The results of the Swedish FIU’s analysis will come as no surprise to readers of FinTelegram. In a recent report, the Swedish FIU identified illicit crypto exchange providers as a significant threat in money laundering schemes and a crucial enabler and facilitator for organized crime. These providers offer unlicensed and illegal services to convert criminal proceeds into cryptocurrencies or vice versa (on-ramp/off-ram).
Characteristics of Crypto Exchange Providers
Role and Operations
- Function as enablers within the criminal economy
- Provide services to convert criminal proceeds into cryptocurrencies and vice versa
- Often possess sought-after expertise in the criminal world
- Operate with an international reach
- Fit the profile of professional money launderers (PMLs)
Subgroups Identified
The FIU has categorized crypto exchange providers into four main profiles:
- The Node Exchange Provider
- Plays a significant role in the criminal economy
- Integrated into criminal networks
- Trades in both directions (mainly cash/crypto)
- Limited in number but possess highly sought-after expertise
2. The Hawala Exchange Provider
- Connected to hawala/underground banking networks
- Has widespread international connections
- Often operates based on the network’s origin1
3. The Asset Exchange Provider
- Part of an illicit business with systematic use of crypto assets
- High capacity to trade crypto in volume
- Usually trades crypto for own needs1
4. The Platform Exchange Provider
- Advertises services on open P2P platforms and crypto forums
- More likely to service small-scale narcotic buyers and fraud offenders
- Large number of perpetrators in the market
Key Concerns
- Widespread Use: The demand for crypto exchange services is very high among criminals, indicating widespread use of cryptocurrency in criminal activities
- International Scope: These illicit crypto services have a wide international reach with cross-border capabilities.
- Support for Organized Crime: By facilitating the criminal infrastructure, crypto exchange providers support influential criminals in organized crime, financing violence and other serious crimes.
- Difficulty in Detection: Some providers operate on the periphery, seemingly separate from other criminal arenas, making them difficult to detect for regulatory and law enforcement agencies.
Recommendations
- Increased Law Enforcement Presence: Law enforcement agencies must increase their presence on platforms used for crypto exchange to identify and map illicit providers.
- International Cooperation: Given the international scope, joint international operations involving agencies in and outside the EU are necessary
- Strengthened Regulatory Framework: The Swedish Financial Supervisory Authority’s ability to sanction unlicensed crypto exchange providers needs to be strengthened.
- Enhanced Monitoring by Obliged Entities: Banks, neobanks, and payment service providers must implement sufficient monitoring to detect suspicious transaction patterns related to crypto trading platforms.
- Vigilance by Legitimate Crypto Platforms: Licensed crypto trading platforms need to be vigilant about deviant trading patterns on their clients’ wallets and take necessary actions as per AML legislation requirements
Conclusion
The Swedish FIU’s report highlights the critical role that illicit crypto exchange providers play in facilitating money laundering and supporting organized crime. As compliance professionals, it’s crucial to be aware of these emerging threats and implement robust measures to detect and prevent such activities within our respective organizations.