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[REPORT PREVIEW] Money Laundering and Cryptocurrencies: Trends and New Detection and Investigation Techniques
This blog is a preview of our Money Laundering and Cryptocurrency Report. We are excited to launch the first-of-its-kind research that delves into the intricacies of money laundering in the cryptocurrency ecosystem. Building on the insights we publish in our annual report Crypto Crime ReportThis comprehensive report not only shows how to track known illicit funds on the blockchain, but also introduces advanced data techniques to identify potential money laundering activities for lead generation. It also explores global anti-money laundering (AML/CFT) policy and strategies for both crypto-native and non-crypto-native scenarios. Learn how blockchain intelligence and data-driven insights are the cornerstone of cryptocurrency investigations and how the technology is empowering institutions in the fight against money laundering and other financial crimes.
While public blockchains are inherently transparent and traceable, illicit actors turn to cryptocurrencies to launder illicit gains for the same reasons people use them for legitimate purposes: they are cross-border, virtually instantaneous, and generally inexpensive to conduct. Money laundering in the context of cryptocurrencies is typically associated with cybercriminals attempting to hide the flow of funds related to on-chain crimes, such as darknet markets and ransomware operations. However, cryptocurrency is increasingly being used to launder funds from a broader range of illicit activities beyond the conventional understanding of crypto crime. The growing ubiquity of cryptocurrencies has made them a tool for laundering the proceeds of various off-chain crimes, such as drug trafficking and fraud. In 2024, crypto money laundering encompasses all crimes, not just those intrinsically tied to the cryptocurrency ecosystem.
This shift has significant implications for investigators. First, cryptocurrency expertise must extend beyond specialized cybercrime units to include law enforcement agencies of all types. Cryptocurrency is now a payment method used by illicit actors around the world, and as such, this expertise must include both blockchain transaction tracking and a comprehensive understanding of traditional money laundering tactics. Second, there is a silver lining: With the right data and tools, investigators in the public and private sectors can leverage blockchain’s transparency to uncover illicit activity that might otherwise go unnoticed. Blockchain analytics can generate both signal intelligence for proactive lead generation and more concrete evidence of illicit flows in existing investigations, helping a wide range of analysts and investigators uncover increasingly sophisticated money laundering networks.
What is money laundering?
Money laundering is the process of concealing the origins of money obtained from illegal activities so that the funds can be used without drawing attention to their illicit source. This typically involves making large sums of money generated by criminal activities, such as drug trafficking or terrorist financing, appear legitimate.
The money laundering process generally consists of three stages: placement, layering, and integration. Placement is the initial stage in which illicit money is introduced into the financial system. Layering involves moving the money through a series of financial transactions to obscure its origin. Finally, integration is the process of reintroducing the money into the legitimate economy, making it appear as if it came from a legitimate source.
Chainalysis has released a report on money laundering analyses in our annual Crypto Crime Reports for several years, analyzing the flow of funds from known illicit wallets during the placement phase, to conversion services that represent the layering phase of laundering. Known illicit wallets contain funds linked to confirmed crypto-native criminal activity such as exchange thefts, crypto scams, and darknet market proceeds. Conversion services exchange cryptocurrencies for fiat, other types of cryptocurrencies, or provide other services. Examples of conversion services include centralized exchanges, DeFi services, gambling sites, mixers, and bridges. Because this activity occurs entirely on-chain, we call it crypto-native money laundering. This type of money laundering can be tracked and analyzed with a higher degree of accuracy and speed than in traditional financial systems due to the inherent transparency of blockchain.
As shown below, since 2019, nearly $100 billion in funds have been sent from known illicit wallets to conversion services. The highest amount recorded was in 2022, with $30 billion identified, largely attributable to transactions involving sanctioned services such as the Russian exchange Guaranteed.
These amounts represent the dollar value of assets as they leave wallets associated with illicit actors. These estimates include only the totals transferred from illicit sources to crypto services and do not include the value sent and received between intermediaries, a process described below, which can include tens or hundreds of individual transactions. This estimate also does not include transactions where cryptocurrency is used to launder funds, but the source of the illicit activity is unidentified or off-chain. For example, consider a drug cartel selling narcotics and paying a distributor using cryptocurrency. If this transaction flows directly between two known exchanges, it would be indistinguishable on-chain from legitimate service-to-service transfers without specific information. However, investigators can still track these funds using a combination of off-chain intelligence and on-chain analytics, and compliance teams can flag unusual transactions outside of their clients’ business profiles.
In this report, we intend to expand our analysis of money laundering to include not only cryptocurrency-based money laundering, but also suspicious transaction patterns that may indicate money laundering activities related to off-chain crimes that would require more in-depth investigation to confirm.
This material is not intended to provide legal, tax, financial, investment, regulatory or other advice, nor should it be considered professional advice. Recipients should consult their own advisors before making such decisions. Chainalysis does not warrant or guarantee the accuracy, completeness, timeliness, suitability or validity of the information contained herein and undertakes no obligation to update any forward-looking statements to reflect any circumstances that may arise after the date such statements are made. Chainalysis has no liability for any decisions made or for any other acts or omissions in connection with the use of this material by the recipient.