A recent study conducted by SmartSearch has unveiled a concerning trend of many illicit funds infiltrating the cryptocurrency industry at an alarming rate. According to the study, 28% of crypto firms have reported an increase in Suspicious Activity Reports (SARs) over the past six months, signaling a growing challenge in combating money laundering and other illicit activities.

Suspicious Activity Reports (SARs) are utilized by financial professionals, such as solicitors, accountants, and estate agents, to notify law enforcement about potential cases of money laundering or terrorist financing. In the United Kingdom, the SARs provide extremely valuable insights into the economic crime within the private sector, but they do not constitute official criminal complaints or fraud reports.

The study by SmartSearch encompassed 500 compliance decision-makers across various sectors, including crypto platforms, gambling firms, property developers, and banks. The findings shed light on the ongoing struggle faced by compliance professionals in tackling the rising threat of crypto-related money laundering. Another recent survey indicated that two-thirds of crypto firms are concerned about potential anti-money laundering (AML) violations.

Moreover, a survey conducted by First AML revealed that 53% of respondents believe current practices only partially address the risks associated with money laundering through cryptocurrencies. Disturbingly, 41% of participants identified cases of money laundering involving cryptocurrencies, while 51% faced fines or penalties for non-compliance with anti-money laundering regulations.

Criminals view cryptocurrencies as an attractive alternative for money laundering due to several factors. Firstly, cryptocurrencies like Bitcoin offer pseudonymity, making them harder to trace compared to traditional fiat currency transfers. Additionally, cryptocurrencies facilitate quick and seamless transactions of large sums, enabling access from anywhere in the world. Furthermore, many Virtual Asset Service Providers (VASPs) lack the necessary infrastructure or resources to effectively monitor and prevent illegal activities.

In Chainalysis’s most recent Crypto Crime Report, it was revealed that 2022 witnessed a record-breaking year for crypto money laundering, with $23.8 billion USD worth of funds being “cleaned” using cryptocurrencies. This marked a 68% increase from the previous year. However, it is essential to note that less than 1% of all cryptocurrencies are associated with illicit activity, as highlighted in the same report.

Martin Cheek, managing director of SmartSearch, suggests that criminal organizations target crypto firms to exploit weaknesses in their compliance processes, particularly when relying on flawed manual customer checks. Cheek emphasizes that traditional practices like requesting an ID document are no longer sufficient and fail to meet know-your-customer (KYC) and AML standards. Furthermore, these practices can leave room for identity theft.

Cheek adds, “The quality of forged documents has evolved to a level of sophistication that makes identification increasingly difficult. The Home Office’s own guidance on checking for forgeries of official documentation lists 24 potential failure points, many of which require expert knowledge to spot.”

The specter of money laundering continues to haunt the cryptocurrency industry as it strives to establish a legitimate and compliant image. In June, French authorities announced an investigation into Binance, the world’s largest cryptocurrency exchange, for “aggravated money laundering.”

Currently, the European Union is undergoing a consultation process to include Virtual Asset Service Providers (VASPs) within its anti-money laundering regulations, reflecting the growing concerns surrounding illicit activities in the crypto space.

It is important to note that the SARs are not crime or fraud reports. To report a crime or fraud in the UK, individuals can contact 101 or the Action Fraud on 0300 123 2040.