19/10/2023 Alexander

How do law enforcement track digital asset money laundering?

Former special agent for the US Department of Justice (DoJ) Lili Infante speaks with Pawel Kuskowski about the growth in the use of cryptocurrencies as a tool to launder money, how law enforcement track digital asset money laundering, the difficulties in the process, the developments that made crypto more attractive to criminals and what can be done to address it.

Lili started her career in the DoJ initially being assigned to the Drug Enforcement Administration (DEA). Primarily, Lili’s role was to enforce the controlled substances and Anti-Money Laundering laws of the United States focusing specifically on cryptocurrency related crimes. This ranged from the Silk Road (the first dark web where crypto was used as a method of payment to deal with illegal items) to more recent sophisticated crimes which sometimes involve similar techniques that drug cartels and terrorist organizations use in conventional money laundering schemes.


What makes crypto more attractive than traditional money for money laundering?

Lili claims traditional money laundering costs were very expensive, costing up to 30% of a criminal organization’s revenue, and very risky, as it involves cash transported in a duffel bag. When crypto was introduced, it eliminated all the risks of traditional money laundering with its easy to use, quick, cheap and anonymous method of payment. So, Lili believed that initially, crypto would seem like the best option to launder money without getting caught for criminals provided that they knew how to do it right.


Pioneering a federal level task force

Lili pioneered a federal level task force with the participation of several agencies including the DEA, Federal Bureau of Investigation (FBI), Homeland Security Investigations (HSI), US Postal Inspection Service and other state and local departments to focus on cryptocurrency enabled crimes. One of the main reasons this task force was created was because Lili believes that if the bad actors participating in this revolutionary technology can be removed, the technology is capable of making a difference to the world we live in.


Illicit activities done in cash versus crypto

When Pawel asked Lili for a ballpark figure on how much cryptocurrency is being used for money laundering or other illicit activities, Lili explains that while on-chain analysis can provide metrics for crypto money laundering, it’s not the complete picture. For traditional money, a laundering technique would involve generation of cash through illicit activities e.g. drug trafficking and then integrating that cash into the traditional banking system to “clean” the money to make it seem legitimate. However, with the advent of crypto, cash can be converted to crypto and transferred across borders before being integrated into the banking system. Therefore, one cannot really attribute the amount of crypto on the blockchain to the proceeds of crime as they can look like normal transactions.

Lili thinks the figure could be very similar to the percentage of fiat money used for criminal activities estimated at 2-5% of global GDP.


Increased usage of cryptocurrency in crime

Lately, criminal organizations have started to use cryptocurrency a lot more aggressively. According to Lili, there are also

  • malicious data actors who use it to finance their operations
  • terrorist organizations that use it to fund their operations 
  • drug cartels who use stablecoins

Investments in newer techniques are needed in order to combat these new threats.


Watch the whole discussion:


How to mitigate difficulties involved in recovery of assets

Understanding and cooperation between different agencies and governments is crucial because each agency has a different mission statement and resources. For example, the Internal Revenue Service (IRS) are experts in tracing money so must be involved if agencies want to recover any asset. Collaboration also helps avoid internal conflict between different agencies from fighting over assignment of cases.

On an international level, tracing assets become even more difficult as money moves into different jurisdictions and relevant authorities are unaware of the following:

  1. where the dark web market is hosted
  2. who is the target
  3. who are the administrators of the dark web
  4. who are the co-conspirators 
  5. the relevant authority in charge of the other jurisdictions

Therefore, it is very important for authorities and agencies situated in different parts of the world to conduct a thorough, effective and efficient investigation with shared evidence and information.


A stark change in the cryptocurrency crime landscape

Cryptocurrency related crimes have changed dramatically from what it used to be in 2012 versus 2023. Initially, criminal organizations used cryptocurrency primarily in dark web and cybercrime. It was mostly Bitcoin, Litecoin, and Monero (a privacy coin with low liquidity and high technical barriers to entry). Now, the usage of cryptocurrencies have increased significantly with the combination of Tether on Tron or Tether and Ethereum stablecoins, functioning in a highly liquid manner similar to fiat currencies.

The shift may have started when the centralized mixing service was launched in 2014. This made it harder for law enforcement officers to trace cryptocurrencies. It’s even harder now with Decentralised Finance (DeFi) and other dark web mixing services. Highly liquid stablecoins were a game changer during the pandemic in 2020, allowing light drug traders and terrorist organizations to launder money while at home in quarantine.

In the last 3 years, North Korea, terrorist organizations and drug traffickers have also started to use cryptocurrencies. Is there a way out of this or are we creating the most efficient method of funneling proceeds of crime and increasing the number of criminals in the world?


Crypto is just another technique, but it could be an opportunity

Crypto is just another vehicle which bad actors use to launder proceeds of crime so it would not be fair to say that cryptocurrency is increasing the number of criminals in the world. Authorities need to invest in training and tools to stay ahead of cryptocurrency and understand the structure of criminal organizations by monitoring the movement of their funds.


What regulatory changes are needed?

A switch from regulation by enforcement to more proactive regulation is needed although this is a challenge because of lack of resources. However, Lili hopes that proactive regulation, when it happens, does not stifle innovation and allows people to continue experimenting. In addition to this, some clarity is also needed amongst agencies to help them understand jurisdictional limits. In an ideal world, a separate regulatory authority set up to deal with digital assets would be the best way to go forward.