Digital finance is a money-launderer’s dream

Cutting-edge financial technology is fast becoming the handmaiden of organised crime, helping some of the world’s most dangerous crooks to move and hide ill-gotten gains. This situation will only get worse, unless governments and the technology industry can find common ground.

Money-laundering has a history almost as long as crime itself. But it became much more sophisticated during the cocaine-cowboy era of the 1980s, when narcotics flooded into America.

The traffickers’ laundering process had three stages: placement, layering and integration. Placement involves finagling the dirty money into legitimate finance. Drug cash can be mixed with earnings from, say, a restaurant or a casino. However, if law enforcers uncover the drug-dealing, they might still be able to trace the profits to the bank that serves the legitimate business. Hence the second stage, layering, in which criminal money is moved from account to account, withdrawn, redeposited, swapped into different currencies, and so on—anything to throw off the cops. The final stage, integration, is the crooks’ satisfying pay-off. Having been cleansed of its links to wrongdoing, the money can now be spent, ideally on something with an attractive long-term return, such as property or art.

The big change since the 1980s has been finance’s digital revolution: unceasing innovation in payment systems, virtual banking and the like. In addition, new technologies have created fresh infrastructure outside the traditional financial world, from cryptocurrencies to non-fungible tokens to video-gaming marketplaces, which now handle huge sums.

As financial digitisation has accelerated, the first stage of the laundering process, placement, has waned in importance for some criminal groups. After all, it really applies only to cash-intensive, often street-based crimes like drug dealing and prostitution. Commensurately more emphasis has therefore been placed on layering and integration. In a world where financial transactions are increasingly logged and tracked by computers, the task of throwing off the investigators and escaping with the loot has become more demanding.

The group with the longest experience of this is computer hackers. They have found new ways to make stolen funds vanish, assisted by the creation of bitcoin and other cryptocurrencies, which not only offer near-anonymous (or at least pseudonymous) payments but stand largely outside the watchful eye of the regulators policing traditional finance.

Other organised-crime operations are waking up to the advantages of digital money-laundering. Even the more traditional, street-based crimes are undergoing digital changes—from the shift of drug-dealing onto the dark web to the explosion of online prostitution services—which open these new laundering routes to them.

As digital money-laundering has boomed, the tech industry has found itself increasingly enmired. That’s not just because of criminals’ use of cutting-edge tech. At a deeper level, there is a confluence between the aspirations of tech disruptors and those of money-launderers.

In essence, launderers are seeking three things: a financial environment with febrile activity and fluid asset prices, so they can move lots of money without arousing suspicion; a global system that makes it easy to deposit crooked cash in, say, Los Angeles and pull it out in London; and non-existent or minimal regulation.

The same three things help fast-growing tech companies to thrive. The vast majority of tech disruptors do not deliberately foster financial crime, but they too benefit when markets are large and liquid, money can slosh easily across borders and they can exploit regulatory blind spots.

Another common factor is a libertarian streak. When the voices of authority call for more regulation to stop crooks using new tech, startup founders and coders bristle, fearing government overreach and accusing “trad-fi”—traditional finance—of an underhand campaign to stymie competition from disruptors.

A good illustration of these tensions is the story of Tornado Cash. In March 2022 hackers with suspected links to North Korea stole cryptocurrency worth $625m from a crypto-based video game called Axie Infinity and used Tornado Cash, a so-called crypto-mixer, to launder much of the money. Crypto-mixers take in cryptocurrency from users, mix it up and send it back, obfuscating its provenance. There are some good, privacy-related reasons to use such mixers. But for the Axie Infinity hackers, it offered a virtual getaway car.

America’s government acted swiftly, imposing sanctions on Tornado Cash—freezing it out of America’s financial system—and charged two software developers who had allegedly built the mixer with money-laundering and sanctions violations. The reaction from the tech community was equally forthright. Crypto campaigners sued the US Treasury, claiming the sanctions deprived users of a vital privacy tool. More broadly, opponents of America’s crackdown feared that it set a dangerous precedent for software developers worldwide. The people behind Tornado Cash, they argued, should not be held responsible for the misuse of their invention.

And so the authorities and the techies are at an impasse. Governments are looking to rein in what some see as a technology industry that’s out of control, rolling out innovations without a care for the social harms they create. Many crypto bros, meanwhile, insist that tightening oversight will destroy the technical foundations on which their disruptive new world is built. It echoes the debate over the encryption technology behind apps such as WhatsApp and Telegram. Governments want some kind of legal access to the communications on these platforms. Techies insist that would be the thin end of a wedge that would eventually render encryption useless.

Resolving this impasse will require movement on both sides. Governments and regulators must do a better job of understanding the tech that undergirds these new innovations, and work harder to grasp how this stuff is actually built. Only then will they be able to speak to the tech world with authority. And the techies have to understand that if their dogmatic defence of innovation can credibly be reframed by their opponents as a willingness to enable large-scale financial crime, then they’ve lost the argument. Somewhere between those two entrenched positions lies the future of cutting-edge finance.

Geoff White is the author of The Lazarus Heist (2022), an investigation into North Korean cyber-warfare, and Rinsed: From Cartels to Crypto, How the Tech Industry Washes Money for the World’s Deadliest Crooks (2024).

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