Interpol, Europol, and the Basel Institute of Governance recently held a conference in Doha, Qatar. The Global conference on countering money laundering and digital currencies attracted over 400 financial investigators from financial intelligence units around the world.
The primary purpose for the conference was to give law enforcement agencies and the private sector the tools and training to detect and fight the criminal use of digital currencies. The three day event included a range of presentations, mostly from private sector speakers, including several researchers, entrepreneurs, and criminal investigators and prosecutors with experience in cyber crime enforcement.
“Digital currencies are now undoubtedly part of the payment system,” said Europol’s Head of Financial Intelligence, Simon Riondet. “Their use is expected to increase exponentially in the coming years. And understandably so, since they improve payment efficiency, reduce transaction and fund transfer costs, while facilitating international remittances.”
“The other side of this narrative is that they are also a powerful new tool for criminals and terrorist financiers to convert, remit and conceal illicit funds from law enforcement authorities.”
- Simon Riondet, Europol Head of Financial Intelligence
The conference was organized by the Working Group on Virtual Currencies (WGVC), a joint initiative formed in September 2016 by Interpol, Europol, and the Basel Institute on Governance. While Interpol is also a member of the Commonwealth’s Virtual Currency Working Group, the WGVC is a global effort funded by the authorities of Qatar.
The WGVC was designed to create a network of experts to share best practices, as well as provide operational assistance and policy recommendations. “Europol, INTERPOL, and the Basel Institute on Governance recognise that Law Enforcement Agencies worldwide could benefit from the exchange of information and knowledge with peers from other jurisdictions,” states the Basel Institute.
The conference concluded with six specific recommendations for the attendees. The first was a call for increased information sharing, and specifically mentioned bitcoin addresses that agents suspect, “threaten economic stability.” The solution is to send offending bitcoin addresses to Interpol and Europol, so they could be shared with law enforcement globally.
The second recommendation focused on training initiatives, including manuals, special programs, and conferences. Similar standards and best practices were suggested, and the WGVC advocates training courses for more than just police investigators, such as prosecutors, private investigators, judges, and regulators.
Regulatory transparency was recommended, with forums where regulators, lawmakers, and law enforcement can work together on generic regulations for each country.
The fourth recommendation specified targeting, “Digital Currencies Exchangers and Wallet Providers under current Anti Money Laundering and Counter Terrorism Financing Legislation.”
“The existence of such crime and its usage as a predicate offence for the crime of money laundering is key factor successful investigations/convictions/confiscations in this field.”
- Basel Institute on Governance
While Bitcoin exchanges handling fiat currencies typically fall under strict Anti-Money Laundering (AML) regulations already, applying the same regulations to wallet providers may be a far larger challenge than the WGVC bargained for. Many wallet developers only produce software. Development teams behind this software are often anonymous, such as popular bitcoin wallets Electrum and Samourai. Much of this software is open source too, making it impractical to stop development of them even if the developers are known.
Another WGVC recommendation was for law enforcement to take specific action against the use of digital currency “tumblers,” otherwise known as mixers. “The existence of such companies should not continue to be tolerated,” the WGVC stated.
There are at least nine active bitcoin mixing services on the deep web today, each requiring the anonymity-providing TOR browser to access. The high level of privacy that TOR offers has so far effectively helped them evade local authorities. It’s often impossible to know which country they are located in, so local law enforcement is unlikely to know if one is operating in their jurisdiction.
The final recommendation was to “consider the creation of the crime of unexplained wealth.” Separate from tax evasion or money laundering, attendees should push for their respective agencies to add a new crime to their books, that makes it illegal to be in possession of undocumented money.
Europol’s 2016 Internet Organized Crime Threat Assessment highlights a growing trend in technologies that present problems for lasw enforcement, and mentioned a handful of up-and-coming technologies by name, including the fully-anonymous cryptocurrency ZCash, the fully peer-to-peer exchange Bitsquare, and even individual smart contracts made on the Ethereum blockchain. The report argues that small contracts like those could be ideal for facilitating money laundering.
Developers are also working on open-source tumbling programs like the Ethereum contracts and Joinmarket to decentralize the need for tumbler service providers. Likewise, self-hosted wallets that have anonymous developers behind them are also in development, such as Dark Wallet and Torwallet.
“The philosophy behind many of these projects is the protection of the privacy of those who perhaps need it most, such as activists or those outspoken against oppressive regimes. However, it is not hard to imagine who would be the primary benefactors of a currency which was entirely anonymous and resistant to law enforcement surveillance.”
- Internet Organized Crime Threat Assessment
The Heritage Foundation argued in a September research report that the existing AML laws “impose large costs on society and fail any reasonable cost-benefit metric. Costs exceed $7 million per conviction,” they explained. “There is little to no evidence showing that the BSA/AML laws are a cost-effective law enforcement tool.”
Poorly made regulations are a huge part of the problem. In one instance, the foundation pointed out that current regulatory framework “requires financial firms to file millions of reports each year even though records show that there are only approximately 2,000 AML investigations per year.”