According to guidelines instituted in April of 2017, the National Police Agency (NPA) of Japan has reported its findings for suspicious financial transactions. The results for potential money laundering cases where cryptocurrencies was the “detergent” of choice rose tenfold, escalating from 669 cases in 2017 to 7,096 in 2018. Although crypto cases constituted only 1.7% of total cases reported, the accelerating growth reflects the concern of global law enforcement authorities that cryptocurrencies are providing a new avenue for the concealment and transfer of illicit gains from criminal activities.
There are no consistent cryptocurrency regulations across the globe, but at a minimum, regulators have made attempts to institute basic Know-Your-Customer (KYC) and Anti-Money Laundering (AML) rules by soliciting exchanges and requiring minimum reporting of suspicious transactions. The United Nations estimates that roughly 2-5% of global GDP is washed on an annual basis, some $2 trillion on the top end. Specifically to cryptos, Europol estimates that as much as $5.6 billion of the criminal in-take in Europe is actually crypto-laundered.
The NPA has acted in line with guidance provided the Financial Action Task Force (FATF), an intergovernmental organization that develops policies against money laundering. The FATF recently updated its preliminary guidelines related to cryptocurrencies, but the NPA has already required registration by each exchange, instituted monitoring procedures independent of the local self-regulating entity, and will begin to take measures to deal with infractions.
In its report, the NPA noted that:
Criminals were using a variety of tricks to conceal their identities during a mandatory know-your-customer procedure. In many instances, suspected offenders had different names and birth dates but the same ID photo. In a few cases, users logged into cryptocurrency exchanges from abroad even though they said they were in Japan. The agency also noted that criminals were allegedly using cryptocurrencies to purchase drugs and child pornography from underground online marketplaces.
Japan, a hotbed of cryptocurrency activity, has also been rocked by several major crypto exchange compromises. The most infamous was the Mt. Gox breach in 2014 that resulted in the loss of $473 million of Bitcoins. The bankruptcy trustee is still sorting out the pieces of this debacle. More recently of note was the hack of Coincheck in January of 2018. An extraordinary amount of $532 million was the take in this compromise. Recent analysis demonstrates that hackers may use as many as 5,000 separate transactions to layer the movement of their illegal gains before cashing out in fiat.
As for next steps, the NPA is in the process of training staff in detection techniques and data analysis required to reveal money laundering situations in crypto exchanges. It is also building new tools, assisted by Artificial Intelligence and Machine Learning protocols, to detect anomalies and patterns within transaction flows that might indicate crimes related to drugs and money laundering. The national financial regulator, the Financial Services Agency (FSA) is also stepping up its monitoring activities, as well.
Dirty money and cryptocurrencies, unfortunately, have developed a close relationship since the inception of Bitcoin. The infamous Silk Road was one highly publicized case where law enforcement stepped in to shut down a sizable illegal operation. Trends, however, are pointing to more, not less activity, and in order to protect the reputation of the cryptocurrency industry and appease regulators, new sophisticated tools must be deployed to attack money laundering before it gets out of hand.