abuse. In addition, the paper focuses on the question
to which extent the measures of the questionof the extent to which the measures of the fifth
EU AMLD as well as other preventive measures are sufficient to reduce the money
laundering risk in thearea of VC and where there is a need for adaptation.
The analysis starts with a consideration of the theoretical foundations of money
laundering methods and a brief overview of the organization of money laundering
prevention in Germany, as well as a presentation of the technical foundations of
cryptocurrencies and their ecosystem. Subsequently, it is discussed to what extent VC are
suitable for money laundering, which characteristics enable them to launder money and
which new money laundering techniquesresult from this. The theoretical explanations will
be illustrated by means of exemplary case constellations from practice. Furthermore, a
comparison of the different moneylaundering risk classifcations will be made in relation to
VC from the perspective of different actors on the financial market. This is followed by an
analysis of the new requirements of the fifth EU AMLD as well as a presentation and
evaluation of existingand other preventive measures.
At the end of the analysis, weaknesses of the new directive are revealed and the
prevention measurescurrently under discussion are critically evaluated.
2. Basics and methods of money laundering
The term money laundering refers to the smuggling of illegally acquired assets into the
financial cycle while concealingtheir true origin (Schnabl, 2020). A generally valid definition
does not exist owing to the variety of manifestationsand the complexity of the process. As
early as July 1989, the heads of government of the G-7 countries decided during the Paris
World Economic Summit to strengthen measures to combat money laundering and set up
the so-called “FinancialAction Task Force on Money Laundering”(FATF) (Findeisen,2017).
Shortly afterwards, the EU issued the first directive on combating money laundering. In
Germany, the criminal offence of money laundering was added to the Criminal Code (para
261) in 1992 (Findeisen, 2017). The first AMLD was essentiallyimplemented by the “Act on
the Tracing of Profits from Serious Crimes,”abbreviated as the Money Laundering Act
(MLA), in November 1993. The Money Laundering Act imposes specific obligations to
prevent and detect money laundering on all those who are considered obligated persons
under Section 2 (1) MLA and who act in thecourse of their business or profession
(Bussmann, 2017). With the fourthEU AMLD, which entered into force on 25 June 2016, the
European regulations were adapted to the FATF recommendations revised in 2012. In
January 2020 the amending directive to the fourthEU AMLD was transposed into national
law. For the first time, the scope of application of those obliged under the MLA has been
extended to providers of electronic purses used to hold VC in custody, as well as exchange
platforms for tradingin VC(Schnabl, 2020).
3. Background of virtual currencies
3.1 Definition and central features
VC or cryptocurrencies are a substitute currency not issued by a state authority (Schmidt,
2018). According to Art. 1 no. 2 lit. d of the fifth AMLD, VC are “a digital representationof
value which has not been issued or guaranteed by a central bank or public authority and
which is not necessarily linked toa legally established currency (also referred to as fiat
money) and which does not have the legal status of a currency or money, but which is
JMLC
25,1
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