Money Laundering in the Digital Age

March 2024

Fintech & Payments

Daniel Bedford

Senior Research Analyst

As technology advances, criminals will always find new ways of concealing the source(s) of illicit funds, making new anti-money laundering systems an imperative. As we discuss in our latest research, this 'cyber laundering' currently takes several forms, including:

Cryptocurrencies 

Cryptocurrencies and digital currencies are important instruments in cyber laundering. Mixing services, sometimes known as tumblers, are used by criminals to combine their illicit and legitimate money. Because of this, it is difficult for the authorities to determine the original source of the funds.

Compared to conventional non-cash payment options, cryptocurrency transactions offer a higher level of privacy. Virtual money can be exchanged online by users, and transactions are typically characterised by the absence of in-person customer interactions. This allows for anonymous funding, which can be either cash funding or third-party funding through virtual exchangers that fail to sufficiently identify the funding source. For global corporations, having a global presence increases the dangers associated with AML/CTF since it complicates surveillance and enforcement.

Law enforcement may target certain exchangers in order to obtain client information that the exchanger may gather, but they are not permitted to launch an inquiry or take assets against a single central location or business (administrator). 

Consequently, using virtual currency for transactions offers a degree of anonymity not achievable with conventional credit and debit cards, or outdated Internet payment methods.

Online Gaming and Gambling

Platforms for online gaming have grown in popularity as a means of money laundering. The regular international transfer of virtual assets, in-game money, and objects creates a complex network of transactions that is challenging for investigators to comprehend. Money can be laundered through online auctions and sales, gambling websites, and even virtual gaming sites. Ill-gotten money is converted into the currency that is used on these sites, then transferred back into real, usable, and untraceable clean money. 

Proxy Servers and Anonymising Software

A technique known as ‘proxy piercing’ allows hosts to ascertain whether or not a user is making a proxy purchase. A transaction in which a customer uses a proxy server to mask their IP address is referred to as a proxy purchase.  By using proxy piercing, one may determine whether a customer attempting a transaction is using a proxy. Next, it will ‘pierce’ the proxy server and identify the original IP of the transaction, according on the degree of the piercing programme. Proxy piercing goes one step further and can also pinpoint that user's exact location.

Proxy servers are frequently used by scammers to conceal their real identities when they make chargebacks or fraudulent transactions. They do this action to evade discovery that the address on their payment method does not correspond to the geolocation of their IP address. By breaking through that barrier, proxy piercing determines whether a buyer is making use of a proxy. 

Romance Fraud

Suspects devote a great deal of time to socially manipulating their victims because they are aware that the more trust the victim gives them, the more likely it is that they will be able to take large sums of money from them at the same time. Instead of asking the victims for money right away, con artists spend time establishing a rapport with them online. When they request substantial quantities of money, their justifications for needing financial support are more credible. This is referred to as the ‘grooming period’.

The quantity of money transferred tends to increase with the length of time between the initial point of contact and the first financial transfer date. Data suggests that a significant percentage of victims are widowed, lonely, or recently lost a loved one, experienced a breakup, and/or are suffering from depression.

Job Scamming 

Some financial institutions provide a video identification service to customers who want to create bank accounts in order to verify their identity without requiring them to visit a branch office or post office to have their credentials confirmed.

With this service, users typically use a smartphone app to identify themselves in a video conference with a financial institution or a subcontractor. Customers must answer a few questions and show a valid identity card or passport to the camera in order to verify their identity. Online con artists have mastered the art of taking advantage of this digital account opening option. They entice customers to divulge personal information and participate in a video identification procedure. The criminals utilise the accounts created in the identities of their victims for illicit activities like money laundering and accepting payments from fake businesses.

Dark Web and Encryption

The dark web is an encrypted part of the internet that hosts online content not indexed by conventional search engines. Also known as the ‘darknet’, its first structure was conceived by the US Naval Research Laboratory in the mid-90’s as an anonymised and ciphered network for the ease of communication between US spies.

The dark web provides a hidden environment for criminals to conduct various illegal activities, including money laundering. Drugs, prescription drugs, porn, malware, guns, stolen computers and smartphones, counterfeit passports and national identity cards, credit card theft, bank account information theft, and hacking services that enable the erasure of negative information from credit reports or the acquisition of thousands of likes and followers for social media accounts are just a few examples of the many illicit goods and services that can be found — while increasingly advanced encryption technologies make it difficult for law enforcement agencies to intercept and decipher communication between criminal actors.

Source: Global AML Systems Market 2024-2028

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