What Virtual Asset Providers Can do to Prevent Dirty Money From Entering Their Space

The digital currency space is currently on the verge of being strictly regulated due to the fact that it has been used for transactions that involve criminal activities over the past years. During a panel discussion at the last CoinGeek Conference held in New York City on October 5 to 7, experts in blockchain forensics and cryptocurrency crime investigations examine the problem and provide advice as to how virtual asset providers can prevent dirty money from entering their space.

The panel, moderated by Bitcoin Association Founding President Jimmy Nguyen, is comprised of BlockTrace Founder and CEO Shaun Magruder, Merkle Science Founding Member and Associate Director for Sales Ian Lee, IRS Criminal Investigation Special Agent Richard G. Reinhardt, and Director of Government & Strategic Affairs at Blockchain Intelligence Group William Callahan, who also spent more than two decades as a Special Agent at the Drug Enforcement Administration (DEA).

Dirty Money

With a public blockchain, all transactions are timestamped and stored in an immutable manner. This essentially means that with the right tools, blockchain forensic investigators are able to trace and monitor potential criminal activities on the blockchain.

“What used to be done in the early days of cryptocurrency investigations by hand, excel spreadsheets was very time-consuming. I love it when I have a law-enforcement officer come to me and say, ‘What took me three or four weeks, I did it in two or three minutes with your tool.’ That’s rewarding because that’s more time spending chasing the bad guy who’s taking advantage of your platform,” Callahan said as he talks about Qlue, a tool that can benefit virtual asset providers when it comes to ensuring that their companies are crime-free and regulation compliant.

Criminals, as with all types of illegal activities, have their own ways to circumvent restrictions that are in place to prevent money laundering and other schemes. Virtual asset entities would also oftentimes put a ceiling amount before applying KYC and AML rules. For instance, a particular exchange may put 2 BTC as the minimum amount to be reached before KYC and AML rules apply. This is where it goes wrong.

“And the unfortunate side effect of that is something like this, where criminals today are realizing that crypto is basically programmable money. ‘If you tell me that I can do less than 2 BTC in one account, well, I’ll just write a script that basically moves my money through, like hundreds of different wallets and deposit it into each account less than 2 BTC in order to evade the kind of thresholds that you have,’” Lee revealed.

The best thing to prevent this is to first, employ a trained and experienced compliance officer who knows what they are doing. These officers are supposed to not be just for show. They should be able to do their jobs properly, which includes the implementation of the compliance process and the performance of cyber security audits.

Second, do diligent research when it comes to partnering or doing business with other service providers. Prioritize quality over price, because in the long run, these third-party providers may allow for dirty money to seep into your system, which will cost more. And third, which is the one thing that is oftentimes neglected, develop a good relationship with regulators and relevant law enforcement officers.

“Today, regulators and law enforcement agencies are more than happy to engage with the virtual asset providers in their jurisdiction… At the end of the day, in cases like this, it is time-sensitive. Developing that close relationship with local authorities helps you not just in the case that an incident happens, but helps you just build a safer and more compliant business,” Lee concluded.

Dragan Sutevski

Posted by Dragan Sutevski

Dragan Sutevski is a founder and CEO of Sutevski Consulting, creating business excellence through innovative thinking. Get more from Dragan on Twitter. Contact Dragan