The Sunday Telegraph - Money & Business
City watchdog targets Bitcoin dealing
Investigations come after rising concerns over effect cryptocurrency dealings have on market integrity
THE City watchdog is currently investigating 18 companies in connection with cryptocurrency transactions amid escalating concern over the threat posed by Bitcoin and other digital assets to the integrity of financial markets.
In figures released to The Sunday
Telegraph under freedom of information laws, the Financial Conduct Authority (FCA) said that as of Nov 12 it had opened inquiries into 67 firms involved in cryptocurrency businesses.
The regulator has stepped up its scrutiny of the technology in recent months.
Nearly two thirds of the investiga- tions have been launched since May.
Of the 49 inquiries that have already been closed, four out of five triggered warnings to the public about the companies involved.
The FCA declined to name the 18 companies who are still being tar- geted.
Christopher Woolard, the executive director of strategy and competition at the authority, has warned that cryptoassets posed “potential harm” to consumers and market integrity in the UK.
He added that the FCA, HM Treasury and the Bank of England would each be taking a number of steps over the coming months to address the threat and to encourage more “beneficial innovation”.
Bitcoin, the world’s biggest cryptocurrency, saw an almost 60-fold increase in value over three years – peaking at nearly $20,000 (£15,700) in December 2017, before crashing to its current level of less than $4,000.
The rise and fall of Bitcoin resulted in big losses for retail investors and sparked concerns that cryptoassets were not being adequately regulated. These concerns are still yet to be resolved.
The FCA has announced its intention to “consult on perimeter guidance” by the end of the year, to try to clarify which cryptoassets it should be regulating.
The Treasury is now due to consult on whether the FCA’S scope should be widened so that it can better regulate cryptoassets – along with associated entities like exchanges and so-called cryptowallet providers.
“We’re concerned that retail consumers are being sold complex, volatile and often leveraged derivatives products based on exchange tokens with underlying market integrity issues,” Mr Woolard said.
“To combat financial crime risks, the Treasury will undertake one of the most comprehensive responses globally to the use of cryptoassets for illicit activities by applying and going further than the existing directive, the fifth EU anti-money laundering directive,” he added.
In October the Government’s cryptoassets taskforce, which combines elements of the Treasury, the FCA and the Bank of England, warned that “the use of cryptoassets for money laundering is growing”.
In September the Securities and Exchange Commission issued a ceaseand-desist order and $200,000 fine to the digital hedge fund Crypto Asset Management and its founder, Timothy Enneking.
The US regulator said that the company falsely marketed itself as the “first regulated cryptoasset fund in the United States”.
In the same month, the SEC launched a separate order against the unregistered cryptoasset broker Tokenlot, which agreed to pay a $471,000 fine.
The operation netted more than 100 types of synthetic drugs, including Europe’s biggest ever seizure of LSD, as well as cryptocurrencies worth nearly €6m. Police arrested eight individuals of Spanish, Austrian and French nationality on suspicion of drug trafficking, money laundering and membership of a criminal organisation.
Two illegal laboratories were dismantled, three properties seized and 10 luxury vehicles impounded.
According to Europol, the organised crime group had been operating in Spain since 2012, offering synthetic drugs to more than 100 countries exclusively through dark net web pages and using virtual currencies to take payments and launder the proceeds.
Cryptocurrency money-laundering operations are part of a wider boom in cross-border economic crime that has been turbocharged by new technologies – and sparked an online arms race between criminal groups and those who want to stop them.
The battlegrounds include theft, fraud, drug dealing and terrorist financing – with both sides utilising cutting-edge technologies like artificial intelligence, machine learning, encryption and cryptocurrencies.
Prior to the raids in Austria and Spain, Europol said 3pc to 4pc of the proceeds of crime in Europe was being laundered through virtual currencies and warned that was increasing.
“We believe virtual currencies are playing a growing role in moneylaundering operations in Europe,” says Simon Riondet, Europol’s head of financial intelligence. “Changing technologies mean we can’t concentrate all of our efforts on a single area. We constantly have to expand our field of specialisation as criminals use different techniques. As soon as criminals see one area as a weak point – or an area that is not scrutinised – they take advantage.” According to Europol, cash remains a favourite vehicle for groups laundering money in Europe. Tradebased money laundering, as well as the use of shell companies and trusts, also remain popular.
The rapidly expanding number of bank transfers taking place within the regulated banking system, inside European countries as well as across borders, means monitoring these transactions for suspicious activity has become increasingly difficult.
“Identifying illicit transactions is like finding a needle in a haystack – and as time passes the haystack keeps getting bigger,” says Riondet.
At the same time, there is increasing pressure on banks, police and regulators to crack down on financial crime in the wake of high-profile scandals including the Panama papers leak in 2015, which revealed clients of the law firm Mossack Fonseca used shell corporations for illegal purposes, including fraud, evading international sanctions or evading tax.
More recently, the internal investigation published by Copenhagen-based Danske Bank in September made headlines worldwide – revealing its tiny Estonian branch was the centre of a large moneylaundering operation. Between 2007 and 2015 about 15,000 non-residents made more than nine million transactions worth a total of €200bn (£180bn) – around 10 times the value of Estonia’s GDP.
Jamie Hutton is the co-founder and chief technology officer of Quantexa, an analytics company that uses big-data technology to help companies fight financial crime and announced a partnership with HSBC earlier this year. “Cases like Danske Bank have demonstrated clearly that serious financial crime is rarely about individual transactions – it usually requires a complex network of individuals, entities, organisations, and payments that all work together to make this illegal activity possible,” he says.
“Criminals know what the thresholds are that will trigger an investigation by a bank. If they know depositing £10,000 will trigger an investigation they will deposit £5,000 or £3,000 multiple times from multiple accounts.”
One of the techniques used by criminals to launder money within the regulated banking system includes individuals known as “money mules”, who can be used in large numbers to transfer sums of money on behalf of criminal organisations in numerous small transactions designed to escape the scrutiny of regulators.
While this kind of operation has existed for years, the rise of social media and new forms of electronic personal banking has made it far easier for groups to recruit mules and co-ordinate their operations.
Those tracking illicit money flows have also found criminals are now creating complex deceptions using trade finance accounts, investment banking products and capital markets.
“It’s become easier for criminals to use complex structures to hide their activity and evade detection,” says Hutton. “Increasingly they are setting up pretend cash-only businesses and fabricating complex trading relationships that make it look like products are being bought from another country.
“They’re hiding in areas where high volumes of money are the norm – and in the past they didn’t need to do that.” Hutton cites the “Russian Laundromat” scheme uncovered last year as an example of the outlandish lengths to which criminals are willing to go to mask illegal transactions.
More than $20bn (£15.8bn) was moved out of Russia between 2010 and 2014. The operation included the use of a corrupt court in Moldova, which would issue fake fines to companies as a vehicle for moving funds across borders. It used a network of 21 shell companies and operated across 96 countries. Global banks that came into contact with the laundered money include Deutsche Bank, Barclays and Standard Chartered.
Banks have come under pressure to do more to crack down on new forms of illegal activity. This has meant using artificial intelligence, machine learning and big-data technologies that combine banking transaction data with other information, such as data from Companies House, to analyse large groups of transactions and how they interact. Increasingly banks are creating their own data science teams to help build systems that identify groups of suspicious transactions.
“Data science has a place here,” says Hutton. “That is going to be a trend that you will see continue. Banks will increasingly have their own data science teams looking for financial crime rather than relying on an external vendor.”
Anti-corruption campaigners are also starting to use technology to process data and track down illicit money flows.
Earlier this year the investigative organisation Global Witness published a report that used big-data techniques to flag companies owned by disqualified directors, as well as exposing how criminals could exploit loopholes in the UK company register.
It has also started to look at how blockchain technology, which underpins virtual currencies like Bitcoin, can be used to track criminal transactions. “People can purchase it anonymously – but the blockchain technology that Bitcoin is built on means that you can see every purchase that Bitcoin has ever made,” says Ava Lee, a campaign manager at Global Witness.
“Cryptocurrencies are involved in all manor of illicit activities on the dark web, but they also represent a new level of transparency – because there is more potential to follow the money.”
While acknowledging cryptocurrencies offer new opportunities to criminals looking to transfer money across borders, Lee believes further efforts to tackle offshore secrecy jurisdictions, like Panama, are required in order to stop criminals from moving large volumes of money across borders with ease.
“Cryptocurrencies and the dark web have made secretive financial transactions available to medium-sized criminal organisations,” she says. “But as long as the offshore secrecy system is still as strong as it is – allowing anonymous companies to be easily created – big players in the organised-crime world won’t need to look to new technologies.”
As well as utilising cutting-edge technologies, banks and law enforcement agencies in Europe are increasing co-ordination between the public and private sector using financial information-sharing partnerships to bolster efforts to clamp down on illicit financial flows.
This started with the National Crime Agency’s Joint Money Laundering Intelligence Taskforce (JMLIT), which was set up in the UK in February 2015 and brought together more than 40 financial institutions along with the Financial Conduct Authority and five law enforcement agencies. It has launched more than 500 investigations and contributed to 130 arrests and the seizure of more than £11m.
The model used by the JMLIT has been used to create other organisations including Europol’s Financial Intelligence Public Private Partnership, which was launched in December 2017 and involves financial investigators from seven European nations and the US, as well as senior compliance officers at 14 global banks.
While closer co-operation between the public and private sector is yielding results, experts believe that innovations by criminal and terror groups, along with the continued existence of offshore secrecy jurisdictions, will mean substantial illicit funds continue to flow across European borders without detection.
“I’ve got no doubt that the trends we are currently seeing will continue,” says Hutton. “Criminal financial activity will become more organised and more complex. It’s like a squeezed balloon – operations expand in the areas where there is less resistance”.
‘Identifying illicit transactions is like finding a needle in a haystack – the haystack keeps getting bigger’