The Red Pill Realities of Anti Money Laundering

By Shirish Netke

Money laundered through the banking system is estimated to be over 2 trillion dollars a year. A recent study by BAFT (Bankers Association of Finance and Trade) estimates that 1% of the proceeds from financial crimes are intercepted. Meanwhile, nine out of ten suspicious activities flagged by AML software in banks are false alarms.

Let’s put these numbers in perspective. 99% of laundered money is not caught. 90% of the resources spent catching suspicious actors are wasted. 100 % of US banks have known this for years.

The bottom line is that 70 billion dollars are spent every year in compliance costs by banks to intercept less than 25 billion in illicit funds.

How did we get here? Modern technology, specifically data analytics, is well-suited to address this problem. Why hasn’t this problem been solved?

Let’s look at what happened over the last few decades.

Most banks use process automation software for Anti-Money Laundering. This software was designed many years ago based on abstracting human tasks and automating them to be more efficient. This seemed like a very good idea at that time when AML/BSA/CFT compliance was a matter of running through a checklist.

This was a very efficient solution until the stakes for non-compliance became very high. The business process was no longer effective and there was no provision in the software to change it. Meanwhile, financial crimes posed a clear and present danger to banks. Banks did the only thing they could do to solve the problem – they created manual workarounds to process automation and hired more people to implement them.

Bank compliance teams are well-aware of the limitations of the process and use their judgment to execute their functions while staying within guidelines. However, exercising sound judgment does not necessarily free them from the tyranny of a process designed for a different time.

It is not unusual to see a bank increased its staff ten-fold in five years. Many people in banks have been deployed to manually (and intelligently) intervene where the software fell short. As banks continue to be fined for AML related activities, staffing continues at a frantic pace. Today, banks are actively looking at hiring more compliance people. Some are also moving compliance teams to low-wage geographies to reduce the burgeoning cost for compliance. Others are looking for outsourcing firms to manage this business process.

What is a banker to do?

Here are a few things to consider.

#1 There is No “App for That”

A risk-based business process is not something you buy. It’s something you do.

The FFIEC manual on AML/BSA says “The first step of the risk assessment process is to identify the specific products, services, customers, entities, and geographic locations unique to the bank.”

Sadly, this requirement is in direct conflict with the specifications of packaged enterprise software. This software was created as a solution that works for all banks. It caters to the “least common denominator” requirement of a large number of banks. It is very unlikely that a business process built into an enterprise solution will be optimized to a bank’s unique risk profile.

Today, when you buy a traditional AML software application you tacitly commit to a business process that goes with it. If the business process does not suit the risk profile of your bank, you need to deal with it. You can follow the process anyway even though it is neither efficient nor effective and rationalize it as an industry standard solution. You can also manually override the process and customize it to your needs. The first is not sustainable and the second requires manpower and resources, the extent of which depends on the amount of customization.

A third choice is to re-design the business process. This requires re-examining the objectives of the process and the underlying technology. It also means convincing your bank examiners that an updated process is more effective, efficient and minimizes risk.

A risk-based process can be broken down in terms of the 4 M’s – Measure, Monitor, Manage and Mitigate. There is some skill involved in deploying the right combination of human intelligence and machine intelligence in deploying such a process. As a bank, you have a unique understanding of your risks. These risks will determine your business process and the allocation of resources to that process.

An important question to ask a technology vendor in implementing a risk-based process – will the technology drive process, or will the process drive technology? If the process drives technology, will it let the bank change its business process when the risks change?

The question to ask yourself – how are the vendors’ incentives aligned with those of the banks’? Do they get paid for the success of a risk-based process, or for selling a software license and billable hours irrespective of the outcome?

#2 Understand the Modeling Math

Mathematical models can make your AML process more effective and slash your costs if (and only if) they are implemented judiciously.

George Box, a British statistician, is credited with the quote “all models are wrong, but some are useful”. A model cannot guarantee or predict an outcome, but it can provide a metric for its accuracy. Understanding model accuracy is a key input to designing a risk-based process.

Let’s take an example.

Current models used by AML software are wrong 90% of the time. Which means when they call out 100 suspicious actors, only 10 of them are suspicious enough to require a SAR (suspicious activity report) to be filed with FinCEN. A better model may produce 80% false positives for those 10 SARs. The second model is an obvious improvement. What is not so obvious is that the second model will produce a 100% increase in productivity because it produces only 50 alerts for the same 10 SARs – and only needs 50% of the resources.

Both models have a finite possibility of being wrong and letting some bad actors slip through the cracks. However, the second one is more useful. A model’s usefulness can be measured in mathematical terms which can be the basis for allocating resources to the business process.

The important question to ask a vendor who provides a model is – how can a model’s performance metrics be used to modify the business process?

The question to ask yourself is – do I clearly understand the trade-offs of using a risk-based approach powered by a mathematical model? Can I explain this approach to a regulator during a bank examination?

#3 Regulatory guidance is global. Bank exams are local.

The long-term impact of policy changes is often underestimated. The short-term impact of these changes is often overestimated.

Bank regulators are encouraging banks to adopt new technology to make it easier to manage AML processes. A recent report from the US Dept. of Treasury says “Regulators should not impose unnecessary burdens or obstacles to the use of AI and machine learning and should provide greater regulatory clarity that would enable further testing and responsible deployment of these technologies by regulated financial services companies as the technologies develop.”

This is a welcome change from the past. Implementing this change will need alignment with the rank and file of all regulatory organizations. Regulators understand that this entails a process of education and training of bank examiners to familiarize them with the technology.

Much as we would like changes to be immediate, banks and regulators have a history of being deliberative in adopting new ways of doing things. There is a natural gestation period between policy changes and gaining familiarity with new approaches by bank examiners and compliance officers.

Recent guidance from regulators indicates that the stage is set for pilots to deploy in a manner where bankers will get some relief from regulatory scrutiny. This will make it easier for banks to try new technologies.

The important question to ask a vendor who provides a new technology is – can they help you through the transition to the new way of doing things?

The question to ask yourself is – can my bank define a path from the current situation to a future where new technology can be used to work with regulators?

In the science fiction film, The Matrix, Neo, played by Keanu Reeves, is given a choice between the blue pill of comfort coupled with ignorance and the red pill of reality that has an uncertain future. The rebel leader’s closing words to Neo are – “Remember, all I am offering is the truth. Nothing more.”

Here are our truth offerings on AML for bankers:

Design your AML process around desired outcomes; not legacy technology.

Understand trade-offs between human intelligence and machine intelligence.

Be practical about the ground realities of affecting change.

Criminals using ‘Fortnite’ to launder money ‘with relative impunity’: report

The virtual currency used by millions of gamers who play “Fortnite” has become popular with money-laundering cybercriminals, according to reports.

Money launderers use stolen credit cards to purchase V-bucks – which players use to purchase weapons, outfits and other items in the wildly popular game – from the “Fortnite” store and then resell them on the dark web.

Agents with the cybersecurity firm Sixgill posed as customers and uncovered operations being conducted globally in Chinese, Russian, Spanish, Arabic and English.

“Criminals are executing carding fraud and getting money in and out of the Fortnite system with relative impunity,” said Benjamin Preminger, a senior intelligence analyst at Sixgill.

“Threat actors [a malicious person or entity] are scoffing at Epic Games’ weak security measures, saying that the company doesn’t seem to care about players defrauding the system and purchasing discounted V-bucks… This directly touches on the ability of threat actors to launder money through the game.” he continued.

The Independent noted one example of a seller who accepted Bitcoin and Bitcoin Cash as payment who claimed to be selling at a discount and wanted “to give back to the deep web at a massive discounted rate.”

Epic Games, the North Carolina-based developer of “Fortnite,” told the Hollywood Reporterit takes the money-laundering claims seriously.

“Epic Games takes these issues seriously, as chargebacks and fraud put our players and our business at risk,” a company spokesperson said. “As always, we encourage players to protect their accounts by turning on two-factor authentication, not re-using passwords and using strong passwords, and not sharing account information with others.”

Some security experts have said the company isn’t doing enough to monitor how its products are being used.

“Epic Games doesn’t seem to clamp down in any serious way on criminal activity surrounding Fortnite, money laundering or otherwise,” Preminger said, adding that “several steps could be taken to mitigate the phenomenon, including monitoring the transfer of high-value goods in the game, identifying players with large stockpiles of V-bucks, and sharing data with relevant law enforcement agencies.”

Epic Games did not immediately respond to Fox News’ request for comment early Friday regarding the accusations of illegal activity on its platforms.

The immensely popular game is free to download and play and has around 200 million players worldwide. It has generated upwards of $3 billion in revenue, the Reporter said.

Between September and October, IT security firm Zerofox found 53,000 instances of online scams related to the video game.

Bitcoin’s ‘First Felon’ Faces More Legal Trouble

Charlie Shrem went to prison in 2015 after he pleaded guilty to helping people buy drugs online. Now he’s being sued by the Winklevoss twins.

SAN FRANCISCO — Over the last year, Charlie Shrem, a 28-year-old Bitcoin investor, has bought two Maseratis, two powerboats — one of them 32 feet long — and a $2 million house in Florida, along with smaller pieces of real estate.

In the world of cryptocurrencies, where millions can be made and lost in a day, that might not make Mr. Shrem stand out. But unlike most Bitcoin entrepreneurs, in 2016 Mr. Shrem got out of prison, where he spent a year after pleading guilty to illegally helping people turn dollars into Bitcoin to buy drugs online.

Mr. Shrem, who had been the chief executive of Bitinstant, one of the first prominent Bitcoin businesses in the United States, has said in recent interviews that he went to prison with almost no money.

So where did the money for the expensive toys come from? That’s what two former business partners want to know.

Cameron and Tyler Winklevoss, the twins who turned money from a settlement with Facebook’s Mark Zuckerberg into a Bitcoin fortune, said they suspected Mr. Shrem had actually been spending Bitcoin that he owed them since 2012, according to a lawsuit unsealed in federal court on Thursday. The Bitcoin would be worth around $32 million at current prices.

“Either Shrem has been incredibly lucky and successful since leaving prison, or — more likely — he ‘acquired’ his six properties, two Maseratis, two powerboats and other holdings with the appreciated value of the 5,000 Bitcoin he stole from” the Winklevoss twins in 2012, the lawsuit says.

The judge who oversaw Mr. Shrem’s earlier trial has already agreed to freeze some of Mr. Shrem’s financial assets, according to court documents.

The lawsuit could blossom into an even bigger problem for Mr. Shrem because an affidavit filed in court suggests that Mr. Shrem has also not paid the government $950,000 in restitution that he agreed to as part of his 2014 guilty plea.

Mr. Shrem’s lawyer, Brian Klein, said in a statement that the claims by the Winklevoss brothers were baseless. “The lawsuit erroneously alleges that about six years ago Charlie essentially misappropriated thousands of Bitcoins,” he said. “Nothing could be further from the truth. Charlie plans to vigorously defend himself and quickly clear his name.”.

The lawsuit from the twins threatens another reversal of fortune for Mr. Shrem, who went from being one of the earliest Bitcoin millionaires to being called Bitcoin’s “first felon.”

When he was arrested in 2014, Mr. Shrem was accused by federal authorities of using his company, Bitinstant, to knowingly sell Bitcoin to people who wanted it to buy drugs from the online black market, Silk Road.

Since his release in 2016, Mr. Shrem has said in numerous interviews that he recognizes his past mistakes and wants to cut a new and legal path. On the podcast “Love, Sex and Money,” Mr. Shrem said that in the first months out of prison, he worked as a dishwasher and didn’t look at his email.

Over the last year, though, Mr. Shrem, has already gotten involved with a number of troubled projects.

He was among the leaders of two efforts — one a cryptocurrency credit card and the other an initial coin offering — that had to give money back to investors after various partnerships that Mr. Shrem had promised fell through.

But those are likely to be mere headaches compared to what he could face in a confrontation with the Winklevoss twins. Mr. Shrem helped get the brothers interested in Bitcoin in 2012 and became their first adviser in the young industry.

A few months into this partnership, the twins said they realized that Mr. Shrem had not given them all the Bitcoin they were due. The brothers gave Mr. Shrem $250,000 in September 2012, but the lawsuit says that a month later, he only delivered around $189,000 worth of Bitcoin at the going price, which was around $12.50 at the time.

The 5,000 or so missing Bitcoins became a point of tension between the twins and Mr. Shrem. They asked him numerous times for an accounting of the Bitcoins he had purchased and eventually brought in an accountant who documented the missing funds, according to court documents.

“I have been patient and at this point, it’s getting a bit absurd,” Cameron Winklevoss wrote to Mr. Shrem in 2013 in an email quoted in the lawsuit. “I don’t take this lightly.”

The missing Bitcoin, which were worth 98 percent less at the time, appeared to have been forgotten in a broader battle between the brothers and Mr. Shrem over an investment in Bitinstant.

In 2013, Bitinstant fell apart and the twins blocked Mr. Shrem’s efforts to revive the company with new investors because of their concerns about his management style. By the time Mr. Shrem was arrested in 2014, as a result of activities at Bitinstant that took place before the brothers invested, they had cut off contact with him.

The Winklevoss twins’ problems with Mr. Shrem have not held them back. They were briefly each cryptocurrency billionaires last year, and they have built one of the leading cryptocurrency exchanges, Gemini. Despite this year’s big drop in cryptocurrency prices, their holdings are still worth nearly a billion dollars.

Cameron Winklevoss said that he and his brother decided to pursue the missing Bitcoins again after they saw Mr. Shrem’s recent spending patterns.

“When he purchased $4 million in real estate, two Maseratis, and two power boats, we decided it was time to get to the bottom of it,” Mr. Winklevoss told The New York Times.

The brothers hired an investigator, who found that 5,000 Bitcoins were transferred in 2013 through addresses associated with Mr. Shrem and onto the Bitcoin wallet services Xapo and Coinbase, according to the complaint. The investigator traced the money on the blockchain, the public ledger where all Bitcoin transactions are recorded.

Jed S. Rakoff, a judge in the Federal District Court for the Southern District of New York, approved an application the twins made in September to freeze any funds that Mr. Shrem holds with those companies. Judge Rakoff wrote in his order that Mr. Shrem had “evidenced an intent to frustrate the collection efforts of his creditors.”

The court fight could cause problems for Mr. Shrem’s latest venture, a firm called Crypto.IQ. The company, which promises market intelligence to Bitcoin traders, is holding a conference for customers in Las Vegas this month promising “unparalleled insights from a roster of experts at the very epicenter of the crypto universe.”

In an interview with Breaker magazine last month, Mr. Shrem said he was getting used to the ups and downs.

“My personal life goes through bull and bear markets, too,” he said. “So the key is how to deal with it when you’re in the bear markets.”

Bitcoin [BTC] worth $5.84 million stolen from MapleChange; Binance CEO gives his insight

MapleChange, a Canada-based cryptocurrency exchange, recently announced that their platform was hacked. The exchange platform took to their Twitter handle to provide clarity on the situation, stating that they could not refund the stolen cryptocurrencies.

According to their official post, a bug on the platform enabled a group of hackers to withdraw funds remotely. The platform reported that 913 Bitcoins [BTC] were stolen and that they cannot refund any of the funds until a “thorough investigation” was conducted.

Another controversial aspect was that the “thorough investigation” resulted in the exchange platform realizing that they did not have funds for repaying its users. Furthermore, they stated that the platform would not function anymore and that they would soon deactivate their social media channels. Their official post stated:

“We have sustained a hack, and we are investigating the issue.”

On their official Twitter handle, the exchange stated that they had not “disappeared”, but had temporarily turned off their accounts to think of a solution.

In addition, they could not refund “everyone with all their funds”, but would soon open wallets in order to allow its users to “hopefully” withdraw whatever funds were left on the exchange. They added:

“We CANNOT refund any BTC or LTC funds unfortunately. We will try our best to refund everything else.”

Changpeng Zhao, the CEO of Binance, the world’s largest cryptocurrency exchange in terms of trading volume, was surprised by the hack and stated that a procedure was required to rank exchanges based on their wallet storage. He added that users had to avoid using exchange platforms which did not have anything in their cold wallets.

Maplechange’ed, a platform dedicated to find, take down and expose maplechange.com, with the help of members from the Lumeneo [LMO] telegram channel, allegedly found that Glad Poenaru, a service technician at American Piledriving Equipment, could have been responsible for the hack.

Joseph Young, a cryptocurrency investor and analyst, stated:

“A small crypto exchange pulled off an exit scam, taking all customer funds. There is no incentive for using small exchanges. Use established exchanges that are regulated, & transparent. Small exchanges also focus on maximizing profitability, not security or investor protection.”

MapleChange further added:

“We are sending all of the coin developers the wallets containing the coins we have left. So far, LMO and CCX have been handed over the funds.”

https://ambcrypto.com/bitcoin-btc-worth-5-84-million-stolen-from-maplechange-binance-ceo-gives-his-insight/

How The Unexplained Wealth Order Combats Money Laundering

The UK is a haven for dirty money; more than £90 billion is estimated to be laundered through the country per year. The size of the UK’s financial and professional services sector, its open economy and the attractiveness of the London property market to overseas investors all make it unusually exposed to international money laundering risks. As part of new measures to tackle asset recovery and money laundering, the UK government introduced Unexplained Wealth Orders (UWOs) in January, which are being hailed as the cure to Britain’s dirty money problem.

What is an Unexplained Wealth Order?

UWOs require the owner of an asset worth more than £50,000 to explain how they were able to afford that asset. Introduced primarily to target Russian and Azerbaijan laundromats, UWOs have wide-ranging applications to all situations where the National Crime Agency (NCA) believes wealth was acquired illicitly, including tax evasion.

The game-changing nature of UWOs lies in the power they give UK law enforcement to prosecute. Formerly, little could be done to act on highly suspicious wealth unless there was a legal conviction in the country of origin. In cases where the origin country is in crisis or the individual holds power within a corrupt government, this is unlikely to be achieved. Where previously law enforcement agencies needed to prove in court that an asset was purchased with laundered funds, UWOs shift the burden of proof away from prosecutors and on to the asset’s owner.

Preventing Financial Crime with Unexplained Wealth Orders

The first successful use of a UWO since its implementation is the recent case of Zamira Hajiyeva, who owns millions of dollars in properties in London through offshore companies. Her husband, Jahangir Hajiyev, was convicted and sentenced to 15 years in prison for fraud and misappropriation of public funds, and authorities were able to identify a clear disparity between his income and the couple’s apparent wealth.

With corruption watchdog Transparency International estimating that £4 billion of UK property has been purchased with the proceeds of crime, it is hoped that this successful implementation of a UWO will herald a clampdown on overseas criminals laundering via the property market.

The success of this UWO has been fundamental in beginning to reduce the appeal of the UK as a destination for illicit income. In June, mortgage brokers were already reporting that Russian purchases of prime real estate in London had slowed as a result of both government pressure and a tightening of anti-money laundering rules.

There are, however, reasons to be wary of perceiving the introduction of UWOs as a cure-all for the UK’s money laundering problems. These court orders are ineffective as soon as a defendant can provide an explanation for the source of their wealth. In the absence of evidence to the contrary, they then win the argument. Legal difficulties and costs are other factors that can lead to delays in the UK’s fight against money laundering, while information obtained via a UWO cannot be used in criminal proceedings against the respondent. For UWOs to have credibility, authorities will need to ensure the first uses of them continue to be successful in order to serve as a useful deterrent going forward.

Further, money laundering covers a wide range of criminal activity and consequently can’t be solved by a single approach. Fragmented supervision and anonymous ownership of property in British Overseas Territories and Crown Dependencies are just two areas where Transparency International is still advocating for change to improve the UK’s asset recovery and anti-money laundering regime.

How Can We Continue to Fight Money Laundering?

It is clear that UWOs have the potential to act as powerful tools for law enforcement but are not yet being used frequently enough— more action is required if real change is to come. We need further action from the government to restrict property ownership and levy realistic local taxes.

With UWOs beginning to lead to the identification of criminals, questions will be asked of the financial institutions who facilitated the individual’s money management. To better equip themselves for the fight against money laundering, banks need to overhaul outdated AML systems to suit the complexity of the schemes perpetrated by criminals. They need to combat problems by employing entity resolution and network analysis techniques to understand vast data networks and identify hidden money.

https://www.forbes.com/sites/vishalmarria/2018/10/25/how-the-unexplained-wealth-order-combats-money-laundering/#26a904a54703

How Binance is Legitimizing the Crypto Market by Eliminating Money Laundering

Binance, the world’s largest crypto exchange, has voluntarily engaged in an initiative to eliminate money laundering on its platform.

For years, despite the inherent lack of privacy measures on major public blockchain networks like Bitcoin and Ethereum that discourage the settlement of illicit transactions, a widely pushed narrative against crypto has been the suspected usage of digital assets by criminals.

Eliminating Easily Refutable Claims

Bitcoin, Ethereum, Ripple, Bitcoin Cash, EOS, and many other major cryptocurrencies are not anonymous by nature. With Know Your Customer (KYC) and Anti-Money Laundering (AML) systems integrated by cryptocurrency exchanges, it is extremely difficult for criminals to utilize digital assets to settle the transfer of illegal proceeds.

Authorities and government agencies across the globe are well aware of the non-anonymous characteristic of blockchains, which could have motivated governments like the US, Japan, and South Korea to legitimate and recognize the cryptocurrency market.

This week, Binance has started to cooperate with Chainalysis, a leading blockchain analysis company that evaluates suspicious transactions and addresses, to improve its AML system and to further legitimize the cryptocurrency sector.

binance cryptocurrency exchange

“Cryptocurrency businesses of all sizes face the same core challenge: earning the trust of regulators, financial institutions and users. We expect many to follow Binance’s lead to build world-class AML compliance programs to satisfy regulators globally and build trust with major financial institutions,” said Jonathan Levin, co-founder and COO of Chainalysis.

In 2018, some of the world’s most influential banks were cracked down for money laundering. Danske Bank laundered $243 billion from criminal groups, and as CCN reported on October 20, Nordea Bank, the largest financial group in the Nordic countries, is said to have taken several illicit payments from banks in the Baltic region.

With the institutional market of cryptocurrencies growing exponentially, the tightening of AML systems employed by public exchanges is expected to solidify cryptocurrencies as a recognized asset class and the digital asset market as a well-regulated sector.

Wei Zhao, the CFO at Binance, said that maintaining the firm’s vision of increasing the freedom of money globally, the exchange will continue to adhere to regulatory mandates in the countries it operates in.

“By working with Chainalysis, we are able to continue building a foundational compliance program that enables the next phase of our growth. Our vision is to provide the infrastructure for a blockchain ecosystem and increase the freedom of money globally, while adhering to regulatory mandates in the countries we serve.”

Importance of Compliance

The cryptocurrency sector is entering a new phase of development and growth, as Zhou explained.

During the 2017 bull market in which the valuation of the cryptocurrency market surged to $800 billion, the asset class obtained significant mainstream awareness in both countries that support crypto and regions that have established impractical regulatory frameworks to prevent local blockchain markets to flourish.

In a period in which governments are introducing increasing efforts to embrace crypto and blockchain businesses as a part of the fourth industrial revolution, voluntary initiatives by companies like Binance to legitimize the industry will ease the process of governments in regulating and acknowledging the global market.

https://www.ccn.com/how-binance-is-legitimizing-the-crypto-market-by-eliminating-money-laundering/

Dark Web Dealer ‘OxyMonster’ Forfeits $700,000 in Crypto with 20-Year Prison Term

US District Judge Robert Scola has imposed a 20-year prison sentence on 36 year-old Gal Vallerius also known as “Oxymonster” on the dark web drug hub Dream Market.

In June, CCN reported that the French-Israeli citizen was apprehended by police at Atlanta airport in 2017 while attending the World Beard and Moustache Championship in Austin Texas. He will now start his prison term in Southern Florida after being convicted of money laundering and narcotics trafficking.

Huge Crypto Seizure

In his plea agreement, Vallerius admitted to selling drugs like oxycodone, heroin, cocaine, fentanyl and Ritalin in exchange for cryptocurrencies including bitcoin and bitcoin cash on the dark web. More than 100 BTC and 121.95 BCH – equivalent to over $700,000 – seized from him as proceeds of illicit activity will now be forfeited to the government.

For many, the big question following the forfeiture is: “What becomes of this huge amount of crypto in the hands of the U.S. government?”

A development of this nature is not new. In 2015, after Silk Road creator, Ross Ulbricht was given a life sentence, the government took possession of 144,336 BTC found on his laptop. At a time when the price of one bitcoin was just over $300, the government realized a total of over $48 million selling to multiple auctions. Some later criticized the government’s hasty sale which prevented it from earning far more.

With his plea agreement, sources say Vallerius would have to “provide all necessary passwords” to enable the government gain access. It remains uncertain if the government will take similar action to that taken of Silk Road, or delay auctions till prices show upward movement. The rarity of this situation makes it hard for analysts to predict what decision the government will make.

Earlier this week, Irish native Gary Davis pleaded guilty to conspiring to sell drugs on the Silk Road under the alias Libertas. In 2017, the District Court in California also seized over $8 million worth of cryptocurrency from Alexandre Cazes who committed suicide in Thailand after being accused of running a dark web market AlphaBay. With more cases related to crime which might ultimately lead to similar forfeitures, the U.S. government might just be dealing with crypto auctions more regularly.

Some have however suggested that at a time when the U. S. Justice Department is investigating the possible manipulation of cryptocurrency prices, crypto acquired through the legal system is somewhat unlikely to last in the custody of government for long.

https://www.ccn.com/dark-web-dealer-oxymonster-forfeits-700000-in-crypto-with-20-year-prison-term/

Bitcoin Hedge Fund and CEO Slapped With $2.5 Million Penalty for Ponzi Scheme

A New York federal court has ordered cryptocurrency hedge fund Gelfman Blueprint, Inc. (GBI) and its CEO Nicholas Gelfman to pay over $2.5 million for operating a fraudulent Ponzi scheme, according to an official announcement published Oct. 18.

GBI is a New York-based corporation and denominated Bitcoin (BTC) hedge fund incorporated in 2014. As stated on the company’s website, by 2015 it had 85 customers and 2,367 BTC under management.

The order is the continuation of the initial anti-fraud enforcement action filed by the U.S. Commodity Futures Trading Commission (CFTC) against GBI in September 2017. The CFTC charged GBI for allegedly running a Ponzi scheme from 2014 to 2016, telling investors that it had developed a computer algorithm called “Jigsaw” which allowed for substantial returns through a commodity fund. In reality, the entire scheme was a fraud.

Per the announcement, GBI and Gelfman fraudulently solicited over $600,000 from at least 80 customers. Moreover, Gelfman set up a fake computer “hack” to conceal the scheme’s trading losses. It eventually resulted in the loss of almost all customer funds.

The current order charges GBI and Gelfman to pay over $2.5 million in civil monetary penalties and restitution. GBI and Gelfman are ordered to pay $554,734.48 and $492,064.53 in restitution to customers and $1,854,000 and $177,501 in civil monetary penalties, respectively.

James McDonald, the CFTC’s Director of Enforcement, said that “this case marks yet another victory for the Commission in the virtual currency enforcement arena. As this string of cases shows, the CFTC is determined to identify bad actors in these virtual currency markets and hold them accountable.”

Last month, the CFTC filed a suit with the U.S. District Court for the Northern District of Texas against two defendants for the allegedly fraudulent solicitation of BTC. Per the suit, defendants Morgan Hunt and Kim Hecroft were running two fraudulent businesses and misleading the public to invest in leveraged or margined foreign currency contracts, such as forex, binary options, and diamonds.

https://cointelegraph.com/news/bitcoin-hedge-fund-and-ceo-slapped-with-25-million-penalty-for-ponzi-scheme

Cryptocurrency Thieves On Track To Steal Over $1 Billion In 2018

By Nermeen Abbas

The total value of stolen cryptocurrency is expected to hit over $1 billion by the end of this year, which represents a 350% increase over the amount that was stolen in all of 2017, according to a new research from CipherTrace.

The U.S cybersecurity firm revealed that during the first three quarters of 2018, $927 million of cryptocurrency was reported as stolen from exchanges by hackers; $166 million was reported stolen since the second quarter, driven by an emerging trend toward more frequent and smaller cyber-attacks by sophisticated thieves.

According to CipherTrace 2018 Q3 Cryptocurrency Anti-Money, a quantitative analysis of all the transactions on the 20 top cryptocurrency exchanges globally, 97% of direct bitcoin payments from identifiable criminal sources were received by unregulated cryptocurrency exchanges.

Nearly 5% of all bitcoin sent to poorly regulated exchanges comes from criminal activity before the money is moved, undetected, into the global financial payments system.

The poorly regulated exchanges have laundered a significant amount of bitcoin, totalling 380,000 BTC, or $2.5 billion at today’s prices, which means that 36 times more criminal bitcoin was received by crypto exchanges in countries where AML is either lax or lacking.

The CipherTrace reports analyzed 45 million transactions at 20 top cryptocurrency exchanges globally between January 2009 until September 20, 2018. “There are likely 50% more criminal transactions than those that were traced for this report because criminals are typically very clever and deft at hiding their tracks,” the cybersecurity firm commented.

“This extensive research shows that regulation does have a direct correlation in hindering criminal activity, and we are on the right track to instill further trust in the crypto ecosystem. We will see the opportunities to launder Cryptocurrencies greatly reduced in the coming 18 months as Cryptocurrency AML regulations are rolled out globally,” commented Dave Jevans, CEO, CipherTrace and co-chair of the Cryptocurrency Working Group at the APWG.org.

The study shows that efforts to enact and enforce strong cryptocurrency Anti-Money Laundering (AML) regulations are drastically reducing criminal activity on digital currency exchanges.

It also marked a steadily growing number of cryptocurrency thefts, which included several heists in the $20-$60 million range; the data indicates a pattern of smaller robberies on a regular basis and sophisticated professional cyber thieves who carry out hacks at both the exchange and platform.

In the 2018 Q2 Cryptocurrency Anti-Money Laundering Report, CipherTrace revealed a three-fold increase in cryptocurrency thefts during the first half of 2018 compared with the entire year of 2017. Most notable were the $530 million worth of tokens stolen in Japan from Coincheck and $195 million worth of tokens stolen from BitGrail.

According to CipherTrace, criminals are expected to quickly launder the stolen tokens before stronger cryptocurrency anti-money laundering controls are deployed globally over the next 18 months.

Global standard for cryptocurrency anti-money laundering to be agreed

The global anti-money laundering task force has said it is closer to establishing a worldwide set of standards to apply to virtual currencies.

The president of the Financial Action Task Force, Marshall Billingslea, said he is optimistic that at its plenary, due in October, the FATF will agree a series of standards that will close the anti-money laundering “gaps” that all nations face.

“It is essential that we establish a global set of standards that are applied in a uniform manner,” he added.

The task force has accelerated its work and made significant progress on reaching a “consensus across nations” after the G20 requested the organisation tackle the issue as a matter of urgency.

In October, the FATF will discuss which of its existing standards need to be updated to address virtual assets, since its current recommendations do not acknowledge them. It will then revise the methodology it uses to assess how countries implement these standards and when this revised assessment methodology will take effect.

Mr Billingslea, who is also assistant secretary to the US secretary, said currently the adoption of anti-money laundering standards and regimes pertaining to digital assets and virtual currencies is “very much a patchwork quilt or spotty process,” which is “creating significant vulnerabilities for both national and international financial systems”.

China and South Korea have clamped down on the sector, while other countries — including France, Switzerland, Malta and Gibraltar — are drawing up regimes for formally policing the space in an attempt to attract fintech business.

UK MPs also highlighted on Wednesday the urgent need to regulate “Wild West” crypto-asset markets. The Commons Treasury select committee warned that a dearth of regulation around crypto-assets had left investors exposed to a “litany of risks” — without any of the protections usually afforded to consumers, such as access to compensation.

Cryptocurrencies are not regulated by central banks but are held digitally via electronic identities that in many cases allow their owners to remain anonymous. As a result, they have been linked to payments for prohibited goods such as guns and drugs and are a target for hackers.

Mr Billingslea said there were concerns of an emerging use of virtual currencies by terrorist organisations including Isis, as well as in extortion schemes, such as the WannaCry attacks.

His comments come after some observers argued that authorities such as Europol, Europe’s law enforcement agency, should devise a centralised system that flags cryptocurrency wallets linked to nefarious activities to major exchanges, so that they can block the owners from exchanging those funds for hard cash.

Despite the risks associated with digital assets, Mr Billingslea said they also presented “a great opportunity”. In terms of regulation, he said, “you can’t tilt too far in one direction or another” since blockchain, the technology that underpins virtual assets, “will continue to evolve”.

https://www.ft.com/content/1a67f6b2-bbf7-11e8-94b2-17176fbf93f5

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