Analysis – Darknet, a money laundering machine
Thomas Pageault at 2015-08-31 in Décryptage
From crowdfunding to P2P lending, this remarkable disintermediation machine known as internet has brought back old practices by giving them qualities that are particularly important to our times: ease, speed and globality.
These networking qualities attract a larger public every day and the solutions offered are becoming more common. These qualities are also used for modernizing old practices generating interest of an entirely different public. This public wishes to conceal the source of illicitly acquired funds. While national and international laws are consistently becoming stricter, the usage of digital technologies for money laundering purposes appears as a suitable alternative for international organised crime. Overview of some of these practices...
Digital currency, a market in full e-mulation
Money Mules, by analogy with smugglers recruited for transporting drugs, are intermediaries in charge of moving the sums acquired fraudulently away from their source.
Then, once recruited, the actual work of the mule can start. Monitoring authorities have observed that most of the procedures insist on the fact that mules receive money by wire transfer and convert it into prepaid cards (phone services, paid online games, gift cards, etc.).
This payment method consists of an electronic money card, most often provided by a non-bank financial intermediary, and accepted by listed stores. This medium is preferred since it offers advantage of anonymity and complex traceability.
With these prepaid cards, the mules communicate the corresponding PIN codes to the recruiter. These sums are then reintroduced through online gaming or e-commerce websites accepting prepaid cards.
Here, the scattering mechanism is not profoundly disrupted. However, Internet’s enrolment capability and the dematerialization of exchanges between the recruiter and the mules enable to implement a money laundering channel more easily. The business and analysis report of Tracfin, a unit of the French Ministry for Economy, Finance and Industry (MINEFI) in charge of anti-money laundering, shows that the number of reported suspicious activities (link) related to this payment method has increased by almost 200% between 2012 and 2013.
From gaming to laundering…
As highlighted in a report issued under MINEFI (link), virtual money is one of the main concerns of anti-money laundering stakeholders. TRACFIN considers that the closing of the Silk Road website by the FBI, on October 2nd, 2013, is emblematic. Originating from online gaming, virtual money is defined as an alternative for legal money and can fulfil the same economic function. However, in accordance with the laws, it is neither electronic money1, nor a payment instrument2. It is characterised by the absence of regulated players and transparency (identity of instructing parties and traceability of operations) as well as their extraterritoriality.
In an open system, it can be converted into legal money, at a variable or fixed exchange rate. Since 2013, and on the initiative of Robocoin Technologies, there are even dispensers that allow « materializing » Bitcoin, the first virtual money in terms of value of the volume of units issued (link).
The speed as well as the cost of a virtual money transaction encourages more and more economic players to use it. A study by Goldman Sachs3 thus points to a transaction cost that is one-tenth of standard transaction cost.
Because of the possibility of reintroducing it into lawful activities as well as its opacity, virtual money is also a tool facilitating the laundering of proceeds of criminal activities. TRACFIN however observes that due to the operational risk and volatility of this medium, its usage is rather meant for micro-laundering or the laundering of profits from cybercrime.
… and back in the game !
Casinos and private gaming clubs are traditionally preferred for reintroducing funds acquired fraudulently. They generate huge volumes of transactions and deal with very high sums. According to ARJEL4, poker alone (cash-game and tournament betting) represented a volume of 8 billion euros in France for the year 2014.
The French gambling regulatory authority (Observatoire des jeux) has observed an inclination of money launderers towards the games in which they think they can better control the winnings because of their expertise (sports betting, horse races or poker) and also towards other types of games offering a limited number of winnings (win/tie/loss from a match score, roulette wheel numbers, etc.).
Once again, dematerialization reduces the risk of detecting a fraudulent activity and facilitates multi-account, in case of permissive on-line identification measures. This practice consists of a same individual controlling several accounts.
The process requires that the money launderer creates a « safe » account from real identification documents. Once the account identification and verification phase is completed, the account can be provisioned with fraudulent funds (from virtual money for instance). A variant is based on the collusion with another player. In this case, the money launderer shall decide to entrust her/his funds to a player (dummy in case of multi-accounts) against whom she/he would play (for instance poker) and shall win. The winnings shall thus be hardly distinguishable from « real » winnings.
Finally, after being reprocessed from their criminal origins, the funds can be reintroduced in legal economic activities.
Beyond these practices, the ingenuity of international organised crime is continuously showcased through Internet (use of crowdfunding platforms by drug dealers to pay their wholesaler, creation of dummy e-commerce sites, etc.) and the example of Liberty Reserve (link) has shown the extent of the threat with approximately 6 billion US dollars laundered. The need to know these new money laundering channels is thus reaffirmed so as to regulate the use of some of its components (particularly through online identity verification and flow traceability).
Furthermore, this knowledge of new money laundering channels shall enable to adapt vigilance measures within firms subject to a reporting obligation in case of suspicious activities (activities, payment methods, etc.) Finally, due to the very nature of Internet, global cooperation is mandatory so as to avoid any violation of national legislation and facilitate the exchange of information between anti-money laundering units.
1/ Cannot be qualified as electronic money, since virtual money does not represent a claim on the issuer and is not issued upon receipt of funds (under electronic money directive 2)
2/ As per Article L. 133-4 of the French Monetary and Financial Code
3/ Goldman Sachs, 2014:“All About Bitcoin”, Global Macro Research, Top of Mind, no. 21 March 11
4/ French Online Gaming Regulatory Authority, independent administrative authority (AAI) created by the law related to the opening to competition and the control of the online gaming and gambling industry No. 2010-476 of May 12, 2010
5/ COSI differs from the « standard » reporting of suspicious activities under Article L. 561-15 of the French Monetary and Financial Code in that only the suspicious activity reporting may serve as a basis for investigations by Tracfin and exempt the reporting party from her/his responsibility.The thresholds from which information is required are set to 1,000 euros per transaction and 2,000 euros in total per client over one calendar month. The information related to all these transactions is sent to TRACFIN at the latest within thirty days following the month when the transaction was paid.
Finance and Risk Management