Quick guide to cryptocurrencies and money laundering investigations
By Federico Paesano, Senior Financial Investigation Specialist, Basel Institute on Governance
When I first started talking about cryptocurrencies and money
laundering with my counterparts at INTERPOL and Europol back in 2014, the
subject filled a tiny niche.
There was basically only one cryptocurrency (Bitcoin), only
one case to discuss (Silk Road) and only 20 of us in a small room at the
University of Basel. Regardless, we decided to co-found a Working Group on
Cryptocurrencies and Money Laundering. We could sense something big was
happening and law enforcement needed to be ready to face the challenge.
Today, thousands of people apply to attend our annual Global Conference on Criminal Finances
and Cryptocurrencies. There are hundreds of new cryptocurrencies and other innovative
forms of virtual asset – such as non-fungible tokens – and soaring numbers of money
laundering cases that require investigators to enter the crypto sphere.
Global regulators are also taking the topic more seriously.
The Financial Action Task Force (FATF), the global anti-money laundering
watchdog, has issued updated
standards and guidance on virtual assets and virtual asset service
providers (VASPs), and is closely monitoring countries’ progress in compliance.
What kind of crimes could involve cryptocurrencies?
Cryptocurrencies have many legitimate uses and benefits,
including their potential to provide a cheap, fast, accessible and
international payment system to millions of unbanked people worldwide. But like
any store of value, they can be misused.
Some cases involve criminals using cryptocurrencies to
launder “normal” proceeds of crime or corruption. A simple example is a corrupt
official receiving bribes and trying to hide the origin of the money by transferring
money in and out of various cryptocurrencies and fiat currencies, such as
Mostly, though, we’re talking about crimes that generate
profits in cryptocurrency. As described in Europol’s Internet Organised Crime
Threat Assessment (IOCTA), cryptocurrencies are used to facilitate payments
for various forms of illicit activity. This includes the trade in drugs and
other illegal goods on the dark web, ransomware like WannaCry, kidnapping and
ransom payments, and cybercrime.
Following the virtual money – easier in some ways, more challenging in
The blockchain technology behind cryptocurrencies
theoretically makes it easier for financial investigators to “follow the trail
of the money”. Why? Because each transaction is recorded permanently in a
shared ledger – the blockchain – that cannot later be altered or falsified. The
money trail will theoretically stay there forever, ready to become evidence
even years later.
This is not the same for cash transactions, for example. It
is impossible to rewind time and see who gave what to whom.
Bitcoin transactions include the time and amount of the
transaction, plus the sender and receiver’s addresses (pseudonyms in the form of
long alphanumeric strings of characters). In contrast, smaller and more
privacy-focused cryptocurrencies such as Monero and Zcash conceal this
What’s tricky in all cases is attribution: linking
transactions and addresses to real people in the real world. In other words,
identifying potentially criminal transactions and the criminals behind them.
Breaking through the shield of anonymity
Luckily for investigators, there are techniques to penetrate
the apparent anonymity of cryptocurrencies and link transactions and addresses to
suspected criminals and money launderers.
For example, heuristics can be used to create clusters, i.e.
groups of addresses which are likely controlled by the same entity. Special techniques
are then applied to de-anonymise those clusters.
This is where blockchain analysis firms can help. For a fee,
they can analyse addresses and transactions to obtain critical information such
as geolocation data or the cryptocurrency exchange that was used to purchase
Investigators can then request further details from the
exchange, just as they would from a bank or other payment provider. As the
FATF’s above-mentioned standards on VASPs are rolled out through national
legislation, we hope and expect that more reliable data on their customers will
be made available to competent authorities.
The cost of consulting a blockchain analysis firm could be a
barrier in countries with limited resources for law enforcement.
However, in fact most investigations involving
cryptocurrencies start with the suspect, not with a mysterious transaction or an
anonymous address. Investigators are simply trying to find out which cryptocurrency
addresses a suspect controls. This information can often be revealed through
forensic analysis of the suspect’s devices, without the need to consult a
blockchain analysis firm.
Prosecuting cases – why expert witnesses are handy
The relatively new and fast-evolving nature of virtual
assets means that blockchain technologies such as cryptocurrencies are not
This holds true among law enforcement and judicial officers,
who may need to interpret evidence from blockchain analysis or digital wallets
in order to convict a suspect.
In this case, it is helpful to call an expert witness to clarify
and verify such evidence in court. Of course, a clear explanation of the
investigative steps followed will also help to demonstrate to the court that
the resultant evidence is just like any other evidence of financial crime.
Recovering stolen assets held in cryptocurrencies
Assets held in cryptocurrencies can be treated just like
assets held in bank accounts or real estate. For example, a judge can issue an
asset freezing order on a cryptocurrency account, pending the outcome of the
Given that cryptocurrency transactions can be made in just a
few minutes, however, international cooperation on asset freezing really needs
to speed up. Even for regular bank transfers, in the time it takes to issue the
freezing order, the money can have bounced around the world several times.
When it comes to confiscating and recovering assets held in
cryptocurrencies, authorities – which still use national fiat currencies,
although who knows what the future holds? – have a couple of options.
- One is to transfer the
cryptocurrency into the relevant fiat currency through an exchange.
- Another is to hold an
auction. The US Department of Justice recovered nearly
USD 50 million by auctioning a hoard of illicit bitcoins after closing down
the Silk Road online market in 2013.
Volatility in the value of cryptocurrencies is a headache
for those in charge of recovering assets. The Silk Road auctions of 144,336
bitcoins would have generated around USD 6 billion if sold today.
What can law
At the 4th Global Conference on Cryptocurrencies and
Criminal Finances in 2020, which was hosted by INTERPOL in cyberspace due to
the pandemic restrictions, seven
key recommendations emerged from the discussions.
In short, we see progress already, yet law enforcement still
has a long road ahead.
A multidisciplinary approach
For example, Recommendation 5 encourages investigators to
adopt a multidisciplinary approach. This translates to joint investigation
teams that combine financial investigation, cybercrime and technical
IT/forensic analysis expertise.
Yet many investigators still don’t reach out to counterparts
with such expertise, or else their institutions do not routinely convene
multidisciplinary investigation or asset recovery teams. They should.
Similarly, Recommendation 6 promotes new technologies to
be applied to financial investigation of virtual assets. Governments should
support research and innovation on tools that facilitate the investigation and
prevention of money laundering and terrorist financing through
At the moment, this is mainly being done by private firms,
which then charge a fee for their service to law enforcement.
Last, remember that cryptocurrencies are used by real people
in the real world. Our 7th recommendation last year to adapt investigation
strategies could include, for example, systematically searching suspects’
premises for devices or documents that might contain details of cryptocurrency
And as the use of cryptocurrencies increases around the
world, tracing transactions through the crypto sphere needs to become routine
practice among investigators. For that, our law enforcement officers quickly need
- The 5th Global Conference on Criminal Finances
and Cryptocurrencies, organised by the
Basel Institute on Governance and co-hosted with Europol and INTERPOL, will be
held virtually again in 2021 due to pandemic uncertainties. It combines a
one-day public conference with a second day of working sessions restricted to
law enforcement only.
- The Basel Institute offers
a training course on the fundamentals of cryptocurrencies, financial crime and
AML compliance. The Cryptocurrencies
and AML Compliance Training course takes place virtually at various times
per year and is spread over four three-hour sessions. Registration is open to
anyone seeking to prevent, detect and investigate the use of virtual assets for
illicit activities, including both law enforcement and private-sector
Download a PDF of this quick guide.