Many people, private institutions or government agencies believe that everything about cryptocurrencies is wrong. Since their rise to popularity and value appreciation, cryptocurrencies have been criticized, especially in the case of bitcoin, for causing harm to the environment as a result of mining activities that consume too much power. Cryptocurrencies have also been bashed for not having any value, with many people calling these virtual currencies the “biggest scam of all time”.
A bigger issue used as a reference point for crypto-criticizers is the fact that digital currencies are breeding grounds for money laundering and other illicit financial activities. Cryptocurrencies are young, the industry is still grappling with many problems, and adoption is not yet strong. Crypto-aficionados agree, together with the its critics, that these money laundering problems are real.
Right from SilkRoad to recent money-laundering reports through different cryptocurrencies, the industry is battling with law enforcement agencies across the world, as well as facing the criticisms of advocates of a money-laundering-free financial system. Data from CypherTrace shows that since 2009, more than $2.5 billion worth of Bitcoin has gone through the hands of illicit financial dealers. The money laundering activities that have gone through other cryptocurrencies are not even accounted for. But is cryptocurrency the biggest enabler of money laundering around the world? No.
Too much blame on cryptocurrencies
One major issue is that every money laundering claim in recent times seems to be directed towards cryptocurrencies. That’s a big mistake. Since the introduction of cryptocurrencies and their subsequent involvement in money laundering activities online, a lot of individuals, world-renowned leaders, and international institutions seem to have placed almost all the money laundering woes on these digital currencies. According to the statistics, the involvement of cryptocurrencies in illicit financial activities form a small, insignificant portion of global money laundering activities.
Blaming cryptocurrencies too much for almost every money laundering problem leaves the major issues out of the picture. As Rob Wainwright, head of Europe’s police agency Europol estimated, only 3 to 4 percent of the continent’s annual criminal activities are linked to cryptocurrencies. So if crypto forms a small portion of the illicit financial world, which area leads the industry? Banks.
Far more money is laundered through banks than through crypto
Money laundering is no new problem. The United Nations Office on Drugs and Crime estimates that between $800 billion and $2 trillion, representing 2 to 5 percent of global GDP, is swept away through money laundering activities every year. It turns out a chunk of this money passes through supposedly highly regulated financial institutions and banks.
These statistics show that nearing 100 percent of the money laundering activities end up passing through a bank. There is no bank in the world that does not have an anti-money laundering regulation. Add this to the country-wide and regional AML regulations, as well as increased spending on anti-money laundering policies, and banks could be well placed to fight illicit financial activities. But over the years, the opposite has been on the rise. Money laundering has become a global canker for the financial sector, a phenomenon ignites every single day.
From the infamous Bank of Credit and Commerce International (BCCI) scandal in the 1980s that had dealings with the likes of Manuel Noriega and Saddam Hussein, and the $6 billion Liberty Reserve mess in 2013 to the recent 200 billion Euros laundered through Danske Bank; illicit financial activities are increasing in the financial services and banking industry.
Amidst all the anti-money laundering regulations, issues like the Panama Papers released in 2016 showed us the level at which big financial institutions engage in money laundering. In 2018, the degree to which banks serve as safe havens for illicit financial activities became paramount, with many banks getting caught up in different forms of scandals.
The end result is that these banks have been fined huge sums. JPMorgan Chase has had its share of the fines, where the bank was asked to pay $2.05b for allowing Wall Street financier Bernard Madoff to run a $65 billion Ponzi scheme through the bank. HSBC was equally fined $1.9b in 2012 for allowing more than $670 billion in wire transfer from Mexico to pass through the bank’s systems, as well as Commerzbank’s fine of $1.45b for undertaking ineffective compliance controls in dealing with Sudanese and Iranian entities.
Other banks have had their executives jailed for money laundering practices, including banker at state-owned Petroleos de Venezuela SA (PDVSA) who was jailed for 10 years, the sentencing of Arthur Budovsky, Liberty Reserve’s founder to 20 years in prison, and many other cases. Some of the well-known banks that have served drug cartels, terrorist organizations and other illicit financial activities include Citigroup, Standard Chartered, Deutsche Bank, ING, Wachovia, and the Commonwealth Bank of Australia.
The ultimate goal is not to tag cryptocurrencies as perfect financial systems where money laundering does not occur. But to think that the first forms of anti-money laundering regulations started many decades ago, yet we still have banks accounting for a chunk of illicit financial transactions gives a proper perspective of what the problem is all about – and we can conclude that banks are safe havens for money launderers than cryptocurrencies are.