With the rise globally of money launderers and financial criminals increasingly exploiting technological advancements to conduct financial crimes, and taking advantage of loopholes in Dubai money laundering regulations and technology to find new ways of placing and layering illicit funds. The world of virtual assets and cryptocurrency is its latest victim of laundering attacks and raising the question of whether Dubai is a high-risk country for money laundering.
Why is Cryptocurrency Laundering Attractive to Money Launderers
Minimum or no Regulation
The minimal or lack of controls, regulations, and money laundering laws in the UAE on cryptocurrencies is the main reason for a rise in crypto money laundering in the UAE. Many laws and rules exist for other financial channels, currencies, and instruments, wherein fines and penalties are imposed for non-compliance with these laws.
However, these are not currently prevalent in regulating the world of cryptocurrencies. Since it is a new form of currency, which not all countries have accepted, it is not duly regulated by most countries. There is also the absence of centralized authorities involved in crypto transactions. Money launderers are attracted to crypto assets, as loose regulations result in a higher chance of not being caught by the authorities.
Anonymity
While dealing with cryptocurrencies, individuals do not need to reveal their names. Public addresses are used in these transactions, which do not relate to the user’s name. It provides users with a degree of anonymity, which is what makes cryptocurrencies desirable to money launderers.
There is no paper trail of a transaction or the personal data of the user. Only a digital record exists on the distributed ledger technology. Therefore, it is easier for criminals to move large amounts of illicit funds through blockchain technology without disclosing their identity.
No Legal Tender
Cryptocurrencies have no legal tender, they cannot be authorized. Also, anyone can subscribe to it. Since no owner details are maintained, it is easier to launder.
How Can Cryptocurrency Laundering Happen?
- One way money launderers use illicit cryptocurrencies is to buy chips or game currency on gambling websites. Once they are finished with gambling or gaming, they encash the remaining amount. Thus, the illicit cryptocurrency entered the gaming or gambling website is cleaned and converted to cash.
- With many unregulated cryptocurrency exchanges operating around the world, they do not conduct any identity checks or KYC of customers or transactions. So, criminals use such exchanges to launder cryptocurrencies. Specifically, launderers use illegal money in fiat currency to open an online account with currency exchanges.
- Another means is that launderers can hide illicit funds’ sources by anonymizing services on crypto exchanges. Anonymizing services breaks the connection between cryptocurrency transactions. Launderers can also participate in Initial Coin Offering (ICO) – using one type of coin to buy another. Thus, they can disguise the origins of the unlawful money by creating multiple layers.
- Also at the integration stage, criminals legitimize illicit cryptocurrency when they have successfully laundered the illegal money but need to show a legal source. In such a situation, crypto money launderers create a fake online company that allows cryptocurrencies as payment methods. Thus, they transform illegal crypto into legal money by faking the trade transaction. Alternatively, launderers can show the money as the sale of a profitable business or an asset appreciation.
Red Flags of Cryptocurrency Money Laundering
Crypto Money Laundering Red Flags That VASPs Must Include in Their AML/CFT Policies and Training Programs:
- When funds are received from a platform that does not have any AML regulations or has been categorized as a jurisdiction with high money laundering risks.
- Several high-value transactions suddenly occur in an inactive account or in a new one.
- When there are multiple transfers of cryptocurrencies from multiple crypto wallets to one account.
- When there are several transactions of purchase of cryptocurrencies by several individuals with the same IP address, followed by several transfers to accounts in another country.
- When the crypto sending and receiving transactions are just below the mark of reporting thresholds.
- When several credit cards and bank accounts are linked to a single crypto wallet, it to move funds around.
- Connected crypto wallets where the customer profiles do not match.
- Continuous occurrence of many high-value transactions in a short time.
- When several high-value transactions occur in a regular pattern and stop entirely after a specific period.
How to Combat Cryptocurrency Laundering
The anonymity in cryptocurrency transactions cannot be denied, which launderers take advantage of. But all the cryptocurrency transactions are documented on a distributed public ledger. These digital records stay permanently. One mistake in the entire money laundering process can help investigators trace the illegitimacy.
One way of protecting cryptocurrencies from money laundering threats is by implementing strict KYC rules. With KYC norms, exchanges could identify the customers and have data about owners of virtual wallets and cryptocurrencies. Registration and licensing of operators in the cryptocurrency market is also a solution that can address the money laundering issue.
Conclusion
The FATF has issued updated recommendations to assist countries in combating misuse of virtual assets and services. The lack of implementation of regulations creates loopholes that criminals and terrorists can take advantage of entities and non-compliance can lead to punishment for money laundering in the UAE.
We at eLegal Consultants can help to implement and update policies and controls with the FATF recommendations to fight AML threats, especially as related to cryptocurrency. Contact us for a free consultation.
