Crypto Money Laundering: Uncovering & Detecting the Scheme

Organized crime now utilizes cryptocurrency for money laundering schemes. Detecting their movement is crucial to ensure they don’t put your business at risk.
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Julia Ront, Founder and CEO of Vespia

April 24, 2024

Crypto crime is a prevalent crisis emerging in the financial industry. Understanding the money laundering strategy most sophisticated illicit actors use can protect your business and clients.

Considering cryptocurrency's pseudonymous nature and the complexities of blockchain, it can be a tempting method for laundering money, especially for the organized crime movement.

Significantly, in 2023, a total of $22.2B in cryptocurrency was laundered. While this number has decreased from the 2022 report of $31.5B, it still represents a concerning risk for the financial industry.

Learn how crypto is laundered and how to detect and trace laundered funds to safeguard your business, accounts, and stakeholders effectively.

What is crypto money laundering?

Money laundering using cryptocurrency involves disguising the origins of illegally obtained money by passing it through numerous transactions and transfers to make it appear as legitimate funds.

Cryptocurrency offers a decentralized environment for peer-to-peer transactions, making it a viable option for funneling illicitly obtained or stolen funds.

How crypto laundering impacts financial institutions

Banks and financial institutions can be vulnerable to these schemes if they have weak anti-money laundering (AML), know your business (KYB), and know your customer (KYC) processes.

Some factors that can affect your business includes:

  • Anonymous addresses that make it difficult to identify individuals and their transactions
  • Decentralization of cryptocurrencies makes it harder to implement traditional monitoring and compliance measures
  • Global transactions across borders have no reigning laws and regulatory standards, which can add to the difficulty of monitoring instances of laundering crypto

The crypto laundering process explained

There are many ways to launder funds from fiat currency. Generally, however, it follows a placement, layering, and integration process.

First, placement involves feeding money into the system. Crypto criminals deposit funds into the digital financial system through wallets or crypto exchanges.

From this point, the goal is to make tracing any transactions back to the source difficult. This means numerous transactions occur which involve converting funds into other cryptocurrencies before redistributing them across other wallets and exchanges.

Once the funds have gone through enough exchanges, crypto is reintroduced as fiat currency, used to buy assets or conduct legal transactions with legitimate businesses.

Common methods of using cryptocurrency for money laundering

Cryptocurrency is used for money laundering through sophisticated techniques exploiting its digital, decentralized nature. These techniques are designed to obscure the origin of illicitly obtained funds.

Here are some of the primary methods by which cryptocurrency can be used for money laundering.

Nested services

This broader category of money laundering services utilizes illicit addresses to conduct exchanges. Smaller exchanges or services operate through APIs of larger, well-known crypto exchanges.

Over-the-counter or OTC brokers are one of the most well-known enablers for large anonymous crypto exchanges. For instance, Lazarus Group, a well-known hacker group made up of North Korea-affiliated hackers use this method for laundering funds. In 2023, OTC brokers were sanctioned for assisting the group.


Smurfing is another form of structuring where multiple users or "smurfs" conduct a number of smaller transactions with anonymous accounts using cryptocurrency to go undetected from anti-money laundering monitoring.

The main advantage of smurfing for money launderers is its ability to dilute the money trail by leveraging cryptocurrency's global, decentralized, and semi-anonymous nature.

Mixing services (Tumblers)

These services mix potentially identifiable or "tainted" cryptocurrency funds with others, to obscure the trail back to the fund's original source. Tumblers receive cryptocurrency in one account and return it, minus a fee, from a different account, effectively making the funds difficult to trace.

Chain hopping

This involves converting one cryptocurrency into another across different platforms, potentially using dozens of digital currencies, complicating the tracing process.

Launderers may hop from blockchain to blockchain because each operates independently and tracing across blockchains can be challenging without specialized tools.

Using privacy coins

Privacy coins like Monero, Zcash, and Dash are designed to offer stronger anonymity features than cryptocurrencies like Bitcoin. These privacy coins can obscure transaction details such as the identity of the sender and receiver and even the amount transferred.

Utilizing privacy coins make transactions nearly impossible to trace. There are several ways to use privacy coins for laundering.

  • Gambling platforms and decentralized exchanges (DEXs) allow launderers to utilize gambling services for a few bets before withdrawing the funds.
    Launderers can use online gambling platforms and DEXs to launder money.
  • Initial coin offerings (ICOs) and token sales
    By investing illicit funds into new cryptocurrency ventures and token sales, launderers can obscure the origin of funds. Once the tokens are traded on the open market, they can be sold and exchanged in a way that makes the original illicit funds difficult to trace.
  • Using Crypto ATMs and Prepaid Cards
    Crypto ATMs allow users to deposit and withdraw cryptocurrencies in exchange for fiat money. By depositing illicit funds into a crypto ATM, converting them into cryptocurrency, and then moving them through various wallets and exchanges, launderers can obscure the source of the funds. Similarly, prepaid cards loaded with cryptocurrency can be used for regular purchases, converting the illicit funds into goods and services.

Detecting the cryptocurrency money laundering process

When it comes to detecting money laundering through cryptocurrency, it can be challenging because of its pseudonymous nature and the complexities of blockchain.

The good news is that centralized exchanges are the usual endpoint for funds from illicit addresses. This means financial institutions can manage the process and prevent the success of laundering crypto.

Let's dive into the different ways to detect and prevent illicit activities from happening.

Transaction monitoring

Continuously monitoring cryptocurrency transactions is crucial in identifying suspicious patterns. Advanced software tools and algorithms including machine learning and AI can aid in analyzing and detecting these anomalies.

Reportedly, implementing blockchain analysis to determine suspicious activities indicated by large sums of money or multiple smaller transactions via the same address proves effective. You can maximize risk evaluations by considering user behavior, financial credit, and peer-to-peer analysis to get a more thorough understanding of a new customer.

Taking a risk-based approach to monitoring your customers is still an applicable concept. Techniques may vary, however, reviewing important data and behaviors can make it easier to protect your business.

KYB, KYC, and AML policies

Combating cryptocurrency money launderers means to introduce layers of security and verification which includes KYB, KYC, and AML policies. Each of the procedures are required due diligence procedures to prevent money laundering and terrorist financing.

Taking this approach to security makes it harder for illicit actors to exploit financial institutions. KYC for instance ensures that financial institutions know the real identities of every customer with the proper risk assessment standards in place. KYB identifies the businesses engaging in financial transactions are legitimate and free from illegal operations. Lastly, AML policies monitor customer transactions national and global transactions based on Financial Action Task Force (FATF) standards.

Together, these policies go beyond complying with legal and regulatory requirements. They also form strong defense against laundering illicit funds even in the crypto space.

Analyzing transaction patterns

Today, there are specialized software tools developed to analyze blockchain transactions. These tools can trace the history of cryptocurrency transactions, identify the concentration of funds in specific wallets, and link blockchain transactions with real-world entities.

Certain patterns, such as frequent transactions across multiple crypto exchanges, using privacy coins, and transactions involving known tumblers or mixers, can be red flags for money laundering activities.

Choosing the right transaction monitoring tool for analyzing cryptocurrency transactions can effectively protect your business against criminal actors. Qualities of a good tool you'll want to consider should include pulling data from a wide range of data sources across various blockchains, real-time analysis especially in the fast-moving crypto space, and the use of advanced analytics like AI and machine learning.

Collaboration with regulatory bodies

There is strength in numbers, especially when it comes to combating crypto criminals. Making the effort to reach out to other financial institutions, crypto exchanges, and regulatory bodies can make all the difference in the knowledge you have on crypto crime.

In this way, you can share information on various areas of expertise to fully understand laundering illicit funds via cryptocurrency.

Education and training

Education and training is valuable no matter how long you've been in the industry. Working this into your standard practice will enable your business to stay one step ahead of any new trends for laundering money in the crypto space.

This means educating employees and stakeholders about the risks and indicators of cryptocurrency money laundering is vital. This includes training for financial institution employees, regulatory bodies, and law enforcement agencies on the latest trends in crypto money laundering and how to detect them.

International cooperation & compliance

Money laundering often involves cross-border transactions. International cooperation and adherence to global compliance standards, such as those set by the FATF plays a significant role in detecting and preventing cryptocurrency money laundering on a global scale.

Keeping the right processes in place

The cryptocurrency landscape continues to pose as a challenge for financial institutions as a decentralized platform for transactions. Crypto criminals can utilize this technology as an avenue for filtering through illegally obtained funds.

Leveraging the best of advanced technology may be the secret to combating these attempts. Choosing tools that implement a robust range of policies like KYB, KYC, and AML can ensure you can mitigate risks and prevent money laundering before it happens.

Vespia utilizes the best of KYB processes and AML procedures to help businesses safeguard operations against suspicious activity and money launderers. Now, Vespia combines the best of these features to efficiently monitor money laundering in the cryptocurrency space.

Schedule a demo today and discover how Vespia can protect your business against crypto crime.

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