A report from The International Narcotics Control Board (INCB) shows that bitcoin is not the preferred method for drug cartels and other criminal groups to launder money, they rather use banks. This opposes the widespread narrative that claims the digital coin creates the opportunity for crime.
Said argument is often used to excuse the hostility of different entities toward bitcoin and tends to propose banning it. But if it is actually the traditional financial institutions that are enabling criminal schemes, should authorities ban those instead and adopt bitcoin? (I’m just pointing out the irony).
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How The Cartels Lauder Money
Drug cartels require a great deal of funding. The INCB attempts to follow the money trails left behind by criminal operations in order to disrupt illicit financial flows and disable criminal groups.
In their latest report, the organization looked into the mechanisms these organizations use in order to disguise the proceeds of crime and integrate them into the legitimate financial system.
“More than 80 per cent of the criminal networks active in the European Union use legal business structures for their criminal activities.”
The main forms of money laundering mentioned are: “the banking system, cash couriers, bulk cash smuggling, money service providers, alternative remittance systems (e.g. hawala), stores of value, trade-based money-laundering, mobile or Internet payments, cryptocurrencies, non-profit organizations, real estate and front companies.”
Although cryptocurrencies have been portrayed many times as dangerous tools that enable illicit activities, the organization states that “traditional banks continue to be favoured mechanisms for laundering money.” They recall an interesting example:
In 2012, HSBC admitted to laundering $881 million of drug proceeds for the Mexican Sinaloa cartel between Mexico and the United States of America. Prosecutors declined to seek an indictment of the bank, but instead allowed HSBC to pay a $1.92 billion settlement and be subject to five years of probation, during which its efforts to prevent money-laundering would be monitored by a court-appointed watchdog.
Afterward, a 16-month investigation by various Journalists and media partners concluded that banks continued to provide services to criminal activity, including “shell companies tied to looted government funds and financial go-betweens for drug traffickers.”
Seemingly, the compliance and anti-money-laundering measures have not been enough to stop the largest financial institutions from “being complicit in the movement and laundering of illicit financial flows,” they highlight.
The Mexican cartels are one of the most dominant drug groups in the world. To launder their money, it is believed they practice “cross-border bulk cash smuggling” and use shell companies, “an intricate scheme that involves national and international financial transactions.”
Is Bitcoin Useful To Criminals?
The report also claims that “Drug cartels in Mexico are increasingly turning to the internet, bitcoin and e-commerce to launder money and sell drugs.”
The Mexican government established a law in 2018 that requires all crypto exchanges to report transfers over $2,830. Although many have claimed cryptocurrencies help criminals because they operate anonymously, exchanges comply with regulatory and anti-money-laundering measurements through a Know Your Customer process. It seems like they have often helped authorities, not criminals.
“Mexican cartels are believed to launder an estimated $25 billion a year in Mexico alone.” The criminal groups “split their illicit cash into small amounts and deposit them into various bank accounts.”
With this method, it is believed they purchase small amounts of bitcoin online, below the red-flagged marks. This can obscure the money and allow them to pay associates, the report claims.
“According to the Drug Enforcement Administration of the United States, both Mexican and Colombian organized criminal groups are increasing their use of virtual currency because of the anonymity and speed of transactions.”
However, unlike banks, the transactions of Bitcoin and other digital coins are easily traceable and publicly stored. Investigators can track the trail of movements.
Chainalysis reported recently that in 2021 crypto-based crime hit a new all-time high doubling the previous year’s amount of money received with illicit addresses to $14 billion. However, the total usage of crypto also grew exponentially over the year around 567%.
Given that the criminal related activity only saw a 79% increase, this also means that the “illicit activity’s share of cryptocurrency transaction volume has never been lower,” 0.15% out of the total cryptocurrency transaction volume in 2021.
Another detail to note is that the recorded $14 billion is far from the estimated $25 billion of money laundered yearly by the Mexican cartels. Even if they were the only ones using crypto illegally, it would not be enough to fuel their funds. They still have to turn to mechanisms linked to the traditional financial system.
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