BTM Compliance is too Rigid for Money Launderers

Bitcoin ATM Growth is NOT a Boon for Criminals
Coin Cloud Team
, published on 
June 29, 2020
BTM Compliance is too Rigid for Money Launderers

When blockchain forensics and analytics company CipherTrace recently released their “Cryptocurrency Crime and Anti-Money Laundering Report, Spring 2020,” a leading digital currency news site responded with an article on how the growth of Bitcoin ATMs might mean a lot more money laundering.

We admit the blog post had a clickbait-worthy title and proved to be an interesting read, but as the biggest of those Bitcoin ATM companies – fully licensed with the Financial Crimes Enforcement Network (FinCEN) and running required Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance programs – we have a slightly different analysis.

One Bad Apple

Sure, there was one guy who operated an unlicensed BTM and exchange, using his non-compliant setup to trade $25 million worth of crypto for criminals, including drug dealers, and other darknet users. 25-year-old Kunal Kalra, a.k.a. Kumar, Shecklemayne and Coinman, pleaded guilty to four felonies last August in a plea bargain. Failing to license the machine was one of those felonies. Another was failing to maintain a compliant AML program.

He was meeting his “clients” on a peer-to-peer (P2P) marketplace based out of Finland – the kind that used to be the only way to trade cryptocurrency for cash. But since they allow personal dealings that are totally unregulated, anything goes. In fact, CipherTrace says just that one site used by Kalra, “LocalBitcoins, one of the largest peer-to-peer marketplaces, received over 99% of these criminal funds.” And Finnish exchanges in general ranked #1 for illicit activity, with over 12% of incoming Bitcoin funds being sent from criminal sources.

Still, even with all that illegal activity on the P2P marketplace, it’s not like using non-compliant BTMs is a rampant practice. It’s like … zero. “This is believed to be the first federal criminal case charging an unlicensed money remitting business that used a Bitcoin kiosk,” stated the Central California Department of Justice in a press release about the Kalra case.

So, obviously, one bad apple doesn’t mean that every BTM out there is being used for money laundering or other criminal activity – especially the big networks like Coin Cloud. In fact, it really couldn’t happen, because in the U.S., AML and KYC processes for crypto kiosk companies are strict. And the large BTM operators, including Coin Cloud, follow them to the letter.

Travel Rule

Not only that, but starting now, similarly strict AML processes must be followed worldwide, as the Financial Action Task Force (FATF) Cryptocurrency Travel Rule kicked in this month. The FATF is the global AML watchdog, and the Travel Rule states that all Virtual Asset Service Providers (VASPs) have to follow the same requirements as standard financial institutions with regards to collecting customer information during transactions.

And even without the Travel Rule, stricter AML procedures seem to have been working. CipherTrace confirms, “the global average of criminal funds sent directly to exchanges dropped 47% in 2019. This suggests that many criminals are finding it harder to offload their illicit funds directly into cryptocurrency exchanges, indicating effective implementation of AML measures around the world.”

If all that seems to go against the pseudo-anonymous nature of crypto, FATF stresses that, “As the guidance makes clear, relevant authorities should co-ordinate to ensure this can be done in a way that is compatible with national data protection and privacy rules.”

Just the Facts, Ma'am

Another misleading aspect of the crypto news article revolves around a fact stated in the CipherTrace report: “88% of funds sent by US Bitcoin ATMs to exchanges in 2019 were sent offshore.” But the article translated that into “CipherTrace also highlighted that the vast majority of U.S. bitcoin ATM transactions in 2019, around 88%, sent funds to offshore destinations.”

Hmmm. Do you see the discrepancy here? CipherTrace is stating a percentage of funds sent to exchanges from BTMs. The article misinterpreted it as a percentage of all BTM transactions, which is not even close to true. “Transactions sent to exchanges from BTMs are a very small percentage of all transactions,” says Chris McAlary, CEO and Founder of Coin Cloud. That's also supported in the report itself:

!BTM money destinations

In fact, for Coin Cloud, just 4% of all BTM transactions are sent to an exchange, with a mere 0.11% (that’s like 1/10 of 1%) going to high-risk exchanges. So that 88% highlighted by the news article as being a big deal? It’s 88% of 4%, which is 3.52%. That seems pretty darned good!

Even if we include P2P marketplaces, sometimes also called exchanges, the amount sent to those through Coin Cloud machines is only 26%, and the offshore ones (LocalBitcoins and Remitano) are only 18%. Over 70% of that 26% is sent to Paxful, which is US-based. So, it’s definitely not a hotbed of illicit activity by any stretch (and still nowhere near 88%). In fact, P2P exchanges have also started increasing their KYC processes in the past year or two, so they’re not as high-risk as they used to be.

Keep in mind that Coin Cloud’s KYC compliance includes a number of levels. Unverified customers have a low lifetime limit if they are using a prepaid or VOIP phone, and a bit higher if their mobile phone is with a carrier. Fully verified customers have to provide photos and ID, and then transaction limits rise. Any discrepancy triggers red flags, and scam transactions are shut down before they complete. So, while it’s possible to commit crimes using a registered and compliant BTM, it’s pretty difficult, and definitely not happening on a regular basis.

Blame it on Wotoken

And then there’s that other one-off scam skewing numbers even more. “In the first five months of 2020, crypto thefts, hacks, and frauds totaled $1.36 billion. The largest contributor to this high sum is a billion-dollar Ponzi scheme by Wotoken in China. The scam promised investors unrealistic returns using a non-existent algorithmic trading software. Ultimately, Wotoken operators (one with ties to the infamous PlusToken Ponzi scheme) stole an estimated $1 billion in crypto from over 715,000 victims,” states CipherTrace.

An Unfortunate Side Effect of COVID-19

The rest of the fraudulent activity revolves primarily around the COVID-19 pandemic, a once-in-a-lifetime scenario. “Coronavirus scams also contributed to the net earnings of crypto crime. While governments funnel resources into mitigating the impact of the pandemic, criminals are taking advantage of the lack of oversight, resulting from the need for urgent action,” the report says.

Those scams include phishing activity through impersonating legitimate non-profits like The Red Cross, applications that spy on users while claiming to help victims, and fake or non-existent Personal Protective Equipment (PPE) like masks, tests, vaccines and coronavirus cures. And they’re even selling phishing kits on the darknet, which are proving to be most popular among criminals.

“FinCEN and U.S. law enforcement have seen reports of cybercriminals leveraging COVID-19 themes as lures, often targeting vulnerable individuals and companies that seek healthcare information and products or are contributing to relief efforts,” says FinCEN Director Kenneth Blanco.

BTM War Against Crime

So, while not everything happens perfectly, and anything money-related will attract criminals, it’s very misleading to say that Bitcoin ATMs are “a boon for money launderers.” That’s just not true. It’s much too difficult, and honestly not worth it for most scammers.

Find out more about Coin Cloud’s war against crime in this post.

Disclaimer: The information and views supplied on the Coin Cloud blog are for educational and entertainment purposes only. We are not financial advisors, so please do your research and consult with a trusted financial specialist before investing your money.

What is Coin Cloud?

Founded in 2014 in Las Vegas, Nevada, Coin Cloud is the leading digital currency machine (DCM) operator. With over 4,500 locations nationwide, in 48 states and Brazil, Coin Cloud operates the world’s largest and fastest-growing network of 100% two-way DCMs, a more advanced version of the Bitcoin ATM. Every Coin Cloud DCM empowers you to quickly and easily buy and sell over 40 cryptocurrency options with cash.

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