On July 13th, United States Deputy Attorney General Rod Rosenstein released bombshell indictments of 12 Russian intelligence officers for charges of hacking the Democratic National Convention servers during the 2016 Presidential Election. The revelations sent shockwaves through the media and the public by decisively proving Russian tampering with the election which saw Donald Trump elected President. Besides the monumental nature of these indictments, the specifics of the Russian intelligence operations reveal disturbing information about the future of another global risk entirely: money laundering.
As reported by the Department of Justice indictments, agents belonging to the Russian GRU intelligence agency hacked servers belong to the Democratic National Convention and purportedly disseminated this information anonymously to organizations such as WikiLeaks, as well as some Republican officials. In order to maintain their anonymity, the report notes, these Russian agents utilized Bitcoin, a popular digital cryptocurrency, to pay for much of the necessary hacking infrastructure, such as domain names and online servers. These hackers utilized hundreds of different email addresses to make individual purposes to mask their activities. The revelations from these indictments demonstrate the unique dangers and opportunities associated with cryptocurrencies, and has shined a light on the means that these technologies can be utilized for money laundering purposes.
Bitcoins and other cryptocurrencies utilize a technology known as Blockchain to enhance both the accountability and anonymity of transactions. All purchases are recorded on a publicly distributed ledger, whereby every account-holder maintains a copy of that ledger. In this way, transactions are readily available and also secure from tampering, as a ‘hack’ of the ledger would require an impossibly coordinated change of more than half of all copies of the ledger. Thus, on the face of things, cryptocurrencies would appear to present a distinctly egalitarian solution to money laundering; by maintaining an accessible, unalterable record of crypto exchanges and transactions, law enforcement officials could conceivably ‘follow the money’ from money laundering activities quite effectively. However, they also present a clear risk for traditional means of combatting these illegal activities.
Money laundering refers to the process of sanitizing funds from ill-begotten sources. This typically involves criminals ‘washing’ or ‘laundering’ illegal funds through legitimate businesses, investments, and financial institutions. By flowing funds through these channels—often multiple times—the money appears, to the outside eye, to be increasingly more legitimate and legal. Theoretically, by the end of the laundering process, the money will be able to enter the legal economy, where it can then be utilized or spent as if it were gained from legitimate sources. The global anti-money laundering regime relies on three tested means of preventing these criminal activities: prevention, detection, and suppression. Through the first means, financial intelligence units and compliance bodies within large financial institutions work together to create requirements that dissuade criminals from using those institutions for money laundering purposes. The second means focuses on detecting money laundering activities that are committed, with the banks sharing the information with the relevant FUIs and law enforcement officials. Finally, the third means utilizes law enforcement to freeze and confiscate assets and, hopefully, charge the perpetrator.
It is the second of these three means—detection—that is most threatened by the rise of Bitcoin. Most states legislate rigorous compliance mechanisms for their financial institutions and close cooperation with their national financial intelligence units, as well as with global partners. In this way, banks and other financial institutions are adept at recognizing suspicious transactions and reporting them to the relevant authorities. Cryptocurrencies, by virtue of their blockchain technology, is necessarily decentralized and unregulated. As a result, there is little pre-emptive filtering work done to detect potentially criminal money laundering activities. If law enforcement officials know what to look for, the public and secure nature of the distributed ledger makes it exceptionally easy to track the transactions. Otherwise, however, money laundering is able to pass by unnoticed.
The money laundering dangers of cryptocurrencies remain nascent, but high-profile instances of their illegal use, such as the recent Russian indictments, may spur more attention to this issue. It is not yet clear how financial intelligence units will respond to this danger, however, as the decentralized nature of cryptocurrencies runs counter to traditional anti-money laundering efforts. If some sort of reporting mechanism was able to be enforced upon cryptocurrency transactions—an uncertain prospect, to be sure—it could destroy many of the benefits that the currencies hold over fiat money. In this way, the ever-increasing interest in Bitcoin and similar cryptocurrencies may dry up, as would-be users, both legitimate and illegitimate, look to other services for safe, secure, and anonymous transactions.
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