7th May 2016, Bachir El Nakib

A Question was raised by a member: What's Bitcoin and what are the money laundering real risks?

Money laundering with Bitcoin is an emerging threat. It has gained enough traction as a threat that the US goverment moved to regulate Bitcoin exchanges. This video provides a basic overview of what Bitcoin is. We then review the stages of money laundering and identify the threats that Bitcoin poses at each stage. We identify mitigating factors that help to reduce the threat of Bitcoin. The video covers the steps of the US government has taken to regulate Bitcoin exchanges.


Video Transcript - The Truth about Bitcoin

Hi this is Stefan Molyneux. Thanks for watching our video today Money Laundering with Bitcoin – What are the real risks? Bitcoin has been in the news a lot lately,  so I thought I would take a few minutes to put together a video. We give you a quick explanation of what Bitcoin is and cover some of the real risks that we face from a money laundering perspective.

So let’s first talk about what Bitcoin is.  It is a completely digital currency It works like real money, but it doesn’t have any kind of affiliation with any country or any kind of central bank. Users of Bitcoin send money back and forth without any kind of an intermediate use of a bank or other financial institution between the concept that they call wallets. So it’s a direct peer to peer connection. You can send money directly just like you can exchange cash. Bitcoins are created in a slow predictable pace over time using a process called mining, which is basically a complex computer computational task. These bitcoins are are minted and new bitcoins come into existence. But unlike a government which can print money, bitcoin creation or mining is controlled. So there can only ever be so many bitcoins. We know how many will be created at any given time. Another thing that you can do is you can use bitcoins and you can exchange them for cash. So you go to a bitcoin exchange you give them your cash and they give you bitcoins. So you can take a real money and you can turn them into this digital or electronic currency called bitcoin.

To understand money laundering with bitcoin, let’s just do a quick review of money laundering and the three stages. The first stage is called placement, and that’s basically when we move cash from illegal activity. We place it or move it into the financial system such as banks. The second stage is layering and that’s where those who are trying to do money laundering conduct a series of transactions. It’s basically a game of three-card monte. We’re trying to hide the original source of the funds so we lose track of it. Ultimately the goal of money laundering is integration, which is the third stage, and that’s moving the money out of the financial system and converting it back into cash but now it has a pedigree of legitimacy. Basically we can show where that money came from and it looks legitimate.

So let’s get down to it. Money laundering with bitcoin at the placement stage of money laundering. We basically have to worry about cash being converted to bitcoin. That’s relatively easy to do through these bitcoin exchanges. Recently the US government has moved to classify bitcoin exchanges as money services businesses. What that means is that these bitcoin exchanges will now have to do just like if you’re dealing in cash, they will have to file currency transaction reports for someone who buys more than ten thousand dollars in cash. They’ll have to perform customer due diligence, basically verify that customers are who they say they are. Ultimately these bitcoin exchanges will have to file suspicious activity reports when they see activity that could indicate money laundering.

So some of the risk that we see at the placement stage of money laundering.  Bitcoin exchanges are new to this compliance game. The US government only recently within the last couple of weeks told them that they have to register as money services business. So it’s going to take them a while to understand how to implement the controls, put the software in place and basically become effective. They may be compliant initially, but to really be effective at controlling the placement of money, its going to take a while. Another thing that we have to worry about is that smurfing is very easy. Smurfing is the process of breaking up transactions to get below the reporting thresholds. Because of the virtual nature or the electronic nature we can go to many different bitcoin exchanges. We can split that cash out we can use many different money mules to buy the bitcoins. So smurfing is going to be something that’s difficult to detect for the exchanges so that’s a real risk. Another thing to consider is that any bitcoin exchanges outside of the United States will not be subject to the same kinds of regulations.  As of this point the United States is the only one to put these controls in place and label bitcoin exchanges as money services businesses. Just as we see with other types of money laundering, we may see bulk cash smuggling to get the physical cash out of the United States and have the purchases of bitcoins take place in other jurisdictions where the controls are weaker.

So the risk that we see at the layering stage of money laundering.  This is where bitcoin really gets scary from a money laundering perspective. Transactions are peer to peer, so it’s basically like sending cash from one person to another. These transactions are anonymous and they’re basically untraceable. So there’s really not a lot of work the criminals have to do to accomplish layering once it goes into the bitcoin system and comes out the other end. You have no idea of. the the source of that transaction and that’s scary from a money laundering perspective.

So let’s talk about the risks at the integration layer of money laundering. This is where the criminals are attempting to take the money that they have put through this game of three-card monte. Basically hidden the trail of where it came from.  Now they’re trying to integrate it back into the legitimate economy so that this looks like clean legitimate money. Then they can go and use that money convert it back to cash if they want. Basically have taken out their money in a clean laundred way. The reason that bitcoin becomes a a bit of a challenge or has some risks is because it’s becoming more widely accepted at merchants of all types. Initially it was used for small online purchases that sort of thing. In a recent Wall Street Journal article we read of one car dealer who was accepting bitcoins in payment for automobiles. So that means that the criminal could wash his money through the bitcoin system and then convert those bitcoins into a high-value luxury automobile which could then easily be converted back into cash which would then be clean and and shown as the the proceeds of the sale of an automobile. So as it becomes more widely accepted and available at more places that makes for more more opportunities for criminals to use the bitcoin system in a meaningful and profitable way for them.

So it’s not all bad news. There are many mitigating factors that limit the use of bitcoin as a large-scale practical means for laundering money. First off as we discussed earlier the US government has placed restrictions on bitcoin exchanges. They are now regulating them as money services bureaus which will help to control placement of money into the bitcoin system. Another thing that maybe a mitigating factor is the bitcoin market itself the value of bitcoin can can fluctuate very widely. Over the last couple of days the value of any given that coin has lost seventy percent of its value. Someone that put in ten thousand dollars two days ago with them ultimately have three thousand dollars. We know that money launderers are are willing to take some risks and and they’re willing to lose some of their profits to effectively launder money. The volatility of the market may may be a mitigating factor here. Ultimately the size of the bitcoin market is is fundamentally just too small to to make it useful in a in a large-scale capacity. Market capitalization or the total value of the bitcoin market is on any given day roughly about a billion dollars. We know that the source of illicit funds are in the trillions of dollars. To launder money all of the money that goes through illegal transactions would ultimately you would have to turn over the entire bitcoin market thousands of times in a year. That’s really just not practical at this point. Perhaps as the the value of bitcoin grows maybe over time it may become more of a serious threat to be a large-scale item. At this point because it’s the relatively new nature and that the size of it that’s definitely a mitigating factor.

So in conclusion, money laundering with bitcoin is a real risk. The primary concern that we have with bitcoin is the anonymity that transactions can be conducted with. As we’ve said the size of the bitcoin market right now, and it’s ability to scale and we don’t see right now becoming the primary means of money laundering. Ultimately, though, financial institution should keep an eye out on this emerging threat particularly in looking for bitcoin exchanges that they may bank. You have to treat them now as money service bureaus. Ultimately any transactions that could be associated with bitcoins may deserve some further scrutiny. So thanks for taking the time to watch our video, Money Laundering with Bitcoin – What are the Real Risks. I hope you found it useful. Take a minute to click the subscribe button down below and you’ll get more news and insights into money-laundering prevention. 

Ex- Compliance Officer and Bitcoin entrepreneur admits aiding black-market web customers

High-profile digital currency entrepreneur Charlie Shrem, who served as the anti-money laundering compliance officer of a Bitcoin exchange that enabled customers to purchase illegal drugs on the black-market website Silk Road, on Thursday pleaded guilty to aiding the operation of an unlicensed money transmitter.

Shrem and his accused co-conspirator, Robert Faiella, pleaded guilty at a hearing in New York federal court as part of a deal struck with prosecutors from the office of Manhattan U.S. Attorney Preet Bharara. Faiella pleaded guilty to operating an unlicensed money transmitter.

Both men had been indicted for allegedly conspiring to launder funds linked to drug trafficking. Shrem was also charged with failing to file Suspicious Activity Reports (SARs).

"Robert Faiella and Charlie Shrem opted to travel down a crooked path – running an illegal money transmitting business that catered to criminals bent on trafficking narcotics on the dark web drug site, Silk Road. The approximately $1 million in 
Bitcoins Faiella and Shrem sold to these outlaws cost them a lot more than they bargained for and bought them today's convictions," Bharara said in a prepared statement.

Shrem's lawyer, Marc Agnifilo, said that what Shrem did was an aberration and that Shrem plans to continue working in the bitcoin world if possible, Reuters reported.

Doing business as BTCKing, Faiella sold 
Bitcoins – the only form of payment accepted on Silk Road – to those seeking to buy illegal drugs on the site, court documents state. 

Faiella knowingly failed to register his business, a form of money transmitter, with the Financial Crimes Enforcement Network (FinCEN) as required pursuant to Bank Secrecy Act regulations, prosecutors said.

Faiella's supply of Bitcoin came from a business at which Shrem served as chief executive as well as compliance officer until it was shuttered in July 2013. Shrem, a well-known figure in the Bitcoin community, at the time held a key post the advocacy group known as the Bitcoin Foundation.

Shrem personally processed Faiella's transactions despite knowing the 
Bitcoins he was peddling were headed for Silk Road, court documents state. They add that Shrem did not file any SARs on Faiella's transactions and in fact instructed him on how to circumvent the company's anti-money laundering controls.

As part of plea deals, both Shrem and Faiella agreed to forfeit $950,000. 

When sentenced, the men could each face up to five years in prison.



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